Finally, we can see that construction is making a comeback. All around us, neighborhoods that were started and abandoned during the financial crisis are now being completed along with new housing projects.
According to the Commerce Department, of the 45,000 new houses sold during the month of May, construction had not even begun on 16,000 of them.
With this recent uptick, banks are rushing to either reinvigorate their construction funding desks or establish new construction lending units. While exceptional for profitability, this momentum requires banks to make significant internal changes to remain both productive and compliant.
Banks’ senior leaders certainly view construction lending as a new or restored income opportunity for their institutions. They want to quickly take advantage of the current, favorable market conditions while complying with the onslaught of new regulations affecting both the lending and servicing worlds.
Many lenders have found comfort as well as success by investing in automated systems that manage their front-office customer service. They are wisely relying on technology to ensure they properly structure financing, and for a wide range of loans, are depending on technology as a complete funds control service.
Some profitable, yet complex, loan types for which banks and servicers are leveraging new technology include:
- Single-close construction-to-permanent loans for consumers, which in several states offer sales tax advantages.
- Single-family construction loans with the owner using the lot as equity.
- Builder lines for spec development of single-family homes in a small subdivision.
- Condominium development of units within a building.
For these loan types and any type of construction loan—Small Business Administration, commercial, land acquisition and development or even low-income financing—funds control will remain essential to the servicing process.
Automation allows banks and servicers to easily manage a construction project’s finances, even if funds come from multiple sources. Through technology, companies can securely wire funds to immediately pay workers, buy supplies and track cash flow throughout the process, which is crucial to prevent the disbursement of funds from outpacing actual construction.
As banks work to rapidly create or reinvigorate their construction lending activity, they remain mindful of the past.
Solutions that control funds allow them to significantly reduce the risk associated with construction loans, often known to be much riskier than other loan types. They can lend with greater confidence when using an automated system that implements checks and balances into the process, providing alerts whenever any delays or problems arise.
Automation standardizes processes, enabling banks to keep up with the growing requirements for security and regulatory compliance and avoid scrutiny from regulatory agencies. Keeping up with complex, ever-changing legislation and applying timely procedural adjustments has become a seemingly impossible task without the help of technology.
Using a comprehensive solution provides valuable analytics and reporting functions that not only answer increased auditing needs, but also give loan officers and administrators access to key information to deliver more meaningful services to their customers.
The rise in construction activity is a ray of light for which the industry and nation have been waiting. The return of construction activity is rebuilding communities, providing jobs and improving local economies. Committing to new procedures and relying on automation to control the multifaceted nature of construction loans help banks gain profitability and at the same time, restore enduring health to our economy.
Phil Freeman is founder and CEO of Data Select.
