As large lenders slid off the economic cliff into the dark abyss of financial insolvency, community banks were expected to help fill the void, to do their part to secure the financial system, and to insulate it from future collapses.

The aim, or at least the concept, was that each community bank’s market share on a relative basis would be small. Therefore, a single lender could not threaten the financial health of the financial system.

Fragmented mortgage market share would preserve the market, distribute risk and alleviate fear.

But satisfying those lofty expectations meant greater compliance burdens for these institutions, burdens that have driven up costs. One approach that many large banks have long favored, for instance, is to rely on automated underwriting, rather than the manual underwriting many community banks have relied on in the past.

Automated processes, generally, eliminate errors and speed processing, and they are often touted as a way to improve lending decisions.

Adopting the technology, therefore, does not sound like much of a sacrifice, certainly not in terms of lending quality. And in the mortgage industry, like most financial sectors of the economy, the automated approach has held sway.

But community banks, in contrast, are relationship oriented. Their inviolable principle is “know the client” before extending credit.

And there is much to commend that approach, but tops among them is stellar performance: Community banks’ manual processes resulted in fewer delinquencies than automated underwriting platforms.

“Over the last several years as mortgage delinquencies reached record levels, the serious delinquency rate of mortgages held by community banks did not go much over 4%, far lower than the serious delinquency rates that climbed to almost 22% for subprime, fixed-rate loans and more than 46% for subprime, variable-rate loans,” said Elizabeth Duke, governor of the Federal Reserve System, speaking at the Community Bankers Symposium in Chicago last November.

Moreover, subprime loans were not the only loan category to perform well at community banks.

“In fact, over the last several years, on average, mortgages held by community banks outperformed even fixed-rate, prime loans, the best performing mortgage category,” said Duke. “I think this statistic by itself is a strong testament to the responsible lending practices of community banks.”

To be sure, manual underwriting decisions are slower and can’t be scaled for a national rollout. In contrast, automated underwriting platforms from Fannie Mae and Freddie Mac can easily be scaled to support a 50-state marketing campaign.

The community banks’ approach, presumably, satisfied regulators because accuracy was improved; community banks preferred it because it ensured that clients were happy and did not require a change in their underwriting processes.

But, I suspect, it leaves borrowers with unfulfilled expectations.

They have grown accustomed to the immediacy of the Internet—in which transactions are completed without delay.

The competition, therefore, is not just other community banks, or a national financial institution, but the expectation of immediate gratification. That’s an unintended consequence of the Internet age and the boob tube that the mortgage market cannot afford to ignore, much less escape.

For many financial organizations, that’s a tough hurdle to overcome, one many would claim impossible to attain in the absence of automation.

Automated underwriting, price and term engines, compliance solutions and other offerings would be the technological glue that held the mortgage market together, satisfied borrowers’ expectations, and ensured loan quality and performance.

But, technology has not been the key for community banks. Their mantra has not changed—know the borrowers, perform due diligence, if they qualify, sell them mortgages.

It’s a simple, direct, effective, and sensible approach that’s worked for community banks for decades.

Matt Strickberger is the managing partner of OnPoint PR and Consulting LLC, a public relations firm that represents lenders, servicers, technology companies and others. He was editor of Mortgage Technology magazine from 1997-2000. If you have comments or suggestions for future columns, email him at