‘You Can’t Write An Algorithm To Do This’: Lending Technology Needs An Experienced Guiding Hand

The number of nonbank lenders has tripled since 2015. That boom is largely thanks to market pressure as capital providers rushed to provide liquidity for those borrowers or transactions that are now too small or too risky for big banks under new regulations. The boom is also due in part to technology, which has allowed nonbank lenders to streamline a number of pieces of the lending process.

While technology can make lending more efficient, more transparent and less painful, participants in the nonbank space say many of the central decisions of lending — how to structure a transaction, or whether to lend at all — must still come down to experience and judgment calls. Even with the advent of technology, the single largest contributor to the success of nonbank lending is a seasoned team of financial experts.

“In terms of actual decision-making, it comes down to what’s between the ears,” Money360 President Gary Bechtel said. “You can’t write an algorithm to do this, you need people who have decades of experience in the business.”

The emphasis on technology varies dramatically across the nonbank lending space. Some lenders have simply moved the traditional model of lending online, without taking the steps to build an experienced back office and servicing department.

But for Money360, technology is central to its value proposition. From origination through sizing and underwriting, all the way to loan document generation and the transfer of the loan to servicing, every part of the lending process is conducted within the company’s secure technology platform, 360Live. At any time during the process, any party associated with a transaction — borrowers, brokers or vendors — can log on to a dedicated portal and view the progress of the loan they are involved with.

“We’re providing all these parties with transparency,” Bechtel said. “It helps us to reduce the cycle time of every loan and close transactions faster. I don’t know of any other nonbank lender that has such a complete end-to-end technology platform.”

Technology can also speed up the extensive intelligence gathering and due diligence that is utilized in underwriting and lending decisions. Before issuing a letter of intent, Money360 pulls data on a property and its surrounding area, including metrics like asking rents, capitalization rates, vacancy rates and demographic trends.

While technology can make lending more efficient and transparent, loan structuring and underwriting still require an experienced professional.

“All in all, our team has overseen tens of billions of dollars of loans, so we can determine very quickly whether a transaction is one we want to do or not,” Bechtel said. “To mitigate risk to our investors and bondholders, while also creating a tailored solution for a borrower, requires a deep knowledge of real estate and the bridge lending space as well as understanding of what the borrower is looking to accomplish and whether that is achievable.”

Bechtel said some of the newer entrants into the nonbank lending space do not have a long history of bridge lending. Instead, they may have previously been mezzanine debt or CMBS lenders that moved into bridge lending because they saw an opportunity in the currently active CLO market and after Dodd-Frank and the Basel III reforms, which restricted big banks from lending to all but the largest and most creditworthy borrowers.

With the next downturn on the horizon, these lenders might exit the space just as quickly as they came into it.

“For a lot of these newer players, bridge lending may be the flavor of the week,” Bechtel said. “If the market begins to soften, they may go back to what they were doing before changing to bridge lending, transition into some other aspect of the business or just go out of business because they were overly aggressive."

Since many of these loans have a future funding component, such as for tenant improvements or leasing, the lender’s survival is imperative. Money360 is dedicated to the bridge lending space long term. 

“We are not here to compete with the lenders that are aggressively underwriting loans to the point of stupidity given where we are in the cycle,” Bechtel said. “We’re building this business for the long haul, funding transactions that meet our criteria but also looking out for the interests of our investors and bondholders. Having been through a few cycles in my 33 years in this business, I’ve seen what happens when lenders get away from prudent underwriting.”

This feature was produced in collaboration between Bisnow Branded Content and Money360. Bisnow news staff was not involved in the production of this content.