alternative lending

Creating Your Own Rules: The Need for Regulation and Expertise in Alternative Lending Programs

Currently, the commercial real estate finance industry faces historically high levels of regulatory oversight. The combination of the risk retention rules and higher reserve requirements, which are set to go into effect over the next several months, will increase pressure on the industry. As a result, new barriers to capital availability will be created, limiting traditional lending sources from financing transactions in the same manner as they have in the past.

As the industry prepares for the effects of the increased regulations, and acknowledges the fact that the current demand for CMBS product is waning, borrowers will continue to look for alternative lending sources to meet demand. With nearly $300 billions in loans coming due over the next 18 months, there is both a need and opportunity for non-traditional lenders, such as non-bank and marketplace lenders, investment funds and private lenders backed by hedge funds, to collectively take the lead in filling this gap.

Marketplace lending will be a critical component in helping to provide liquidity to the industry through the creation of a single source of financing that offers a variety of financial products and provides access to previously untapped sources of capital. Marketplace lenders raise capital via their platforms and then match borrowers with investors who fund or purchase interests in the loans. The marketplace lender sources, underwrites, funds and services the loans, while marketing the loan online to investors for ultimate investment. Marketplace lenders will also set the rates and terms of the loans they originate, keeping the loans competitive within the marketplace. In addition, because the sourcing process happens in an online environment that reduces management fees, owners and investors may receive more attractive financial deals than they would through a traditional process.

While technology is an integral component of marketplace lending for commercial real estate, it does not mean that traditional lending practices are history. In fact, many of the foundations of the paper-based processes are as appropriate today as they were in the past. Having experienced underwriting analysts that conduct detailed cash flow underwriting and thorough reviews of risk factors critical to creating quality loans are components that must be fully integrated into any process powered by technology (e.g., marketplace lending).

Technology will be a key component in the marketplace lending industry’s ability to bring capital to the market to fund the loans, as well as its ability to process select parts of the underwriting process. However, just as was needed in the past with paper-based systems, the industry must identify best practices for technology-based systems like marketplace and peer-to-peer lending.

Many marketplace lenders have already started to create these standards internally, and this trend will continue industry-wide. To build a sustainable and stable industry, leaders must work together to develop best practices, create regulations and keep out bad actors.

With billions of dollars in loans coming due in the next year and a half, alternative lenders will be fundamental in filling the void and bringing new sources of capital to the borrowing community.

Equally as important to the sustainability of the commercial real estate finance market and the growth of non-traditional lenders is the need to continue to bring traditional lending and underwriting expertise to these platforms and develop self-regulations to keep the industry operating smoothly and effectively.

Gary Bechtel serves as president of Money360. Prior to joining the company, he was chief lending/originations officer of CU Business Partners, LLC, one of the nation’s largest credit union service organizations (CUSO).

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