Developing relationships with brokers seeking to enter the private lending space may give your company a boost.

Brokers go where the money is. In 2022, with interest rates increasing, refinancing demand declining, and a fresh wave of bank restructuring and layoffs, that means many conforming loan brokers are seeing opportunity in private lending. Traditional direct-to-consumer private lenders can and should embrace this latest development and adapt where possible.

Mortgage brokers will need to expand their traditional product offering to diversify their own revenue stream. Having more arrows in their quiver will enable them to be more competitive in tomorrow’s marketplace.

With interest rates ticking up, brokers will continue to decamp for better opportunities, including what for many will be an independent broker business. All roads lead back to private lenders. It’s up to current lenders to help pave that road to ensure a smooth transition.

Aligning a previously direct-to-consumer business to accommodate a broker model requires a thoughtful assessment of operations, underwriting, and marketing. The transition must be a holistic one, engaging your teammates across company divisions.

Operating and Underwriting Considerations

Internally, lenders should be building processes for engaging with brokers to ensure your portfolio and loans continue to be managed tightly. An approval process for brokers should implement all possible safety measures, including running an OFAC screening and a criminal background check.

The underwriting process will be similar for customers working through a broker, but with one crucial difference: In many instances, you might not interface directly with the customer during the underwriting process. The broker acting as the go-between removes a critical layer of information and potentially invites confusion. For that reason, you should be applying every discipline to the underwriting and servicing procedures, with systems developed to elicit accurate and detailed information.

An important consideration is that brokers will likely not want to give up control of their own hard-won customers. That may include wanting to order their own appraisals and inspections from an approved vendor list. The more resources you can provide, the more you can demonstrate how your deal is better than your competitors’. As always, a shortened processing time and friendly, helpful service are also critical for differentiating you from the competition.

Marketing to Brokers

On the marketing side, you will need to configure your outreach strategy and messaging to speak to a broker audience. This is relationship building, and ideally the broker-lender relationship will endure over the long-term. For most of us, at the bare minimum, this means creating a broker-facing website or webpage and other related collateral materials. A more comprehensive approach might include a content portal with resources and tools to support brokers. Broker-targeted messaging should educate this new audience about what your products can do and how they will benefit their investor customers.

Brokers are generally looking for a “playground” to explore the product. Give them the tools they need to examine prices and capabilities, ideally demonstrating how your product will perform in different scenarios. Consider that a broker may not even want to communicate directly with a lender until they are sure your product can accommodate their customer’s situation. If you can provide easily accessible information up front, it will help engage the broker and set a broker-friendly tone for ensuing interactions. For example, you create a credit box or a comment box so the broker can feed relevant information to create a loan scenario.

Education Is Key

Account executives should be prepared for a learning curve. Brokers will need to be taught about nonconforming lending and the unique principles associated with it. Mentoring and training programs will be crucial, whether they are via face-to-face information sessions, webinars, or other delivery methods.

Private lenders would do well to listen to their customers, including brokers. For more than a decade, customers had the benefit of huge margins on their real estate investments, largely driven by a significant inventory of foreclosed properties. Today, with a shortage of housing, materials, and contractors as well as rising costs for everything, that window has closed. The change in market conditions calls for a more responsive and nimble approach to product offerings. As a company, you want to service not only your client investors’ needs but those of the brokers representing their own investor clients.

Manage Expectations

With a low bar to entry, and no licensing requirements, brokers will find that private lending is an accessible sector to move into. Brokers will need to understand that private lending is a much smaller slice of lending. Where 10 to 20 loans a month might have been normal in conforming conventional lending, the volume will be much more modest in private lending. Setting realistic expectations for new partners will be key. Equally important is for brokers entering the space to find a lender or lenders who will be a good match for their clients in terms of products as well as the resources and tools they offer to help them meet their objectives.

On the other hand, a move into private lending may open up new territory for brokers. Loan brokers may have multiple state licenses required by conventional lending. With private lending, they will be able leverage other relationships in states they may not been able to in the past.

There are, of course, some cautions for private lenders who are pivoting to establish broker relationships. Private lenders will need to ensure these third-party originators are properly vetted and monitored. Further, it is imperative that these small, less capitalized originators are well educated in your products.

Nevertheless, parties on all sides can benefit. For the private lender, it’s an excellent opportunity to draw talent into the pool and leverage that talent to grow the business. Whereas in the past small lenders had to compete with major banks to attract employees, we now have a tremendous boom not only in sales and brokers but also in operations personnel. With demand for products at an all-time high, the timing for this new era in private lending is exactly right.