SaaS – Digital Trends in Construction Loan Administration

Although post-closing management of construction loans is an area ripe for game-changing process improvement, it has been largely underserved by technology. There are many variables in construction loan administration including draw processing, review of AIA G702 and AIA G703 forms, borrower-to-contractor payment, and lien release processing. Much of the work is done manually, placing a heavy administrative burden on both construction loan administrators and borrowers to juggle. This is why capital partners and project owners are increasingly turning to construction loan software.

Advances in machine learning and automation are helping innovative construction loan administrators realize never-before-seen efficiencies (and profits). What was once done manually through Excel spreadsheets is now automated and organized online. Given today’s competitive lending environment and societal expectations for real-time information, the need for process improvements in construction lending matters now more than ever.

In a recent study, we asked 117 capital partners and borrowers to share their perception of how much time it takes to process draw requests. On average, capital partners reported the entire process takes 5.5 days. Borrowers on the other hand, who want to pay their contractors as quickly as possible, said 9.4 days. The difference in opinion matters most to construction borrowers who, in a tight labor market, are under pressure to pay contractors as quickly as possible. They are also in a position to take their next project to a lender across town with a more efficient process.

Not only do faster draw processing times lead to expedited disbursements, but they equate to more profitable loans for the banks. For example, improving draw processing efficiencies on a portfolio of loans through automation leads to a 65% reduction in administrative time, a 4% reduction in points of risk caught in advance, and, hold your breath, a 10% increase in incremental interest earnings.*

FinTech Software as a Service (SaaS)

Today’s best-of-breed construction loan software falls under the FinTech Software as a Service (SaaS) category. SaaS used by financial institutions is a cloud-based technology designed to streamline a process, elevate the customer experience, and improve efficiencies. While Saas companies focus on developing, securing, and upgrading their product, both lenders and borrowers can focus on what they do best – lending and building.

Unlike on-premise software that is uploaded to computers and requires a perpetual license typically without updates, SaaS lives in the cloud and is a method of secure software delivery that makes data available from any device and is constantly updated. Users can securely log in to the platform by way of a desktop computer or mobile device at any time and from field-based locations.

What is Construction Loan Software?

To help visualize the practical applications of construction loan administration software, let’s review six ways in which software assists with the cumbersome monthly draw request process:

1. Construction loan software serves as a central repository for collaboration and transparency where the borrower, lender, inspector, general contractor, and other stakeholders collaborate on a single platform to prevent data entry duplication.
2. It guides and assists in workflow management including project timelines, monthly draw process document approvals, account balances, payment tracking, and pulling vital reports.
3. It streamlines the manual entry process for contractors transferring invoices from their subcontractors, for developers transferring invoices from their contractors, and for lenders transferring information from their borrowers – all of which ensures clean and consistent data.
4. Construction loan software platforms help to assist the lender in distributing the appropriate amount of funds as quickly as possible. At the same time, the software can ensure that enough funds are remaining to complete the project while tying fund disbursements to a lien release.
5. Construction loan software platforms help track draw disbursements and the interest to be billed each month and assist the lender in withdrawing those funds from the loan amount.
6. In states that allow E-signatures without notary involvement, some construction loan administration software will enable borrowers to send payments to contractors via ACH or a physical check. These transactions are all managed and tracked within the platform and reduce the risk of an unconditional lien not being submitted after the release of payment.

Unlike on-premise software, SaaS doesn’t typically require expensive integrations or an annual 15% to 20% maintenance and support fee. Instead, users pay a monthly or yearly subscription fee, which includes the software license, support, and most other costs. Pricing models for SaaS construction loan software typically include a monthly flat fee per loan or a flat subscription fee for an entire portfolio. Depending on construction loan volume, some construction loan software companies charge basis points on the total loan value to manage the draw process on their platform. So, for example, a fee of 50 bps on a $5m loan equates to a cost of $25,000.

Conclusion

Through advanced machine learning and automation, construction loan software has been shown to decrease administrative workload by 50% to 65%, increase existing portfolio interest revenue by 3% to 5%, and catch document and loan errors three times more frequently. Incorporating performance enhancements by software accelerates the draw process, which provides an easy way to lower a bank’s efficiency ratio, calculated by dividing the bank’s non-interest expenses by its net income. On the low end, these savings cover the cost of a full-time employee; on the high end, they serve as a competitive differentiator allowing banks to grow ahead of their competition.

What’s more, construction loan software brings a new level of visibility and transparency for all parties by way of a web-based platform. By digitizing the process, software like Rabbet helps proactively mitigate risk, which is a concern for lenders who must abide by strict controls and assurances due to regulatory compliance requirements. For example, ensuring unconditional lien releases are automatically signed and tied to payments protects lenders and leads to the end goal of lien-free completion. In addition, software helps monitor borrower equity contributions on High Volatility Commercial Real Estate (HVCRE) loans.

Drop us a line if you want to talk about construction loan administration software. We’ll walk you through some of the great features we have cooking.

*400 loans in portfolio, the average loan amount is $2,500,000, 5.5% interest rate, 12 days average to process a draw disbursement cut by 50% improvement in efficiencies through automation equates to an additional 6 days of interest income per monthly draw.  At $150,685 daily interest earnings x 6 days, the lender realizes $904,110 incremental earnings per month, an 867-hour decrease in administrative time per month, and 80 additional points of risk (issues) caught per month.