Why Does a Lender’s Business Model Matter?

Every business model is shaped by three key elements: mission, process, and technology. Let’s explore this concept with an example from outside the lending industry—airlines. Airlines are consumer-facing, labor-intensive businesses that operate in a highly regulated environment. Consider the differences between Southwest Airlines and American Airlines:

• Southwest Airlines:
  • Southwest focuses on simplicity, operating a single aircraft type—the Boeing 737. This allows pilots, flight attendants, and mechanics to work seamlessly across the entire fleet. Southwest also flies point-to-point routes rather than through major hubs, which reduces complexity. Integrated technology enhances flight efficiency and safety, with every aircraft equipped with heads-up displays for zero-visibility landings in emergencies. As a result, Southwest aircraft fly about two hours more per day than competitors, with approximately 20% lower labor costs.
• American Airlines:
  • In contrast, American Airlines operates seven different aircraft types, limiting flexibility. Pilots and mechanics specialize in a specific aircraft type, adding to operational complexity and costs.

What About Lenders?

Lenders face their own challenges with cost efficiency. On average, 65-69% of the direct cost to originate a loan goes to compensation—a figure that has remained steady for years. Why? Because of their business models.

Key questions lenders should ask themselves:

• Are processes designed for efficiency?
• How many steps require manual intervention?
• How are results measured in terms of profitability, efficiency, and productivity?
• How often are errors corrected during or after the loan process?
• When was the last time the end-to-end process was thoroughly examined?

Compensation costs are the largest barrier to sustainable profitability. Increasing labor productivity is essential to overcoming this obstacle.

Jonathan Corr, retired CEO of Ellie Mae (now ICE Mortgage), provided a vivid metaphor for lenders’ reliance on manual labor instead of automation:

“Filling business process holes and leaks with ‘human spackle’ when automation and reengineering are more direct and efficient answers. Lenders tend to fill the holes and the leaks with human spackle, as it’s a quick band-aid. There's no reason to have all that human spackle and that cost and that inefficiency. Human spackle also adds to the timeline to close a loan. Eliminate human spackle, and closing a loan will take less time, cost less, and deliver a better customer experience.”

Building a Better Business Model

An effective lender business model starts with a clear mission. For example:

Mission: Originate loans in 50% of the time and at 50% of the cost of peers, with no defects during or after the process.

From there, define the process:

Process: Acquire 100% of the data and documents needed for underwriting within 24 hours of disclosure. Ensure that at least 70% of the data is direct-sourced, eliminating the need for OCR, RPA, or verification of direct data.

Finally, leverage Technology:

The technology to achieve these goals already exists. Yet, in two recent surveys, lenders admitted they use only about 25% of the native automation features in their Loan Origination Systems (LOS) and Point of Sale (POS) systems. These same lenders estimated that fully utilizing available automation could increase profit per loan by $2,100.

Why No Action?

Despite the clear benefits, many lenders resist change due to:

• Inertia
• Reluctance to enforce common systems
• Employee resistance
• Attachment to the status quo
• Hope for the return of 4% refinance rates

The Path Forward

Some lenders have already transformed their business models, achieving high profitability by reforming their processes end-to-end and eliminating "human spackle." The opportunity for outsized productivity gains exists right now.

The question is: Will you seize it?

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