According to a recently published working paper by researchers at the Federal Reserve Bank of New York (FRBNY) and New York University, fintech lenders have quickly expanded their market share since the Financial Crisis, and in the process have developed efficiencies that give them a significant advantage over more traditional lenders.

The working paper defines a company as a “fintech” lender if a borrower could get a loan pre-approval based on a hard credit check online without interacting with a loan officer.  In 2010, these lenders originated $34 billion in mortgages (2% of the market).  By December 2016, their originations had increased to $161 billion (8% of the market).  A large share of that growth came through Federal Housing Administration (FHA) loans, which are generally given to borrowers with lower incomes who cannot afford large down payments, and refinances.

The findings of the working paper are as follows:

• Fintech lenders reduced the time it takes to process a loan by approximately 10 days as compared with the average processing time for mortgages.  For refinances, fintech lenders are almost 15 days faster at loan processing than more traditional lenders.
• In instances where a lender is seeing increased loan demand, fintech lenders are more efficient and better at handling the larger inflow of applications.  In cases where the application volume is doubled, the loan processing time increases by only 7.5 days for fintech lenders, as compared to 13.5 days for traditional ones.  Additionally, the researchers found that fintech lenders lower their denial rates when there is a higher application volume.
• In parts of the country where fintech lenders have a greater presence, existing borrowers are more likely to refinance.  But the efficiencies created through their platforms increase the likelihood that borrowers will see an optimal result from a refinancing, including getting the market interest rate.
• The default rate on FHA loans originated by fintech lenders is approximately 25% lower than traditional ones.

The researchers also cautioned that, without the underwriting standards imposed by Fannie Mae and Freddie Mac, poorly constructed automated processes could “produce illegitimate statistical discrimination,” which would raise fair lending implications.

Since traditional lenders are also investing in online platforms and working to digitize the mortgage process, the researchers predicted that fintech lenders’ success will help facilitate more advancement in this space.  “Technology will allow the origination process to be faster and to more easily accommodate changes in interest rates, leading to greater transmission of monetary policy to households via the mortgage market,” the researchers stated. “Our findings also imply that technological diffusion may reduce inefficiencies in refinancing decisions, with significant benefits to U.S. households.”