What is correspondent lending and how is it different to branded lending?
Correspondent lending is an arrangement in which a ‘correspondent’ (usually a packager) is able to market and design its own mortgage products under its own brand and control the administration process up to the point of completion. The completed loans are, however, funded by a lender.
Branded lending is better described as branded packaging, and involves a packager promoting a lender’s products but under the packager’s own brand. Often these particular products will be available to the packager on an exclusive basis. Offer, production and pre-completion work is carried out on-site.
What’s the difference between correspondent or branded lending and a normal packager relationship with a lender?
In a typical packager/lender relationship, the packager will market a lender’s standard products to brokers and be responsible for ‘packaging’ applications in readiness for underwriting. This typically involves taking up references, organising valuations and generally ensuring all the paperwork is in place so that the lender can issue an offer quickly. In simple terms, the lender is outsourcing an element of its marketing and front-end administration to a third-party company.
With correspondent lending, however, this relationship is taken one step further so that the packager has the ability to design and develop its own product range and market it under its own brand. They also take responsibility for the complete application process through to completion when the funds are drawn down from the lender.
As indicated in the previous answer, branded lending is essentially the same as packaging, except that the packager promotes the products under its own brand as its own products.
What is the attraction of correspondent or branded lending for packagers?
Correspondent lending gives packagers complete control over the front end mortgage application process, all the way through to completion. This enables them to eliminate delays and keep control over service quality. Turnaround times are now proven to be shorter than under a lender- packager relationship.
With branded lending, these enhanced turnaround times are achieved via the provision by the lender of on-site underwriters in the packagers’ offices. Control is also an important element of correspondent and branded lending for packagers. It enables them to design their own mortgage products which they can tailor for their own markets. They can also develop and promote their own brand, which adds value to their business. This all helps them to differentiate themselves from their competitors.
What are the benefits for brokers?
Correspondent lending means that packagers can design products to meet the specific needs of their broker base, ‘tweaking’ criteria to meet local market conditions. Brokers should also notice an enhanced quality of service, because the packager has total control over the administration of the loan up to completion. Branded lenders also have an influence on the design of the products they offer and can develop exclusive products with lenders which are particularly suited to their broker distribution.
What about borrowers ‘ should they have any concerns?
No. Mortgage portfolios have been traded by lenders, as they are with correspondent lending, for many years. The lender who is ultimately funding the loan is revealed to the borrower prior to completion. Branded lending is even more transparent. Initially, the packager appears in front end marketing material to be a lender, but the identity of the lender funding the loan is clear to the borrower throughout the application process. Transparency is the key factor.
Will correspondent or branded lending be affected by proposed mortgage regulation?
Correspondent lending in particular faces an uncertain future in the face of mortgage regulation. This is the big debate taking place at the moment. One argument is that ‘correspondents’ are, to all intents and purposes, lenders and should comply with all the appropriate legislation that lenders have to comply with, including capital adequacy requirements. This approach, if enforced, may kill off the market for correspondent lending while still in its infancy in the UK.
The opposing view is that the correspondent is not a lender but a marketing and administration agency providing an outsourced service and correspondent lending should therefore fall outside the regulatory framework, as packaging does. One of the key issues with regulation is that, fundamentally, it is designed to control organisations and individuals who sell products to consumers. Most correspondent lenders, like packagers, provide a service to brokers but do not sell directly to consumers.
There is a strong case, therefore, for saying they should remain outside the regulatory framework. Ultimately, if someone acts and behaves like a lender they are likely to be regulated as one and to be subject to all that entails.
Branded lending will not face so many challenges under the proposed regulatory regime, as it is essentially a proposition geared around service and marketing. We anticipate that many existing correspondent lenders will turn to branded lending as regulation looms ever closer.
Julian Wells is sales and marketing director at Mortgages plc