The Power of Servicing Your Loans
Rewarding, Rather than Burdensome!
“Servicing is the most exciting part of alternative lending” – said no lender ever. With this said, it can arguably be the most important back office process that helps your firm quickly scale and grow. A lot of lenders try to take on servicing manually with spreadsheets and paper files or outsource the responsibility all together. Either way you typically end up putting more work on your shoulders resulting in a customer service nightmare for your investors and borrowers.
With the right technology in place – reporting, borrower communication, and investor relations become easier and rewarding to manage. When you can process a payoff, negotiate a loan modification, and never miss, or miscalculate a distribution – your clients on both sides of the process want you to fund their next project or give you more capital, thus growing your firm.
So how can you make servicing rewarding instead of a burden? First things first – communication.
Communication and Loss Mitigation:
What lenders do not immediately realize is that servicing goes beyond the numbers. When your borrowers need to negotiate payment terms after the loan has already been funded, you must be able to track communication. If you do not have the CRM controls in place to track these discussions, it can become he said, she said without a clear direction. Having event journals and reminders that detail conversations and physically time stamp communications drastically helps keep both you and your borrower on the same page. All this, while better protecting your investors’ investments with the proper audit controls. Having these discussions clearly labeled and book-marked becomes essential if things take a wrong turn and delinquencies, and foreclosures, come into play.
This communication between you and your borrowers is vital, especially as lending environments become more complicated with increased loan modifications, deferments, and the word of 2020 – forbearances.
When your borrower has irregular payments and deferments, it typically has a direct impact on distributions. These calculations would give any excel guru and mathematician a headache – let alone the fun game of telephone tag between you, an outsourcer, the borrower, and even your investors.
It goes without saying: stressed borrowers and upset investors are bad for business.
This is where another key to in-house servicing comes into play – being prepared for any loan situation and scenario. If you have the servicing technology in place to begin with, loan modifications, deferments, and forbearances can become an opportunity – not a problem.
When you get that call from your borrower to make a terms change, you, as both the lender and the servicer, can efficiently and effectively negotiate win-win solutions for the borrower, your investor, and your firm. You do not have to spend hours in a spreadsheet running calculations or on the phone going back and forth with a third party. You have the controls in place and at your fingertips – instantly.
Safeguarding Assets:
On top of enhancing communications, with the right technology you can better protect your investments through compliance and insurance reminders.
Surprisingly, it is easy for lenders (especially newbies) to overlook an incredibly important fail-safe to your investment – property insurance. Many alternative lending projects include financing construction projects, fix and flip, ground up, bridge, purchase loans – the list goes on, but the risk is similar, and you must be prepared. Construction projects, let alone mother nature, do not always go as planned and if your borrower lacks the proper insurance – the responsibility and the lack of preparedness falls on both the lender and borrower.
Tracking insurance and having reminders to initiate your own insurance if the borrower does not react fast enough can prevent a disaster to your portfolio. You need to have a process to track this to protect both you, the lender, and your borrower.
HMDA, RESPA, and Trust Accounting:
Just like property insurance, compliance must not be overlooked either, but also should not scare you. The word “compliance” alone makes many lenders second guess servicing in house – but frankly can be quite easy to balance with the right system in place. Dodd-Frank in particular added rules and regulations that lenders need to monitor. Assuming your spreadsheet or third-party servicer is properly managing state and federal regulations, is risky and not recommended.
Having back office processes that easily provide HMDA reporting, follow RESPA guidelines, and help you monitor escrow accounts as required for high rate or high cost mortgages can provide you peace of mind, and make audits simple and stress free.
Additional Revenue and Liquidity:
The final and most exciting part about servicing in-house is the additional revenue stream that is earned from self-managing your loan portfolio. By the way, this is not just about earning servicing fees.
Yes, by bringing servicing in-house you can make and retain all the earned fees rather than splitting them or forfeiting all of them to a third party.
Beyond generating more servicing and late fees, servicing in house provides lenders the opportunity to make revenue and profits from unexpected areas.
For example, on loans that you have sold off, you can create liquidity by selling off all or part of a loan, but retain the servicing to continue to generate a trailing interest strip or interest arbitrage to you. Many private lenders continue to receive 100-200 bps or 2% interest or more “after” they have sold or syndicated their loans.
The lenders that you sell off too actually enjoy the trailing interest strip, since the original lender still has skin in the game to ensure a continued successful project.
The opportunity to earn interest strips on sold off loans is really only available if you service in house. A lot of lenders will assume that servicing in-house only provides minimal returns on the servicing fees. The negotiation prowess of holding interest strips, plus servicing fees, is the most rewarding part of servicing, and with the right processes and system in place – it’s very easy to automate and manage.
While more revenue is great for the lender – your borrower can appreciate that you have the final call on late fees and additional service fees in general. When you control whether fees get assessed or not, you only enhance the long-term relationships with your borrowers. You decide whether to be lenient when assessing late fees to a borrower that maybe just fell into a month or so of hard times. Either way – it is your decision, not someone outside of your organization.
It is All About Control:
At the end of the day, servicing in house is about one thing – maintaining complete control over your portfolio. When a lender can control the entire process from origination, to servicing, to pay off – they can control the entire relationship and life cycle of the loan.
Maximizing your in-house servicing processes and automation efficiencies is easier than you think with the right partners. My team and I have helped 1,000s of lenders manage and automate their back office and we can help you too.
If you have been thinking about servicing in house – but did not know where to start, then give us a call. We will be more than happy to help your organization fully control your loan cycle, so you can continue to scale and grow your lending portfolio.
As published in Private Lender Magazine December 2020
Nate can be reached at ngoodheart@absnetwork.com or by visiting TheMortgageOffice.com – 800.833.3343
