Loan servicing is a hot-button issue in the financial services industry. As lending regulations become more complex and the cost of managing loan portfolios rises, fewer lenders can effectively service their own loans. Many lenders are getting out of the loan servicing business altogether because it’s too difficult and costly to manage. This is why modern lenders are embracing a better alternative: Third-party loan servicing providers.
These companies take over the loan servicing process so lenders can focus on other operations like front office staffing, customer service, or loan originations. It’s a time-saving and cost-effective way to manage a large loan portfolio. However, to gain these benefits, lenders have to know what to look for in a trustworthy loan servicing company. In this guide, you’ll learn the seven qualities you should consider before outsourcing your loan servicing process.
Who Needs Loan Servicing?
If you provide loans to customers, then you need a loan servicing system of some kind. Loan servicing is the process of managing a loan through its entire lifecycle from disbursement to repayment. It can include loan origination, but that is generally considered a separate process. Loan origination is step one; servicing the loans is step two.
If you service your own loans, you must, at minimum:
- Collect data on every loan in your portfolio, including a detailed record of loan terms, payment amounts, balances, interest rates, payment dates, fines, fees, and schedules;
- Send information and payment deadlines to borrowers;
- Process payments securely;
- Identify late payments or recover delinquent accounts;
- Send borrowers to collections;
- Manage a call center and web portal for borrower communications;
- Meet compliance standards for all lending regulations; and more.
Because so much is involved in this process, loan servicing used to be performed only by large banks or lenders. In the past, small lenders struggled to compete and couldn’t manage as many loans due to limited time and resources.
Things have changed. For a monthly fee, the best loan servicing providers now provide all of the services in the list above. This means that small lenders can offer more loans to their customers without worrying about having the back-office staff and resources to support it, which is helping credit unions, community banks, and small scale lenders to thrive. However, different loan servicing providers offer different types of services, so it’s important to consider which qualities matter most when choosing a lending partner.
The Seven Qualities of a Great Loan Servicing Company
Not all loan servicing providers are created equal. Some offer a hodgepodge of services, like collections and customer communications. Others provide a more comprehensive loan servicing system that may even include loan origination software and data analytics.
Which company is right for you? It depends on your budget and your needs. However, most lenders will get the greatest benefit when they work with a company that has these seven qualities:
#1: End-to-End Services
Ideally, the company should handle the entire lending cycle from origination to collections and repayment. Packaging all of these services together sets your mind at ease and improves operational efficiency. Your originations department, customer service representatives, and collections department stay in constant communication to ensure that nothing slips through the cracks. This also helps you when new lending regulations are passed, as the company will make sure your entire system falls under compliance.
#2: Configurable Credit Decisioning Rules
A loan services company shouldn’t force you to use their own decisioning rules or data collections systems. While they can, and should, recommend methods that will help you mitigate risk, they should ultimately respect that you understand your industry and borrowers best. When you partner with a loan servicing company, ask whether you can use your own decisioning rules or alternative credit data to structure and manage loans. The system should be flexible.
#3: Predictive Risk Analysis
It’s not enough to know when an account has become delinquent. It’s far better to analyze risk patterns so you can prevent delinquencies and defaults before they happen. Loan servicing providers can provide predictive models that use artificial intelligence or machine learning to mitigate risk. It’s a proactive, rather than reactive, way of servicing your loans. This is the future of lending, so it’s important to partner with a company that already uses some of these predictive techniques.
#4: Human-First Communications
Many lenders are worried about outsourcing their loan servicing because they don’t want to alienate their borrowers. Customers may feel undervalued if they’re constantly inundated with robocalls or forced to speak with representatives that treat them like numbers rather than people. Call centers have two jobs. First, they need to effectively communicate with borrowers if they miss payments. Second, they need to communicate in a courteous way that encourages borrowers to resolve the issue rather than ignore their calls. Ultimately borrowers are all human beings that deserve to be treated with respect. It’s important to work with a loan servicing company that agrees with that philosophy and works in the best interest of the lender and the borrower.
#5: Frequent Compliance Updates
Loan servicing providers should be researching the latest compliance standards and taking a look ahead at where each industry is headed. For example, as lenders collect more alternative credit data on borrowers, there may be future compliance standards related to storing this data securely and using it to make loan decisions. Companies should keep all software, hardware, and business operations updated based on these concerns.
#6: Automated Loan Servicing
Although loan servicing providers are in charge of most, if not all, of your loan management needs, it’s still beneficial to automate as many of these tasks as possible. Companies that use automation effectively can spend more time on vital services like customer communications, which may require more direct staff oversight. Automation also reduces errors. You can automate payment schedules, disbursements, and repayments. You can also flag delinquencies.
#7: Fast Collections and Delinquency Response Times
Some loan servicing providers even have an automated schedule for getting in touch with borrowers after the very first late payment and escalating communications as needed until the lender is reimbursed. In lending, time is crucial. The longer you take to respond to a late payment, the more money your business will lose. Getting in touch with borrowers right away also shows them that you are paying close attention to their payments and expect them to reimburse you on time. It sets clear boundaries and expectations from the start and reduces delinquency and default rates.
As you look for a loan servicing company, keep these seven qualities in mind.
Finding the Right Loan Servicing Partner
Overall, the most important quality in a loan servicing company is flexibility. The company should make their system fit your needs, not the other way around. Shop around for a lending partner that:
- Allows you to make your own decisioning rules;
- Builds a custom portal or platform for your staff and borrowers to access;
- Understands your industry, core principles, and company culture;
- Trains their staff on the best way to communicate with your customers;
- Is willing to add services as your business scales up or business needs evolve.
With a partner like this by your side, you don’t have to waste any extra time or resources on loan servicing ever again. You can offer your borrowers the most competitive loans and effortlessly manage their accounts from disbursement to complete repayment.
defi SOLUTIONS is a loan servicing company that provides end-to-end services for lenders in a wide range of industries. We handle every aspect of the loan servicing process, from originations to collections. To find out more about our inclusive and configurable services, contact our team today or register for a demo.
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