community bank lending risk


The defi Team Automation, Community Banking, Compliance, defi ANALYTICS, defi INSIGHT, defi SERVICING, Loan Management, Reporting & Analytics, Servicing Systems

community bank lending risk

COVID-19 is redefining the notion of risk in nearly every facet of the global economy, forcing financial institutions to rethink policies and processes. Lenders must now evaluate risk not only from the perspective of potential portfolio loss, but also on their ability to adapt to a COVID economy. 

Along with strategic decisions to help maintain capital levels, lending technology and loan servicing resources are two of the most important factors that will determine lenders’ success during this disruption. Here, we look at the role of those factors from the perspective of community bank lending risk.

Analytics and Configurable Loan Management and Servicing: Vital to Risk Management

Technology can cover a wide spectrum of functionality, but in the case of understanding risk exposure and efficiently adopting methods to manage it, analytics and servicing are vital. Analytics can reveal the extent of your exposure. Agile servicing systems are critical in implementing mitigation strategies.


Risk Reduction Benefit

Native analytics
  • Allow lending professionals to evaluate loan risk per borrowers, segment, and geography to obtain an immediate understanding of potential exposure. Based on the analysis, risks can be prioritized and insights can be applied to drive the risk mitigation strategy.  
Loan management and servicing system configuration
  • Quickly modify loan management and servicing systems to implement policies and processes to delay payments, reduce payments, or offer new terms with the goal of minimizing risk of delinquencies and defaults.

Gauge the Impact to the Local Economy and Your Portfolio 

Community banks have a decided advantage in assessing the local economy. For years, you’ve weighed lending decisions against risk with a keen understanding of local needs. Now, you need to carefully evaluate those risks in light of unemployment. 

Communities with significant segments of hospitality, tourism, transportation, entertainment, or restaurants have been highly impacted. Initial analysis of your loan portfolio provides baseline insight regarding at-risk borrowers, segments, and geographies, and the level of work needed to mitigate these risks. For example: 

  • Based on past payment patterns, which borrowers, regardless of credit tier, are most likely to become delinquent?
  • What percentage of your portfolio is at risk of default if no accommodations are made?
  • Are any specific cities or towns at greater/lesser risk based on local industries?

The information gleaned from these analyses can be used to proactively contact at-risk borrowers with options—deferred payments, extended terms—that reduce the chance of delinquency or default. Lending professionals could also evaluate different risk-based scenarios to determine which one(s) offer the best chance of minimizing potential losses.  

Community banks whose lending software natively incorporates analytic tools designed for lending professionals will find the initial and ongoing portfolio analyses significantly easier compared to using third-party analytic tools that require database downloads and data scientist expertise to query, extract, and analyze the findings.

Want to find out more about our software and services? Contact our team today.

Loan Servicing Assumes a Major Role in Managing Community Bank Lending Risk 

Your strategy to minimize lending risk will focus on forbearance criteria and guidance for loan servicing personnel. Service agents will need to be educated on criteria that will allow them to defer payments or negotiate different terms. This means your loan servicing department will now play a greater role in managing risk, assuming responsibility for:

  • Handling a significantly greater volume of borrower inquiries via phone, email, webchat, text, and even postal services.
  • Understanding and accurately communicating to borrowers the forbearance options available to them.
  • Applying forbearance criteria consistently to determine who qualifies. 
  • Working closely with borrowers to find the best options, while complying with regulations.   

Loan servicing systems that support your agents need to efficiently manage inbound and outbound communications and ensure compliance with federal and state guidelines. Support for mobile interactions, paperless processes, and digital signatures accelerates transactions and facilitates the easy capture and retention of communications and documentation in the event there’s any question regarding compliance.

Software is critical in bringing efficiency to these activities. Implementing modifications to policies and processes guided by the federal CARES Act or any state regulations may be a challenge for some community banks. However, translating policy and process changes into consistently applied rules and automated workflows greatly reduces the risk of relying on manual processes that may vary based on the servicing agent handling the request. 

Community banks with configurable cloud-based loan management and servicing systems should be able to implement these servicing changes quickly. Alternatively, community banks who outsource loan servicing may be in the best position to accommodate these changes. Experienced providers who focus on servicing have the systems and resources to respond quickly to changing economic conditions. 

Loan Management and Servicing Systems Provide Vital Insights

Community banks are facing one of the most significant challenges to maintaining capital in recent decades. Banks that successfully meet this challenge will do so with the aid of natively integrated analytic tools that allow lending professionals to quickly assess their risk exposure and use that insight to drive the mitigation strategy. 

Easily configurable, cloud-based loan management and servicing systems enable community banks to quickly implement policies and processes to offer loan relief to at-risk borrowers. These systems are critical to helping servicing agents manage the increased volume of inquiries regarding loan relief, consistently apply forbearance criteria, and ensure all aspects of offering payment delays, payment reductions, or adjusted terms are properly executed, communicated, and recorded.  

Getting Started

defi SOLUTIONS provides configurable loan origination systems, loan management and servicing, analytics, and reporting solutions. If you’re looking for more efficient solutions to manage community bank lending risk during a financial crisis, as well as during normal economic cycles, take the first step in realizing the benefits of modern lending technology. Contact our team today or register for a demo.

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