WHY SOME COMMUNITY BANKS USE LOAN SERVICING PROVIDERS

The community banking industry is abuzz over loan servicing providers. Third-party loan servicing is one of the biggest community banking trends of the decade. The loan servicing software market is a $522.3 million industry and is expected to grow to a $785.6 million industry over the next five years. That doesn’t even include all of the other services that these companies provide such as call centers, data analytics, and technical support. 

What’s driving this demand for loan servicing providers? Community banks are looking for more cost-effective ways to manage their loan portfolios without placing a heavy burden on their in-house staff. Hiring a loan servicing provider is a great alternative to traditional loan portfolio management, particularly for small community banks with limited resources. Here are a few reasons why some community banks are choosing to partner with these providers.

What Do Community Bank Loan Servicing Providers Do? 

The loan servicing process has long been a source of struggle for some community banks. Loan servicing is the process of collecting payments or interest from borrowers. The process is much more complex and time-consuming than it looks on paper. It’s not just a matter of processing payments and keeping track of balances. Community banks also have to: 

• Identify late payments as quickly as possible; 
• Resolve and prevent delinquencies; 
• Manage repayment schedules and adjust them as needed; 
• Contact borrowers directly and manage customer relationships; 
• Provide technical support to borrowers and in-house staff; 
• Get in touch with a collection’s agency or collect delinquent funds themselves; 
• Keep up to date with lending regulations and ensure all systems are compliant;
• Keep borrower data secure;
• Analyze borrower data and use predictive analytics to reduce loan risk.

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The problem is that some community banks don’t have enough staff or resources to handle all of this on a consistent basis. It requires hiring loan servicing staff specifically for these tasks and having access to tools like predictive models, data analytics software, payment processing software, repayment scheduling systems, and customer service call centers. It’s a lot of work to manage just one aspect of the lending process. 

Community banks do more than just manage existing loans. They also have to maintain a separate staff for loan origination and applications, customer service, checking and savings accounts, credit and debit card accounts, and much more. It’s a lot to juggle at once. 

Community bank loan servicing providers take over a significant chunk of the loan management work so that your in-house staff can focus on some of these other important services. The less time community banks spend on loan servicing, the more they can provide to their communities.

Why Some Community Banks Are Opting for This Service 

Even some community banks that have the staff and resources to manage their own loan servicing are choosing to work with a loan servicing provider instead. That’s because these companies provide more than just one benefit to community banks. Here are five reasons why some community banks partner with loan servicing providers.

#1: Cost Savings 

Loan servicing providers save community banks money over time because the bank spends less on the infrastructure required to manage loans. Details like staffing, software, hardware, office space, and maintenance are all provided by the loan servicing provider. The community bank only pays a monthly fee to the provider for use of these built-in services. For some community banks, it’s the most cost-effective option.

#2: Fewer Errors

Having a full-time staff dedicated exclusively to loan servicing reduces the risk of human error. Rather than overworking an in-house staff, community banks can rely on a third party to manage their own staff of experienced loan servicing experts. With a loan servicing provider, community banks can securely store and analyze more data. This reduces errors by eliminating information silos and making better use of your data

#3: Faster Delinquency Resolution 

Loan servicing providers often use the best software, including automated delinquency alerts and resolution protocols, to solve problems immediately. In a traditional in-house loan servicing system, it might take a few days for a bank representative to get in touch with a borrower after a missed payment. With automated alerts and call centers alongside an experienced staff of loan servicing experts, these types of issues can begin the resolution process within minutes. If you need to send a borrower to collections, the loan servicing provider will spearhead the process. Loan servicing providers can also help community banks prevent delinquencies in the first place by using predictive analytics tools and advanced risk management software.

#4: Improved Borrower Communications 

If there is a problem with a payment or a missed payment, community banks have to act quickly, while not offending or alienating their borrowers. It’s a delicate balance between staying firm on payment deadlines and showing compassion for borrowers who may need some assistance or a repayment schedule adjustment. Loan servicing providers help community banks strike this balance. They keep track of borrowers’ preferred methods of communication, so you can get in touch with them directly as quickly as possible. Some of these providers also have a combination of staffed and automated call centers. The provider may have a protocol for using either an automated call or a call from a representative depending on the situation. The goal is to make borrowers feel comfortable speaking with bank representatives and resolve issues effectively.

#5: Compliance with the Latest Regulations

One of the biggest benefits of working with loan servicing providers is that community banks no longer have to go through the compliance process alone. Lending regulations are only becoming more complex. Rather than researching all of the latest regulations and making sure your entire system is compliant, you can rely on the experts to stay up to date with these changes. 

Overall, community banks that work with loan servicing providers have more time and energy to dedicate to scaling up their operations or making their existing business operations more efficient. It’s a way for even the smallest community banks to compete with large federal institutions.

Should You Switch to a Loan Servicing Provider? 

With all of these benefits in mind, you may be wondering whether working with a loan servicing provider is the right choice for your community bank. It depends on your needs, resources, and budget. To make this decision, ask yourself the following questions:

1. Does your bank struggle with any aspect of the loan servicing process?
2. Have you avoided offering loans or certain types of loans because you don’t have the infrastructure to manage these portfolios?
3. Could your loan servicing process be more efficient?
4. Are your delinquency rates high or increasing?
5. Do you want to improve or automate your customer communications?

If you answered yes to any of the questions above, then loan servicing providers may be a good choice. However, to gain all of the benefits of a loan servicing provider, community banks should partner with one that has experience with community banks in particular. Working with a provider that understands your needs as a relatively small-scale community lender is essential. The provider will configure its system to fit your customers and your workflow. From the time you disburse funds to borrowers to the day they make their final repayments, the provider will stand by to manage it all for you seamlessly.