WHAT TO LOOK FOR WHEN CONSIDERING LOAN SERVICING PROVIDERS

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. As a result, 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 embrace a better alternative: Third-party loan servicing companies.

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 an extensive loan portfolio. However, lenders must know what to look for in a trustworthy loan servicing company to gain these benefits. 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 customers loans, you need a loan servicing system. Loan servicing is the process of managing a loan through its entire lifecycle, from disbursement to repayment. It can include loan origination, which is generally considered a separate process. Loan origination is step one, and servicing the loans is step two.

If you service your own loans, you must, at a 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. The best loan servicing providers now provide all the services listed above for a monthly fee. 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, helping credit unions, community banks, and small-scale lenders thrive. However, different loan servicing providers offer different types of services, so it’s essential to consider which qualities matter most when choosing a lending partner.

The Seven Qualities of Great Loan Servicing Companies

Not all loan servicing providers are created equal. Some offer an assortment 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.
 
So which of the loan servicing companies is right for you? It depends on your budget and your needs. However, most lenders will benefit most when they work with a company with these seven qualities.

Seven Habits of a Highly Effective Loan Servicing Company
1) End-to-End Services	Handles the entire lending cycle from origination to collections and repayment.
2) Configurable Credit Decisioning Rules	Enables you to use your own decisioning rules and data collection systems if you choose.
3) Predictive Risk Analysis	Provides predictive models that use artificial intelligence (AI) or machine learning to mitigate risk.
4) Human-First Communications	Treats your customers with respect and works in your best interest and the borrower’s.
5) Frequent Compliance Updates	Keeps all software, hardware, and business operations updated based on the latest compliance standards.
6) Automated Loan Servicing	Uses automation effectively so it can spend more time on vital services like customer communications.
7) Fast Collections and Delinquency Response Times	Employs an automated schedule for contacting a borrower after a late payment and escalates communications as needed until the lender is reimbursed.

#1: End-to-End Services 

Ideally, the company should handle the entire lending cycle from origination to collections and repayment. Packaging these services together puts your mind at ease and improves operational efficiency. Your originations department, customer service representatives, and collections department constantly communicate to ensure that nothing slips through the cracks. This also helps you when new lending regulations are passed, as the company will ensure your entire system falls under compliance.

#2: Configurable Credit Decisioning Rules 

A loan services company shouldn’t force you to use its decisioning rules or data collection systems. While it can and should recommend methods to help you mitigate risk, it 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 

Knowing when an account has become delinquent is not enough. It’s far better to analyze risk patterns to prevent delinquencies and defaults before they happen. Loan servicing providers can provide predictive models that use AI 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 courteously, encouraging borrowers to resolve the issue rather than ignoring their calls. Ultimately borrowers are all human beings that deserve to be treated with respect. It’s essential 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 research the latest compliance standards and 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. Based on these concerns, companies should keep all software, hardware, and business operations updated.

#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 contacting borrowers after the 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 immediately 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 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, flexibility is the most essential quality in a loan servicing company. The company should make its 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.
 
If you are looking for a loan servicing company that exemplifies the seven qualities above, look no further than defi SOLUTIONS. Our defi MANAGED SERVICING provides a single hub, digital interactions, and intelligent virtual assistants to bring everything together.
 
defi MANAGED SERVICING uses AI and Contact Center as a Service to boost operations and processes related to auto loans, leases, and leased vehicle dispositions, reducing budgetary expenses and improving customer service.

We offer you a choice of end-to-end auto loan servicing or à la carte services, such as loan and lease customer service, lease maturity management, remarketing, and backup servicing.