The Pros and Cons of Servicing Loans In-House
10 Questions Lenders Need to Ask Themselves
July 30, 2013
Running a profitable lending business; especially one that is experiencing dramatic growth or a changing regulatory climate; can be a difficult task.
Often, one of the key dilemmas faced by the lending businesses is this: Should we spend time on lending and originating and outsource the servicing of the loans? Or, should we attempt to do both?
During my conversations with customers, I hear many reasons for both options. I encounter lenders looking for software in order to bring the servicing back in-house. The reasons vary. Some lenders simply do not trust the data and the reports they receive from third-party servicers. Or, they are concerned that they won't have the flexibility in what they can offer their customers, or the reports they receive. They may also believe they can save money by bringing it in-house.
Looking at the other option, I have talked to lenders who are attracted to a third-party servicer because it mitigates their need to recruit and train a qualified loan servicing staff. Or, they simply don't want to be bothered with the back-end side of lending. They would like to spend all of their time on the sales side and not worry about managing staff and maintaining hardware.
To help with this decision-making process, here are some questions you should ask yourself:
- Staffing: Do you have a knowledgeable, experienced servicing staff or the ability to recruit and train one? A reputable third-party servicer should have the required, fully trained staff.
- Hardware: Do you have the necessary hardware to run the software as well as the necessary technology environment, I.T staff and security? There are two choices here:
- Reputable third-party servicers either own their own hardware or rely upon a hosting partner;
- Hosted solution: Many in the finance industry are using hosted technology services offered by reputable third-party data centers or managed services providers. These types of partners typically possess the hardware, plus the necessary technology environment, redundancy and data security methods to keep your system safe and continuous.
- Security: Are you able to manage the necessary backups? Are your firewalls secure? Both the third-party servicer and the hosted solution will meet these needs.
- Disaster Recovery: Do you send your data to an off-site storage facility? Do you have access to any required testing of that data?
- Report Building: Do you need the ability to use live data for new or changed reports? Do you need to provide analysis of live data?
- Compliance Requirements: Do you have compliance requirements for all relevant regulatory authorities and for your company stakeholders? It's important to know that third-party servicers don't always have everything you need for compliance. Depending on the size and nature of your lending business, your requirements may include:
- State and/or Federal Regulations
- Board of Directors
- Auditing: Can you provide live data for everything auditors might require? Do you trust the data? This is a very important consideration for lenders. Often, they are reluctant to relinquish control to a third-party.
- Flexibility: Do you have the ability to change or add business lines as needed. Can you change accounting practices as directed by management? These are key questions, especially during uncertain economic times. We've seen many lenders expanding their lending products and offerings as the market dictates. In doing so, they require flexible systems. If lenders do not have this flexibility, they may be restricted to making their product fit the software and/or the constraints of a third-party servicer.
- Cost: When comparing the fees a third-party servicer will charge you versus the costs of bringing it in-house, everything mentioned above should be considered as part of your calculation. Failing to fully account for the costs with either choice could have a large financial impact to your business.
- Accessibility: Does anyone else need access to your data, i.e. Underwriters, Loan Officers, Asset Managers, Collectors, Accountants, Dealers, any other 3rd parties? Most servicers will limit the users that can see their data.
Before you make a decision, think through your processes and understand the workflow for who needs to do what at the point of originating the loan through payoff.
Operating a successful lending business requires the active management of a lot of moving parts. As your business grows or changes, it is often a good exercise to ask yourself all of the questions addressed above. Keep in mind that operating behaviors that work perfectly well for a smaller-size lending business may not work for a company that is experiencing growth or one that is subjected to a changing regulatory environment . In addition, business rules that were perfect a few years ago, may require changes to match the economic environment.