Effectively managing loan lifecycle risk

Consumers have seen plenty of changes taking place on the front-end of banking — from increasing options for mobile banking to growth in fully digitized offerings. However, there are changes taking place on the back end as well, especially with higher expectations from consumers and shareholders.

Therefore, as fundamental changes to lending continue their brisk pace, industry disruption is impacting risk management, due diligence, and daily operational practices. 

Lien filing methods are changing too, impacting the management of one’s loan portfolio lifecycles, and all the while lenders need to walk a tightrope of mitigating risk while still meeting the needs of creditors, customers, and shareholders. Those involved must think carefully about how they can best manage and allocate their resources.

UCC filings are still critical

No matter what else happens in the industry, lenders must continue to secure their assets to minimize their potential loss exposure. A UCC (Uniform Commercial Code) filing will never be static. It is a dynamic document that will change over the life of the loan. Lenders need to maximize their returns by looking deeply at their portfolios and be willing to change workflows to operate more efficiently, with the ultimate goal of maximizing the quality of their services.

By taking proactive steps, lenders can protect their interests and actively manage their liens from top to bottom. This more assertive loan management approach can be considered a positive kind of disruption, necessary for lenders that would like to stay ahead of these potential issues. 

And there are many different factors that could place a lender's interests at risk. Some lenders could have 20 percent of their lien portfolio unperfected and not even know it. That imperfection can drastically impact their ability to collect under adverse conditions. Intelligent, proactive lenders understand that perfecting their portfolios is a critical, ongoing process.

Despite putting more due diligence into perfecting each individual UCC filing, it is clear this effort could be wasted if the lender does not consistently track these filings and make sure they are kept current. What does this mean? As noted above, a UCC is not static. Lenders need to be aware of changes to their loan portfolio that could impact the future lien position of those secured assets.

Keeping up with the changes

One part of a lien filing to which lenders need pay special attention is the debtor name and address. For example, a debtor might get married and change their surname. Or a business might relocate to a new address before it has fully paid back a loan. Some lenders might try to mitigate their risk by associating a loan with a borrower phone number, but those numbers can change overnight as people get new cell phones or landlines. These variations in debtor data could allow a UCC to expire before the debt is paid back. If lenders cannot find their debtor, they certainly cannot collect from them.

Lenders don't know what they don't know

Another important point to consider is that lenders don't know what they don't know. They simply can’t envision all the other risks that could impact their ability to collect. How might certain liens and accounts fall through the cracks? Lenders might not know about these risks, placing them in a vulnerable position.

For example, an astute lender needs visibility into additional liens filed against their debtor. Depending on how a lien is filed by another secured party, it could be completely out of the line of sight of the lender. A business that looked financially secure on paper at the outset of a loan may have taken on too much debt — thereby allowing other creditors to jump in line to collect when there’s a default. If a lending organization doesn’t have the ability to scour 50 secretary of state sites and search for every iteration of a corporate name (and few, if any, do), something is bound to be missed.

Risk can be found in other areas of a lender’s existing portfolio as well. When liens are filed by multiple people in multiple locations, sometimes with the help of third-party service providers, it can be a huge challenge to keep an accurate record of them all. Once again, the lack of a formal, enterprise-wide platform can be a gap.

But the fact is that no matter the risks, organizational hurdles, and capabilities (or lack thereof),  lenders must maintain perfection through the active management of all liens and portfolios. The good news? There are automated tools that can help. In the short-term, they might lead to the disruption of current operations; however, those traditional operations are often slower, outdated, manual, and gap-filled. Modern lien management tools can automate many of the tasks that lenders currently do by hand, saving time and money.

Looking to the future

Without a doubt, the world of lending is something that is always a risky venture. Lenders are assuming that their borrowers are going to pay back the money they have been loaned — but that is not, and never will always be the case. Lenders need a better way to understand the risks they face in the modern era and drive opportunity for growth.

How can lenders do this? The easiest thing is to take advantage of available technology that can help them improve their processes. That way, they can partner with the right lien management service provider. This could allow lenders to become more accurate and efficient than they ever have been in the past, leading to increased confidence, better returns, and improved customer service from start to finish.

If lenders are secure in the services they provide, the right kind of borrower will follow, setting the lending operation up for continued and unabated success.

About the Author:

Bill Schulz serves as vice president, Client Services, for Wolters Kluwer Lien Solutions. He is responsible for ensuring a satisfactory client experience from the beginning of a lender’s relationship with Lien Solutions to the fulfillment of their lien management needs.