After the closing: A recipe for sound loan administration
Any cook knows you can have the finest ingredients for a delicious pie, but if you bake the dish without monitoring it in the oven, you could end up with a burned mess.
The same is true with a credit union’s member business loan portfolio. Solid underwriting and sound documentation practices before a loan is approved can mean little to the overall health of your portfolio if the credit union fails to provide ongoing monitoring of its loans.
Credit-union industry consultant Brian McLaughlin of Tullamore Consulting recently offered some best practices for handling loan administration after the loan closes. In an article for CUES’ CU Management magazine, McLaughlin says that while loan servicing is responsible for many of the following types of exceptions, the loan officer is ultimately responsible for ensuring ongoing loan monitoring continues for the life of the loan. Tracking exceptions is a key part of the monitoring process, and there are several kinds of exceptions to oversee, according to McLaughlin:
Exceptions from the completed package: When servicing receives the completed documentation package, it makes sure the documents listed on the documentation checklist are actually in the package, McLaughlin says. Any exceptions should be noted on the exception tracking system. Typically included in the exception tracking system are:
• Recorded mortgages. “If the closing occurred at a title company or attorney’s office, the originals would be retained for recording by that firm and certified copies of the executed forms should be provided to loan servicing,” he says.
• Recorded copies of Uniform Commercial Code filings (UCCs).
• Final insurance policy documentation of coverage required by the loan agreement.
• The final title policy.
Exceptions tied to future items needed: Insurance renewal due dates, file-review deadlines and financial reports that are required by the loan agreement are examples of what should be included in any exception tracking system so that staff are expecting and planning for them. Loan administration software can help with this.
Exceptions for past due items: If required information isn’t received in a timely manner, the financial institution must take action to secure it. McLaughlin notes that it is the loan officer’s responsibility to make sure this happens, even if the credit union’s servicing staff maintains records related to the loans. He recommends loan officers receive at least monthly an exception report listing all outstanding technical exceptions.
Exceptions to required loan payments: Similarly, it is the loan officer’s responsibility to ensure the timely receipt of required loan payments. In some cases, the unique relationship that can exist between loan officers and customers may make it beneficial to have the collection department make the initial contact. In any case, McLaughlin advises, the business loan manager should review delinquencies at least weekly to make certain of prompt corrective action.
To learn more about how the member business lending landscape has changed, what risks come with MBL and how to mitigate those risks, download the whitepaper, Member Business Lending Landscape: Managing Risks & Opportunity.