Loan servicing reports: Does your credit union treat them as a critical control, or do they treat them like a chore, and prioritize other tasks over their review?
The answer is in how you use them and what you get out of them.
When used correctly, loan servicing reports provide valuable tools and control to ensure your loan servicing area is performing their responsibilities correctly and within the regulatory requirements. To perform a proper review of a loan servicing area’s activities, your management team should have a full menu of daily, monthly, quarterly, and annual reports at their disposal. They also need to prioritize this activity and set aside enough time to ensure the reports receive an adequate review.
If your servicing manager considers this responsibility a chore, and are not giving it the attention it requires, they are doing your credit union a disservice, one that will increase your expenses, increase member complaints, kill your efficiencies, and result in exam and audit findings.
Senior management and mid management bankers are always juggling multiple tasks and responsibilities and at the same time dealing with the daily staff and member issues that constantly crop up. We all know day-to-day management can be challenging, especially at a smaller institution. There are always issues that need immediate attention and it is natural for managers to prioritize tasks, completing those they deem critical, and pushing aside those they do not. Unfortunately, pulling and reviewing loan servicing reports is a task that is all too often considered a “chore” and pushed aside. As someone who has held senior management positions at multiple smaller institutions, I can tell you from experience that a failure to properly monitor your loan servicing activities will have negative consequences for your credit union. Monitoring and reviewing loan servicing reports cannot be viewed as a chore, they are as critical of a control as the review of your deposit account activity and teller transactions.
To properly monitor your loan servicing activities your management team should have a report program that consists of somewhere between 15 and 50 reports. These reports can be generated daily, weekly, monthly, and quarterly, or automatically printed upon a specific occurrence. These servicing reports are both forward and backward facing, with both equally important.
A proper loan servicing report management program, completed by a well-trained, and knowledgeable manager, will ensure the following:
- Your loans are being serviced in accordance with state and federal regulations.
- Your loans are operating in accordance with their note and loan agreement.
- Your loan payments are being applied in the proper order and correctly.
- You are processing your escrow transactions accurately and in a timely manner.
- Your loans are uploaded to the servicing system with the correct interest rates and with the correct loan product type.
- The interest rates on your ARMs are adjusting properly and that your borrowers are getting the proper notifications.
- Address changes are being completed in accordance with your procedures and completed by the appropriate team member.
- Unauthorized team members are not performing maintenance that they are not authorized to perform.
- Unusual or possibly fraudulent transactions are noted and reviewed.
- Late fees are being assessed properly and are appropriate for the transaction.
- You are monitoring and managing non-escrow borrowers with delinquent taxes or expired homeowner's policies.
- Expiring HELOC’s are rolling into repayment correctly and the borrowers are getting the required notifications.
- You are monitoring credit quality and credit quality trends.
When a credit union does not have the appropriate loan servicing reports or devalues and/or deprioritizes the review of your loan servicing activities there can be consequences.
The proper review of any report goes beyond a simple review of the data on it, the review must also consist of testing, sampling, and verifying the data. Just having reports is not sufficient, if they are not being reviewed, or if the reviewer is not properly trained, then audit and exam deficiencies will be the result. It is critical that a competent manager spends the appropriate time reviewing and signing off on each report and that they note and follow up on any issues identified. Loan servicing reports are one of the credit union's primary tools and controls, to ensure that the institution is operating compliantly and soundly.
The list above provided details on what strong loan servicing does for a credit union. In this next section I am going flip it around and provide some examples of what can happen when a credit union has weak loan servicing controls.
The following are deficiencies that I have identified and remediated over the years using loan servicing reports. I caution anyone reading not to assume your loan servicing area is perfect. I have yet to work at or encounter an institution with a perfect loan servicing area. If you are not sure all you need to do is review your most recent three exam reports and your most recent three loan servicing audits.
Common loan servicing deficiencies and their impact to the credit union:
- ARM and LOC interest rates are adjusting incorrectly or not at all.
- Leads to regulatory criticism of the management team
- When undercharged it can lead to a significant loss of interest income, forever
- When overcharged it can lead to significant reimbursement expenses
- Criticism from regulators
- PMI cancelations not occurring and premiums are collected beyond the mandatory cancelation date.
- This can lead to significant exam and audit findings
- This can result in significant customer reimbursements and expenses
- Can result in borrower hardships and complaints
- Loan payments not applied in the order dictated by the loan note. This can result in the following:
- The borrower paying excess interest
- Loan payments being reported late, in error
- Fees pyramiding, something that can bring a UDAP accusation
- Expense borrower reimbursements
- Significant audit and exam findings and criticism
- HELOC’s going into repayment with no borrower notification
- Checks bouncing and causing borrower embarrassment and harm
- Regulatory findings and criticism
- Staff not monitoring delinquent taxes and expired insurance
- Leads to serious exam and audit findings
- Brings a risk of loan loss resulting from a tax taking or property damage
When these deficiencies occur, they can continue for months and years and require considerable time and resources to remediate. The resources required to correct these issues not only pull the staff away from their regular duties but result in significant expenses as well as harming the institution’s reputation.
Loan servicing is not an exciting topic, and the area does not generate income but is cost center. Loan servicing representatives typically have high turnover rates and are usually one of the low paying positions at a credit union. Combine these two elements and it is very easy for the department’s activities to go off course or sideways. Staff and team members all make mistakes, most of those are one-time events that require simple retraining to correct the issue. That is not always the case with loan servicing. When a loan servicing team member makes a mistake, in many cases it will not be a one-time event but one that recurs months or years into the future. A wrong system setting, a wrong interest rate, an error in processing a payment, these all can lead to “leaked” interest income and or result the credit union incurring significant expenses to unwind and correct.
We all know the impact a good hire can have, but in the servicing area a bad hire can result in issues that continue to exist for years after they are gone.
In conclusion, your loan servicing report management program is one of the most important controls your institution has at its disposal, and I encourage every management team to review this area in great detail to confirm your team has the reports they need to properly perform the task, that they have the proper training and knowledge to do it, and that they are allotting enough time to complete it. These reports should be signed off and stored each month and provided to the regulators to provide evidence of your dedication and commitment to servicing loans compliantly.
