Regardless of your monthly volume, one aspect of lending that matters to all stakeholders in your operations is loan servicing, so vet these vendors carefully.

Loan servicing is more often a cost than a revenue generator, so it’s easy for private lenders to overlook the time and effort that should go into establishing and maintaining sub-servicing relationships. When servicing is neglected, the impact on your business is real; both your borrowers and employees bear the brunt.

Given the high-touch nature of business purpose loans, every contact with your borrower is either an opportunity to instill confidence in your platform or to sow the seeds of doubt that there may be a better ease-of-use option available. So, how does a private lender put the right pillars in place to optimize these touch points and monitor the performance of your servicer?

The simple answer is to start with a tight grasp of your own business capabilities and goals. Don’t look just at the present. What are you designing and executing that will have different requirements down the road?

Finding a servicer that best fits your business is more about understanding your abilities to work with the servicer than the servicer’s ability to perform within the confines of “generally acceptable servicing practices.” The latter is certainly important and shouldn’t be discounted, but it’s also a conclusion that can be reached with relatively straightforward due diligence and a bit of market research.

The tougher nut to crack is what type of treatment your portfolio will get in the short term and long term as the servicer takes on more loans from you and potentially others. Subsequently, what burden does that leave to be shouldered by your organization to offer your borrowers the best experience possible?

What to Ask Yourself Before Engaging a Servicer

Before you engage a servicer, get clear about your intentions and how a servicer aligns with them. Some questions worth asking before you engage a servicer include:

• What’s the strategy for your loans? If the loans are going to be sold, securitized, or financed, ensure your capital partners are comfortable with and will approve your servicing choice. More important for DSCR at this point, but if you are planning on securitizing DSCR loans, take the additional step of ensuring the servicer is satisfactory for rated execution as well.
• How long are you going to hold the loans? The answer to this question will determine how quickly you will need to board loans to the servicer. Depending on whether loans are sold servicing released or retained may influence your decision to have the loans boarded at all. If loans are pledged or will be pledged to a financing facility, find a servicer familiar with the monthly remittance requirements of repo lenders and procedures around depository account control agreements.
• What’s the plan for ongoing involvement with the loans after sale? For RTL loans, and in some cases, DSCR, the lender will stay engaged after the sale of the loan and perform servicer oversight or asset management for the loans. If this is important to you as a seller of loans, consider what experience the servicer has with this type of transaction construct. Working with servicers that understand the needs of an asset manager will bolster your ability to better service your customers and keep the loan portfolio moving in a positive direction.

What Can a Servicer Prospect Handle?

Once you’ve established a strategy for the loans, you can look into the capabilities of your counterparties. A logical place to start in these conversations is the servicer’s staffing and organizational structure.

What type of assembly line is in place, and how many people are required to make it function the correct way? Depending on the product and probability of delinquency in the loan portfolio, your expectations around experience and the number of loans that can be managed by a single servicing rep may vary. Additionally, are those reps also responsible for other lenders’ portfolios, and what impact will that have on their ability to service yours?

Another important question to consider is what access will you, as the lender, have to servicing personnel? Some servicers operate a “SPOC” or single-point-of-contact model. In such cases, no matter the question, all traffic is filtered through your account owner. This is great for consistency, but it is less effective for turn times related to specific loan-level inquiries because the SPOC is often removed from daily management of loans and acts more as a team lead.

Next, having a communication policy with your servicer is key for the success of the loan portfolio. It’s important to implement a system that creates as little confusion as possible for the borrowers and maintains a quality of contact any time the servicer communicates with the borrower. These scripts help keep the servicing notes up to date and align the servicer with the goals of the lender related to ongoing asset management and data collection. For example, on RTL loans that have a rehab component, any time the servicer is successful in reaching the borrower, it’s an opportunity to solicit updates on the rehab project or potential need for extensions.

Being proactive in the collection of this feedback can avoid chasing borrowers at later stages of their project when the focus should be on completion and the eventual exit of the loan. In assessing whether the servicer is the right fit for your communication needs, it’s also good to understand how the servicer is sending written notices, how quickly the servicer can run updated outreach campaigns, and what the call center or auto-dialer systems look like.

Using Technology

Technology is increasingly important as your portfolio grows. The good news for private lenders is there’s more focus on technology platforms that are used to originate and service business-purpose loans. Unfortunately, it’s still unlikely that you will see a larger-sized servicer using servicing technology set up specifically for the management of RTL and DSCR loans.

The more likely scenario is they are using a version of their existing commercial loan servicing platform or 1-4 consumer residential servicing platform that’s been customized to handle the unique features of RTL and DSCR loans. A few areas to focus on, if this is the case, would be accrual of delinquent interest, cross-collateralization, the release of collateral from multiproperty loans, and correct treatment of interest for disbursements of Dutch vs. non-Dutch loans. This list has the potential to be much larger depending on the number of unique loan features offered.

Because the systems being used today to service these loans are not quite fit for purposes outside of the box, it results in calculations and tasks taking place outside of the system. As mentioned before, these gaps need to be filled by the servicer or within your organization. For this reason, ensure that audit procedures around balances and payments are in place and frequently monitored. The servicer should be performing these audits on top of your own.

As our industry continues to become more institutionalized, there’s a growing need for actionable data. Most conversations that occur on the capital markets front begin with “Send me your performance history.”

Being able to produce this data in a digestible format will pay dividends as you seek to introduce new partners to your platform for financing or sale. To make good on these requests, you must have a handle on the data received from the servicer:

• What information will the servicer send?
• How often will you receive this information?
• Most importantly, does your organization have the ability to take this data and make it useful?

The cadence and type of data received will be more similar than not, but the terminology and purpose of specific data items can differ among servicers. As you interview potential servicing partners, spend more time than you think is needed to get the onboarding completed correctly and the data mapping established. The efforts you put into this upfront will create the tools to monitor the portfolio as well as the performance of your servicer.

When it comes to the lender-servicer relationship, there’s a top for every kettle. The keyword here is relationship. Ask questions that will help focus efforts to serve your borrowers and capital providers and be prepared to fill in the gaps.