The lending journey doesn’t have to end with loan originations. With the right captain and procedures in place, you can board a bigger boat and sail profitably into servicing.

Transforming your operations to run a loan servicing department successfully is not unlike the transformation of a small fishing boat into a mighty cargo ship. Both journeys require adaptation, resilience, and a keen understanding of the tides and currents of the industry to ensure the ship stays afloat and can carry as much cargo with as little crew as possible.

In this article, we’ll take you on an adventure, drawing parallels between the evolution of a lender and upgrading to a bigger ship, showcasing how lenders have transitioned to servicing their loans to increase their bottom line and retention of business. If you are a lender who is not servicing, understand you may be missing out on a voyage that generates revenue for your business.

Attention, The Captain Is on the Bridge!

Before setting sail, you must understand the captain is the biggest part of the ship. Every good captain knows every bolt, weld, crew, and space on their ship. Understanding the cargo (loans) and the cargo supplier (capital lines) is paramount to a successful journey.

That understanding must also include the crew. You have your origination crew and your servicing crew. It is important for both departments to understand each other, their roles, and why things need to be the way they are. As the captain, you must take ownership of leading your team and giving them the resources to be successful on the journey.

Here are the details to consider before you set sail:

Meet with your servicing team. Remind them:

• What your capital lines need in order to continue to service and maintain good records. Servicers should understand the funding agreement of the capital provider to ensure post-closing data can be quality controlled and managed within the company and the borrower. Insurance, extensions, modifications, delinquencies, and foreclosures need to be addressed—and addressed in the manner in which the capital line has agreed upon.
• To communicate with borrowers about what is expected of them after they originate the loan. The servicing department should echo everything the origination team should have said prior to closing. Borrowers need constant reminders about payment dates, insurance renewals, signing of extension or modification documents, and draw information.
• About what is expected to ensure good customer relations and customer retention. Having a good customer relations operation and automation keeps the borrower in front of servicing to manage issues. Never forget the time you didn’t know. Most borrowers may be unfamiliar with payoff procedures, payment options, and how to service an investment property. A baseline of at least monthly communication with servicing while the note is active is bare minimum.

Meet with your origination team and servicing team together. The origination team needs to understand why they are gathering the information and what to look for that causes issues in servicing. Go back to basics regarding why the appraisal needs to be read in a particular way and why entity docs are reviewed (to avoid errors in servicing later). Any protocol or procedure you have with your capital line must be explained to the sales side so they can better inform the borrower and obtain the material more efficiently. Nothing loses confidence in sales faster than “I don’t know why we need this, but just get it.”

Ensure that origination has a basic understanding of servicing. The client is going to be spending more time with servicing than with the sales team. Originations should be able to explain basic steps and keynote dates and be able to walk their customer through their next relationship stage with the company.

If you want a successful servicing team, your first line of defense is having your origination team on board. The most common issue you have when these two departments are disconnected is documentation. Servicers get the file after it closes. They don’t know your borrower and what was agreed upon—they just have the file. When your origination team knows what servicing must manage with a firm operation in documentation, servicing will need to put out fewer fires and manage the post-closing process more efficiently.

Having these meetings will decrease confusion, increase empathy and understanding of each other’s roles, and allow you to have a direct and frank conversation about any failures and errors that need to be addressed.

Setting Sail: Growing Your Revenue

It may surprise you, but servicing can make up more than 70% of your monthly revenue. Most lenders got into this business as originators. They would originate as much paper as they could and then sell it off to note purchases, aggregators, and other financial institutions or investors to replenish capital and redeploy. Not a bad deal. But did you know you are leaving three other big revenue generators on the table in that scenario?

Most lenders probably don’t service because they never had to. They started a small lending operation that turned into a bigger lending operation, but they never went back to look at their growth strategies. They just focused on the original plan: Close loans.

You may want to take another look at the servicing side again and see how much money your business may be failing to generate.

The biggest barrier you will have to address when it comes to pursuing servicing is capital. Visit with your current capital provider to review your options.

The second barrier is personnel. You must have someone with some accounting and financial experience to manage these numbers. Your overhead will grow as you acquire key personnel to manage the accounting, draws, collections, modifications and extensions, all post-closing aspects, and the paperwork between title and recordings. All new personnel will need to be hired and trained.

Starting a servicing operation is not a walk in the park, but starting a lending company wasn’t either. Here are some reasons you should at least consider servicing:

1. Monthly interest payments are huge. Depending on your volume, they can make around 70% of your monthly net revenue. Consider this: You are originating at anywhere from between 2% to 4% origination fees, on average, with average regional lenders lending at 11.9% to 13.9%. If your cost of funds were prime, prime + 1, or prime +1.5 (as of October 27, 2023, prime is at 8.5%), you are effectively leaving that spread on the table every month. Depending on your cost of funds, that’s possibly a 5.4% spread you’re not capitalizing on.
2. Consider extension and transaction fees. Let’s say you sell your notes and keep the spread. The second thing you may be missing out on is extension and other transaction fees when the loan pays off. In today’s market, most lenders are writing 6-, 12-, and 18-month notes. As you know, borrowers are in these loans longer. That’s not such a bad thing as long as you underwrite the collateral correctly in the beginning. Each 6-month extension can afford your company 1% to 2% in extension fees, paid either at the time of extension or on the back end at payoff. So, if you sell your notes, see if you can split the fees.
3. The third missed revenue opportunity is retention. It is perhaps the most overlooked. Nothing kills your business faster than non-repeat business. Ask your marketing department which is cheaper—keeping a client or finding a new one. Servicing is the department where your borrower stays the longest. Servicing makes more financial transactions with customers than originations ever does. If you can service your own loans or retain servicing if you sell your notes, you can establish better relationships and communications with your borrowers, so they make their money and use it for another property with you repeatedly.

Growing Pains: Weathering the Storms While Transferring Cargo

As lenders continue their journey, they may face turbulent economic seas. Economic downturns, market volatility, and changing regulations and covenants with capital partners can make the lending journey challenging. To stay afloat, lenders must adapt and evolve. Here are some tips to help you avoid high seas and rough waves.

1. Update your operations with better software and communications to reduce errors and to increase the efficiency of group projects and tasks.
2. Stay in front of markets and underwrite conservatively. Also keep in communication with your capital partners and the state of their ship.
3. Have key operations in place for collections and documentation processes.
4. Make sure borrowers are touched multiple times a month on upcoming key dates, including payments, insurance renewals, modifications, extensions, etc.

Adding key automations and embracing efficiencies with communications helps keep the seas from rising on you, your team, and your borrowers. When everyone is aware, problems can be solved. Most servicing problems start as a pinhole leak in the ship, and they aren’t addressed until they become almost too big to manage. Your servicers should be communicating with your borrowers as much as your origination staff is.

Communication Between the Bridge and the Engine Room

Poor communication is the root of almost any business or relationship problem. As our cargo ship endures the fluctuating market waves, the bridge must be able to communicate with the engine room. What is the driving force of our engine today (other than communication)?

Technology.

Modern lenders must invest in data analytics, automation, and customer relationship management systems to optimize all department opportunities. Servicing is no different. Here are some “ship” upgrades to consider:

Make loan management more efficient with an appropriate loan origination system (LOS). Don’t shop for an LOS that fits what you are today; buy one that will still serve you six to 12 months down the line.

1. Reduce your risk with internal communication systems like Slack and Teams to minimize email mishandling.
2. Develop automation emails and calendar alerts to send to borrowers about key dates, invoices, and loan needs. Doing so reduces the manual time your team must spend on these important tasks.
3. Record your weekly meetings with departments to ensure everyone is on the same page. Use your internal messaging system to collaborate on ideas and keep abreast of market changes.
4. Consider APIs that link your software so you can co-manage data while decreasing manual error and time expended.

Anchors Away

As lenders evolve into comprehensive loan servicers, they can navigate complex financial waters with grace and resilience. With the right technology, capital compliance, effective internal communication, and a customer-centric approach, lenders can transform their businesses into powerful ships that sail confidently toward a more prosperous future—no matter what the market throws at them. Just as a well-maintained cargo ship can weather any storm, lenders-turned-servicers can thrive.