Improving Loan Servicing

Category: Banking.

The administrative process behind collecting interest, principal, and escrow payments can be hectic and counterproductive when it’s not handled properly. To make customers happy, the process of requesting, disbursing, and repaying a loan needs to be smooth and streamlined. The loan servicing team is responsible for collecting monthly payments, sending monthly statements, maintaining records of payment, collecting and paying taxes, and insurance.

Clearly, loan servicing is an integral function of any financial institution, and when it’s done well, allows customers to receive up-to-date-information about their loans and reminders for paying them back. However, oftentimes, servicing departments could greatly improve their work to make sure they’re providing a great customer experience. An excellent way to make these changes is to develop OKRs that will not only articulate your ambitious goals and objectives but will also address specific ways to make visible progress.

A financial institution can measure the effectiveness of its loan servicing group by taking advantage of the following metrics:

  • Default Expense as a Percentage of Total Loan Servicing Expense: This can be derived by dividing the total servicing loans-related expense in default (foreclosures, loss mitigation, bankruptcy, etc.) by the total loan servicing expense over the same period of time multiplied by 100 (percentage).
  • Commercial Lending Headcount Ratio: This can be known through the division of the number of company-wide employees by the total number of commercial lending staff members of the company at the same point in time including commercial loan officers, underwriting, processors, and servicing staff.
  • Mortgage Collateral Management Headcount Ratio: This can be known by dividing the number of company-wide employees by the total number of staff members involved in collateral management for mortgage loans in the company in the same period of time.

How A Financial Institution Can Improve Its Loan Servicing

Many problems involved with loan servicing that eventually lead to friction between the borrower and the lender can be avoided with excellent loan servicing. Below are some tested and trusted ways a financial institution can improve:

According to Timothy Reimink of Crowe LLP, overstaffing or understaffing can hinder the productivity of any financial institution. Therefore, a financial institution should consistently evaluate what the right number of employees is to handle the loan servicing duties of the company. From there, it’s important to make sure that your company is retaining the best talent and providing opportunities for training and professional development so employees are doing the best work possible.

Improve Process Costs

According to Timothy Reimink, a director with Crowe in the Grand Rapids, a lot of banks don’t take the opportunity to reduce process costs like they should, partially because it requires them to take a more detailed look at their business processes. The goal of improving process cost is to enhance the bank’s efficiency through the reduction of the unit cost-to-value ratio of every transaction. These transactions can include everything from the cost of creating a loan document package or opening an account, to handling a particular type of transaction.

To truly improve the process, you need to continuously monitor performance through analysis, benchmarking, mapping, and rethinking the way the organization carries out its loan operations. This includes a greater reliance on automated routing, electronic documents, and process automation powered by machine learning models.

Address The Less Obvious Drivers Of Customer Experience

Lenders addressing customer experience issues might focus on the parts of the process that are most visible to customers. However, cosmetic changes alone are insufficient and may mask the root causes of a problem or poor experience.

New Fintech players can define the customer experience upfront and develop a supporting infrastructure that accommodates these visions. Banks, on the other hand, often have a legacy infrastructure, process, and culture that impede this execution. Though the specific challenges vary by lender, some of the challenges of developing a better customer experience may include:

  • Technical entropy: Traditional financial institutions often struggle to adapt because of legacy technology that is ill-equipped to meet new business needs. Banks’ back-end systems are encumbered by disparate “spaghetti” systems, incongruent processes, and poor scaling to growth and demand, all of which generates friction and inhibits innovation
  • Legacy processes: Many institution processes are inefficient and result in worse services provided to borrowers. Challenges can include exacting documentation requirements, frequent manual reviews, and time-consuming underwriting approaches.

Banks first must recognize the shortcomings in their customer experience, but it’s equally important that they understand the opportunities for growth and change beyond what’s visible to the customer.

These methods for improvement can be taken and developed into OKRs that will help you meet the needs of your organization. If you want to improve your company’s loan services, you should first think about the challenges you might be facing, whether it’s a high unit cost-to-value ratio, an understaffed team, or the current legacy process. From there, you can structure your OKR based on what you’re looking to improve and add key results based on the outcomes you’re looking to see.

For example, we can create the following OKR to improve loan servicing:

    Objective: Improve Loan Services

  • KR1: Decrease unit cost-to-value ratio for transactions by 5% by switching the driver from ”number of transactions” to ”number of exceptions.”
  • KR2: Move out at least 10 back office processes to be performed at the centralised back office
  • KR3: Generate data-driven capacity model to match staffing levels to actual work volumes.

In KR1, unit-cost-to value ratio is the KPI. While Cost drivers are the metrics that explain how costs are incurred, their origin, their cause and effect,allocation drivers are rules agreed within the bank that regulate how a service will be charged out to each recipient. The cost to serve for delivering trade processing services can be reduced by switching the allocation drivers from ”number of transactions” to ”number of exceptions.” Following this change, the buyers (recipients) of these services were incentivized to improve the documentation quality and to gather the required information prior to submitting the trade for processing. Through this new focus, and effectively a change in consumption behavior,banks can drive a cost reduction and also responsible customer documentation.

For KR2 back-office processes have to be moved out of branch offices and then automated accordingly. Too many common back-office activities were actually being performed in the branches and this created lots of cascading problems like branch work increased with staffing levels increased. Also, extra back-office work was required to correct all the inconsistencies generated by the branches. After these issues were discovered, processes when transferred to the centralized back office gave profound results in the branches and the back office in terms of improved customer experience and more recovery of processing capacity.

For KR3, the precise staffing plan to match the exact needs will turn out to be effective in cutting costs judiciously. A detailed analysis of process steps at the individual activity level can be used to establish standard times required to complete individual tasks. Then a data-driven capacity model with this input can be created to enable the bank to match staffing levels to actual work volumes.

By improving your loan services, you’ll undoubtedly improve your customer service experience. Therefore, you could align this department-level OKR with a corporate OKR pertaining to customer service, such as “Improve Overall Customer Experience.” Moving forward, you’ll then have a clear objective that will contribute to the overall betterment of the organization, which will improve both the customer and employee experience.

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