By Terry Clay
That’s the million-dollar question many in the commercial lending space are asking themselves nowadays. A book could easily be written on this complex topic. There are a lot of questions you must first answer before determining whether your company should outsource commercial loan servicing to a third party vendor, or build a team and license a system like McCracken’s STRATEGY. So before we get into the nitty-gritty details, the short and sweet answer is… “it depends.”
Let’s take a closer look at the 4 biggest questions your company needs to answer before making a final decision one way or the other.
1. What is your commercial loan volume?
If your company has a relatively small book of a few hundred loans it may not be worth servicing them in-house once you factor in the human and tech costs required to run a commercial servicing operation. You can ballpark what 1-2 full-time employee salaries and benefits would cost without too much time or research, as well as annual licensing of servicing software. However, answering this question alone does not give you the full picture. There are ample examples of companies with very low commercial loan volumes that have managed to turn a healthy profit by establishing a lean, efficient servicing function. In some cases, it may not even require adding additional staff, but simply training and compensating a current employee to assume servicing responsibilities for the company.
Tip: Networking and talking to an experienced commercial servicer who has knowledge of how to help condense and organize processes is also a good place to start.
2. What types of commercial loans do you have?
Once you’ve identified your current volume of commercial loans you also need to strongly consider the type of loans that need to be serviced. There may be numerous requirements that need to be tracked in an ongoing basis depending on the type of commercial loans you need to service. Are they bridge loans? CMBS or agency deals? Small or large balance? Commercial real estate or small business loans? What type of covenants need to be monitored? Once you peel back the onion you may realize that servicing specific types of commercial loans is either very manageable or overly complex for the current state of your organization.
Tip: Estimate the number of hours it would take to service each type of commercial loan, based on the various tracking requirements, as well as standard day-to-day processing functions, and then multiply that by the number of loans in your portfolio to get a sense of the time commitment
3. How will your commercial loan portfolio evolve in the future?
Is your portfolio aging? Is it growing leaps and bound? Are you getting into a new type of commercial lending that is more complex than past deals? For example, let’s say you are starting to lend for more commercial multi-family properties. These assets need to be proactively monitored in an ongoing basis to ensure the loan remains healthy and low risk. Or, perhaps the asset is less complex, such as a small-balance deal requiring less oversight. Projecting your future growth, or even lack thereof, will help your company future-proof your decision and think big picture for your business.
Tip: Staying in tune with the overall CRE market will help a successful shop manage and set surveillance thresholds that should be monitored to identify potential risks in your portfolio.
4. What level of data do you need to track?
What mandatory data must be tracked at the borrower, guarantor, and asset levels? Examples may include financials, updated inspections, or covenants. Is tax, insurance, and other reserve requirements included in your loans? Are other third-party providers, such as National Tax Service or Harbor Group, proactively monitoring and advising on taxes and insurance? Are your loans actively asset managed? What current systems are being used to track this data?
Tip: Don’t throw more people at the problem. Jumping the gun to hire new staff is often a luxury most businesses can’t afford. You may miss out on ways to be highly efficient with servicing software automation that is readily available and sometimes heavily underused.
Summary
Once you’ve answered and analyzed these 4 questions and determined potential costs you now have a strong base of knowledge to inform a potential decision. Naturally, the key to designing your servicing engine is using the least amount of costs as possible. It can certainly be done if commercial loan servicing is a business you are interested in growing at your organization. Or, the result you may find is outsourcing is the way to go. The good news is, you have options. The choice is yours.
Terry Clay is CEO of Goldersun Commercial Loan Servicing with nearly 20 years of experience in the commercial lending industry. Working in a variety of senior servicing roles with highly reputable organizations helped develop his unique perspective and consultative approach to servicing. Contact: tclay@clayconsultinggroup.net
