Investors are more cautious than ever regarding where they invest their funds. They’re looking for assurance that their investments will deliver returns equal with current economic conditions. While banks and credit unions are capitalized by deposits, nonbank financial institutions must look elsewhere and provide evidence that their investors’ funds are well-managed. Multiple factors contribute to investor confidence in a lender, such as years in business, management record, underlying lending technologies and return on investment.
Multidimensional lending risk
In the current economic climate of declining auto sales, a profound jump in unemployment and difficulties evaluating borrowers’ creditworthiness as a result of the CARES Act, many lenders are struggling to efficiently handle the increased volume of servicing requests. As a result, borrowers are struggling to make payments, lenders to restructure loan terms and investors to recoup investments.
Given this, investors now want assurance that payments will continue to be collected, loan terms will be adjusted to avoid defaults and investors’ funds will be safe — despite the economic downturns that stress a lender’s servicing capabilities. Lenders can instill investor confidence through a back-up servicing arrangement with an experienced servicing provider.
A range of back-up servicing options
Lenders need a back-up servicing strategy that gives them a wide range of options, depending on their current business needs. An experienced servicing partner should be capable of waiting on the sidelines, ready to assume full responsibility for servicing and quickly provide intermediate levels of support. A range of services could include:
- Establishing a Retainer: Servicing provider is retained as the successor in the event of insolvency or servicing problems, requiring minimal preliminary preparation for the transition.
- Sharing Portfolio Data: Lender’s servicing system data is mapped to the back-up servicing provider’s system, so the provider receives, reviews and stores loan portfolio data files.
- Running Partial Parallel Systems: Runs partial or completely parallel systems, mapping data from lender to back-up servicing provider.
- Running Full Parallel Systems: Runs full parallel systems with backup servicing provider acting as the primary on a portion of the loan portfolio.
Experience and technical capabilities required
To provide this range of back-up servicing options, a provider will need to have experience in the implementation of innovative technologies that meet market and regulatory requirements. Their solutions will need to rapidly scale with lender demands, provide real-time portfolio updates, support multi-channel engagement and include extensive process automation.
Servicing skills are equally important. Experienced agents handle a spectrum of requests, from simple phone inquiries to complex loan restructuring, all while complying with current federal, state and local regulations.
Back-up servicing boosts investor confidence. Investors need to feel protected against the possibility of servicer insolvency or poor performance.
Shaimaa Elk serves as executive vice president, chief information officer and chief technology officer at defi SOLUTIONS, the technology partner of Auto Finance Excellence, a sister service of Auto Finance News.