Loan servicing is a critical aspect of banking that involves managing borrower accounts, processing payments, and handling any issues that may arise during the life of a loan. While loan servicing may seem straightforward, it can be complex and challenging for banks. In this post, we will explore some of the common issues faced by banks in loan servicing.
One of the biggest challenges faced by banks in loan servicing is payment processing. Banks must ensure that payments are accurately applied to borrower accounts and that any errors or discrepancies are promptly addressed. The high volume of loan payments, especially in large institutions, can make it challenging to keep track of all the payments and ensure that they are properly allocated.
Banks follow multiple systems and each system has its own calculation parameters. Most of the time backend systems like mainframes, Hogan etc. are responsible for sending out demand letter, foreclosure letter etc. If the backend systems made mistakes in sending out wrong letters banks liable to hefty fines, e.g.,WellsFargo paid $ 3.7 billion dollars in the lawsuit where the system sent Foreclosure letters by mistake1.
Rounding off issue: For example, Bank ABC using Mainframes as backend – True Source database and Loan Servicing application in the frontend using Java based application. Mainframes application have 7 digits round so when an amount entered in Mainframes as “$100” will be recorded as “$100.0000000”. So, if we have a calculated field where we divide the $100 into 3 monthly payments, we will get $33.3333333 for 1st and 2nd month and $33.3333334 for 3rd month. But the java-based application only uses and sends back up to 2 digits only i.e., on the front end of the application the user can see the payments of $33.33 and can pay the amount up to 2nd decimal point.
If borrower made first month payment and then the Mainframe system receives $33.33 as payment so borrower still owes $0.0033333 to the bank as per the backend systems. In the third month the borrower makes $33.34 towards the payment. So, the payments posted by the borrower are
- first month $33.33
- second month $33.33
- third month $33.33 total $99.99.
The payments recorded in the mainframe system and the difference generated are:
- first month needed $33.3333333 and received $33.33 so still owes $0.0033333
- second month needed $33.3366666 (previous month deficit added by the system) so borrower made $33.33 and still owes $0.0066666
- third month needed $33.3399999, and borrower made $33.34
So, as per the rounding borrower made $0.001 more than he owes. If this pattern continues banks end up charging at least 1 cent extra from the borrower than he is supposed to pay in the US or Europe, this is important.
This will cause charging an extra cent from the borrower and that violates the agreement between borrower and bank could levy hefty fines to the banks and lawsuits.
This scenario occurs at random intervals during mortgage payments and the banks need digital solutions to detect the scenario when it arises in borrower servicing and trigger automatic correction or sending for manual review.
Compliance and Regulation
Compliance and regulatory requirements also pose a significant challenge for banks in loan servicing. There are numerous regulations and guidelines that banks must follow, including those related to loan origination, servicing, and collections. Staying up to date on changing regulations and ensuring compliance with them can be time-consuming and costly for banks.
E.g., The taxes and modification vary based on the government that comes to power, as soon as the orders are issued and mentioned effective date of the regulation need to be followed no matter what the status is .
In April 2020, President of USA announced the federal protection for Loans. So, no matter the state of the loan prior to that, no customer should be called to asking for the premium payment. If so, then the bank can be sued based on the protection offered by the legislation. The application developed should be able to handle such robust changes in the market.
Delinquent Loans and Default
Delinquent loans and default can be a significant challenge for banks in loan servicing. When borrowers are unable to make payments, it can lead to increased costs for the bank, including legal fees, collection expenses, and loan write-offs. Additionally, banks may face reputational damage if borrowers feel that they are not being treated fairly.
Providing quality customer service is essential for banks in loan servicing. However, with the high volume of loans and the complex nature of loan servicing, it can be challenging to provide prompt and accurate responses to borrower inquiries. Banks must have efficient customer service processes in place to ensure that borrower inquiries are handled promptly and effectively .
In conclusion, loan servicing poses numerous challenges for banks, from payment processing to compliance and regulation, to delinquent loans and customer service. Overcoming these challenges requires a combination of technology, expertise, and effective processes. By addressing these challenges, banks can ensure that they provide quality loan servicing to borrowers while also managing costs and reducing risk.
What Brickendon can offer
- Brickendon can help in defining an intermediary application for consolidating all the different apps used in the servicing process – like apps for payments, customer service, modification engine etc.
- Brickendon can help in developing a one stop solution for all the mortgage needs of the banks – beginning from the Servicing – Payments – Modifications – Agreement and Closing, which covers all the borrowers including those who are delinquent and at the verge of Bankruptcy, treating all the customers under one umbrella makes the process more transparent.
- Brickendon can offer digitization solutions like creating decision engines, creating digital letters, and integrating with customers etc.
- Banks spend enormous amounts on integration during all the phases for sending letters to the customers on their payment dues etc., the automated integration along with solution to servicing is smaller area but has enormous advantage in banking to develop solutions.
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