Managing a loan portfolio is no easy task. To properly manage any loan portfolio in today’s economy you need your data to be solid. Over the years having worked with thousands of different data sets we see the same issues occur over and over again. Here are 6 of the most common problems we see with guidance on how to avoid these headaches yourself.
1. Not recording original collateral value
Many times when initiating a loan the loan officer fails to store the appraised value or AVM in the database. This is a common issue we see with many financial companies which in turn affects their ability to get thorough analysis for loan portfolio analysis. Having the original value helps calculate migrations, values, probability of default and delinquency, and in calculating portfolio ratios. To fix this, make sure you have an original value field available to your loan officers in your L.O.S. and database. If you already have this field available make sure you educate your lending staff to ensure this field does not get left blank.
2. Failing to require senior lien balances for second position loans
Raise your hand if it is a policy at your institution to always capture the balance, term, and rate of all senior liens at the application level of a second position loan. My guess is many of you put your hands down half way through the sentence. This is a complex problem that the industry at large is always trying to solve. Pulling this data from title liens or credit bureau are different methods to capture this value after the loan is made, however these methods are not always accurate. A better approach can easily be made by adjusting your processes on your front lines. Make sure you make senior lien information a requirement when your loan officers are taking any type of secondary loan application. Doing this will save you time, money, and make your analytics more accurate.
3. Not recording lien position
Another issue related to lien position might surprise some of you. Frequently we see many institutions that don’t record what position the loan is in at the time of application. This is a common occurrence for HELOC loans. Make sure you have fields available to record your lien position, whether that be 1st, 2nd, or even 3rd position. At the time of application the loan position might seem obvious by way of it’s loan type but once you start mixing together all of the raw data the lien position if not recorded is less obvious and this makes loan portfolio analysis much more difficult.
4. Changing loan data after charge-off
What good is a charged-off loan? We’ll it’s actually a vital piece of information when you start analyzing your trends, calculating your loss given default, or calculating your probability of default. We frequently see companies that will mark a loan as a charge off but lose the data on what type of loan it was before charge-off occurred. By adding the same standard loan fields to your charge-off loan fields and then transferring those data fields back and forth you should avoid losing any data you might want/need in the future. Another common problem we see with charge-off’s is reusing loan ID’s of charged-off loans. This can be a big problem when your are using loan ID’s as a unique identifier. Think about a recent loan you’ve had to charge-off now think of a similar loan that is a profitable loan. Imagine how different those loans are. Reusing the charged-off loan ID as the profitable loan ID will tell the database that these two loans are one and the same. You can imagine what happens to your ratios, concentrations, expected loss, etc. Separating data and then storing as much of it as possible will always lead to better analytics results.
5. Not updating credit scores
Credit scores are one of the main variables used today to determine the riskiness of a borrower. Once a person is approved for a loan they become both an asset and a liability, a liability if they become delinquent on payments, and an asset if they purchase more products that you offer. Monitoring credit score migrations are early indicators of future problems or new opportunities. We see many institutions that only pull a score on a borrower at the time of application. While doing this might seem like you are saving money further analysis of loan defaults and missed lending opportunities will tell a different story. At a minimum credit scores should be updated once per year on your entire portfolio. At a more granular level it is not uncommon for those institutions that are using their data to help them make more loans and minimize risks to pull credit scores for a select group of loans on a quarterly basis. Remember the cost to acquire a new customer almost always exceeds the cost of up selling or saving a current client.
6. Not separating collateral from mailing address
This problem is common in both second homes and in a primary residence. We see to often that the collateral address and mailing address are not separate fields. Not separating both addresses can be problematic for valuations, communications, up selling, concentrations, etc.. Make sure your applications have both field types available and your loan officers are using them appropriately.