August 2025: Loan Servicing Reporting: A Critical Control or a Chore?
March 2025: Servicing Report Spotlight: Interest Rate Changes
February 2025: Servicing Report Spotlight: Expiring HELOC's
January 2025: Loan Payments Applied Incorrectly..... What Could Go Wrong
December 2024: Budgeting Interest Income and Cash Flow
November 2024: What could go wrong when the wrong person oversees a Core system conversion?
Originally Published on CUInsight.com
LOAN SERVICING REPORTING: A CRITICAL CONTROL OR A CHORE
By Steve Borgerson
Loan Serving Reports: Does your Credit Union treat them as a critical control, or do they treat them like a chore prioritize other tasks over their review?
The answer is in how you use them and what you get out of them.
When used correctly, Loan Servicing reports provide valuable tools and control to ensure your Loan Servicing Area is performing their responsibilities correctly and within the regulatory requirements. To perform a proper review of a Loan Servicing area’s activities your management team should have a full menu of daily, monthly, quarterly, and annual reports at their disposal. They also need to prioritize this activity and set aside enough time to ensure the reports receive an adequate review.
If you Servicing Manager considers this responsibility as a chore, and are not giving it the attention it requires, they are doing your Credit Union a disservice, one that will increase your expenses, increase member complaints, kill your efficiencies, and result in Exam and Audit findings.
Senior Management and Mid Management Bankers are always juggling multiple tasks and responsibilities and at the same time dealing with the daily staff and member issues that constantly crop up. We all know day-to-day management can be challenging, especially at a smaller institution. There are always issues that need immediate attention and it is natural for Managers to prioritize tasks, completing those they deem critical, and pushing aside those they do not. Unfortunately, pulling and reviewing loan servicing reports is a task that is all too often considered a “chore” and pushed aside. As someone who has held Sr. Management positions at multiple smaller institutions, I can tell you from experience that a failure to properly monitor your loan servicing activities will have negative consequences for your credit union. Monitoring and reviewing loan servicing reports cannot be viewed as a chore, they are as critical of a control as the review of your deposit account activity and teller transactions.
To properly monitor your Loan Servicing activities your management team should have a report program that consists of somewhere between 15 and 50 reports. These reports can be generated daily, weekly, monthly, and quarterly, or automatically printed upon a specific occurrence. These Servicing reports are both forward and backward facing, with both equally important.
A proper loan servicing report management program, completed by a well-trained, and knowledgeable manager, will ensure the following:
- Your loans are being serviced in accordance with the state and federal regulations.
- Your loans are operating in accordance with their Note and Loan Agreement.
- Your loan payments are being applied in the proper order and correctly._
- You are processing your escrow transactions accurately and in a timely manner.
- Your loans are uploaded to the Servicing system with the correct interest rates and with the correct loan product type.
- The interest rates on your ARM’s are adjusting properly and that your borrowers are getting the proper notifications.
- Address changes are being completed in accordance with your procedures and completed by the appropriate team member.
- Unauthorized team members are not performing maintenance that they are not authorized to perform.
- Unusual or possibly fraudulent transactions are noted and reviewed.
- Late fees are being assessed properly and are appropriate for the transaction.
- You are monitoring and managing non-escrow borrowers with delinquent taxes or Expired Homeowners policies.
- Expiring HELOC’s are rolling into repayment correctly and the borrowers are getting the required notifications.
- You are monitoring credit quality and credit quality trends.
When a Credit Union does not have the appropriate loan servicing reports or does not prioritize their review there can be consequences.
The proper review of any report goes beyond a simple review of the data on it, the review must also consist of testing, sampling, and verifying the data. Just having reports is not sufficient, if they are not being reviewed, or if the reviewer is not properly trained, then audit and exam deficiencies will be the result. It is critical that a competent manager spends the appropriate time reviewing and signing off on each report and that they note and follow up on any issues identified. Loan Servicing reports are one of the Credit Unions primary tools and a controls, controls to ensure that the institution is operating compliantly and soundly.
The list above provided details on what a strong Loan Servicing Report Management program does for a Credit Union. In this next section I am going flip it around and provide some examples of what can happen when a Credit Union has weak loan servicing controls.
The following are deficiencies that I have identified and remediated over the years using Loan Serving Reports. I caution anyone reading not to assume your loan servicing area is perfect. I have seen yet to work at or encounter an institution with a perfect loan servicing area. If you are not sure all you need to do is review your most recent three exam reports and your most recent three Loan Servicing audits.
Common Loan Servicing deficiencies and their impact to the Credit Union:
1) ARM and LOC interest rates are adjusting incorrectly or not at all.
· Leads to Regulatory criticism of the management team.
· When undercharged it can lead to a significant loss of interest income, forever.
· When overcharged it can lead to significant reimbursement expenses.
· Criticism from Regulators.
2) PMI cancelations not occurring and premiums are collected beyond the mandatory cancelation date.
· This can lead to significant exam and audit findings.
· This can result in significant customer reimbursements and expenses.
· Can result in borrower hardships and complaints.
3) Loan payments not applied in the order dictated by the loan Note. This can result in the following:
· The borrower paying excess interest.
· Loan payments being reported late, in error.
· Fees pyramiding, something that can bring a UDAP accusation.
· Expense Borrower Reimbursements.
· Significant Audit and Exam Findings and Criticism.
4) HELOC’s going into repayment with no borrower notification.
· Checks bouncing and Causing Borrower embarrassment and harm.
· Regulatory findings and criticism
5) Staff Not Monitoring Delinquent Taxes and Expired Insurance
· Leads to serious exam and audit findings.
· Brings a risk of loan loss resulting from a tax taking or property damage.
When these deficiencies occur, they can continue for months and years and require considerable time and resources to remediate. The resources required to correct these issues not only pull the staff away from their regular duties but result in significant expenses as well as harming the institution’s reputation.
Loan Servicing is not an exciting topic, and the area does not generate income but is cost center. Loan Servicing representatives typically have high turnover rates and are usually one of the low paying positions at a Credit Union. Combine these two elements and it is very easy for the department’s activities to go off course or sideways. Staff and team members all make mistakes, most of those are one-time events that require simple retraining to correct the issue. That is not always the case with Loan Servicing. When a loan servicing team member makes a mistake, in many cases it will not be a onetime event but one that recurs months or years into the future. A wrong system setting, a wrong interest rate, an error in processing a payment, these all can lead to “leaked” interest income and or result the Credit Union incurring significant expenses to unwind and correct.
We all know the impact a good hire can have, but in the servicing area a bad hire can result in issues that can continue to crop for years after they are gone.
In conclusion, your Loan Servicing Report Management program is one of the most important Controls your institution has at its disposal, and I encourage every management team to review this area in great detail to confirm your team has the reports they need to properly perform the task, that they have the proper training and knowledge to do it, and that they are allotting enough time to complete it. These reports should be signed off and stored each month and provided to the regulators to provide evidence of your dedication and commitment to servicing loans compliantly.
Minimal Reports = Minimal Controls
Today’s Servicing Report Spotlight: Expiring HELOC’s
By Steve Borgerson
Servicing Reports are a key management tool and a control. Used properly, they can help management ensure that the Bank or Credit Union is servicing loans compliantly. Many are used looking both forward and backward, including the Expiring HELOC report.
This report should be pulled first of each month and used to identify the HELOC’s that will be expiring, mine is set to look 60 days out. When an expiring HELOC is identified in the report, a letter is sent to the borrower notifying them that the Draw period will be expiring soon and that any balance on it will roll into repayment. The letter must state the date that the borrower can no longer draw on the line, provide the estimated balance on the Line that will go into repayment, and provide the amount of the estimated payment. Not sending this letter can cause serious customer and regulatory issues.
Once the expiring HELOC’s are addressed, the previous month’s Expiring HELOC’s report is pulled and each Expired HELOC account is pulled, and the new loan payment is reviewed to make sure the payment was processed currently. To properly QC a HELOC’s roll into repayment the reviewer should review the loan note to determine if the new payment should be an amortized loan payment or a fixed principal and interest loan payment and that the new payment used the correct method in calculating the new payment.
Monitoring Expiring HELOC’s is one of the more critical responsibilities of a Loan Servicing Manager. I recommend anyone in Senior Management reading this to follow up with their Loan Servicing area and confirm this task is being done and that the review is looking at both the past and future expiring HELOC’s.
For more information:
Phone: 617-609-9747 | Email: steve@sbloanconsult.com | Web SBLOANCONSULT.COM
Here are the 5 most common outcomes when loan a payment is misapplied:
1) The principal portion of the payment is reduced: this could result in a borrower paying additional interest over the life of the loan and could be an audit finding.
2) A reduction in Interest Income
3) Fee’s being applied improperly, this can result in a partial, rather than full payment.
4) A loss of fee income.
5) Late Fee Pyramiding
Some of the above are not only regulatory violations but could be considered a UDAP. Loan payments must be applied her the terms of the Note.
How, or Why does this happen? This is not a one-off due to teller or human error. This is a systemic issue that results from an improper setting in your loan servicing system. This improper setting could be for one loan product or all of them. It is never just for one loan.
If any of your institutions’ recent audits or exams have noted loan payment application issues, without addressing the cause, you will likely see those same findings repeat.
How can I help? I can identify the system setting that is the root of the cause, and I will provide the correct setting so that the payments are processed and applied correctly so you avoid a repeat finding.
If desired, I can also test your loan payments to determine if they are being applied properly ,and per the loan Note, and I can provide the solution to any that are not. I specialize in Solutions!
To learn more about my services: visit my website at www.sbloanconsult.com,
call 617-609-9747, or email me at steve@sbloanconsult.com.
I recently concluded a two-part consultation for a small 135-million-dollar Credit Union. The consultation was a success as it provided the CEO and CFO some critical information which they used to bolster their 2025 loan interest income and put the Credit Union on a path to meet their 2025 Strategic Plan’s revenue goals.
Part One: Estimate the CU’s 2025 Loan Interest Income
After analyzing their YTD Loan Interest Income GL’s through 10/31/2024, I did some calculations and produced a report that estimated their November and December 2024 loan interest income and their estimated 2025 Loan Interest Income. The next step was to calculate the interest income from their 2025 new loan originations. Once completed, I produced and sent a report with my estimates for the Credit Unions 2025 Loan Interest Income to the CEO and the CFO.
The big test came a few weeks later when a follow-up meeting took place at which I walked the CEO and CFO through my calculations and data. The CEO asked me what my estimate was for the November 2024 Loan Interest Income. I directed him to my final report which provided a figure of $356,752. The CEO then asked the CFO if she had closed the November books, and if, so what the actual figure was.
How did I do? When compared to the actual figure my estimated Loan Interest Income for November 2024 was off by $42. I passed the test!
Part Two: Provide a Cash Flow and Cash Position Analysis for 2025
When the Credit Union completed their budget for 2025, the CEO was not satisfied with the income that their overall budget projected. The income was not where he needed it to be and he had to find a way to increase it. The CEO asked me to do a monthly cash flow analysis for 2025. I had all the data I needed from the previous assignments request list and accepted the consultation.
After analyzing their YTD monthly cash flow through 11/30/2024, I then overlayed their 2025 new loan originations. I then completed and sent a final report to the CEO and CFO that projected the CU’s 2025 cash position for each month of 2025.
After reviewing the report and the data provided in it the CEO and the CFO determined that their cash flow and positions were strong, especially in February of 2025. They concluded that in February of 2025 they could comfortably take 2 million dollars and put it to work by purchasing a residential participation. This participation would provide the credit union with an additional $100,000 in interest income in 2025, and an additional $120,000 in annual interest income in 2026 and 2027.
Conclusion
By bringing in SBorgerson Consulting LLC for a short four-day consultation, the CEO and CFO, used the data provided, to increase their 2025 loan interest income by an additional 100K, a figure which slightly exceeded the income goal detailed in their 2025 Strategic Plan. Their investment in the consultation will be returned tenfold in 2025 and repeat that return for 2026 and 2027.
What is that old saying: Plan the work and work the plan.
Here is my story…. maybe you can benefit from my experience.
I joined the Credit Union in March of 2023, filling the role of Vice President and Lending Manager. I was in charge of all the Lending functions of the Credit Union including Residential and Commercial Loan Origination, Home Equity Loan/Line Origination, and Loan Servicing. This role was one I have held for a number of years, and one I was experienced at. My start date was a full seven months after the Credit Union went through a core system conversion. They had migrated from a FiServ core banking system to the Corelation Keystone core banking system.
The previous management team, none of whom were still on staff, had signed the contract, had done all the preparation work, had done all the mapping work, and had done all the system and product set up. The person who was responsible for the lending set up and prep work was not a lender, they knew nothing about lending, and knew nothing about loan compliance.
So, what could go wrong?
The new management team came on board less than 60 days from the conversion and had no choice but go forward with it. The lending issues that would result from the poorly planned conversion were then compounded by a lending team that consisted of three people who didn’t have the knowledge or the skill set to roll out a new core servicing system. They were good people, and good employees, but none of them had been trained to service loans. You know the old saying “they didn’t know what they didn’t know?”
Well, they didn’t know what they didn’t know, but I did know what they didn’t know.
What I learned in my first weeks and first few months was that the Credit Union was not servicing loans compliantly, loans were not operating per their notes, and the lending team didn’t know what the core was doing correctly or incorrectly. They had no servicing reports other than the delinquency report and the closed loan report. Without reports, they had no mechanism or opportunity to identify issues. Neither did they have any written procedures, so they had no vehicle to tell them what they should be doing or how to do it. It took me a good 4 months to identify and remediate all the deficiencies and to put together a 200-page procedure manual that contained 55 Lending related procedures.
Everything I learned during this experience, every fix and adjustment I made, I can now share with other Corelation users who could benefit from a system “tune up", a system tune-up from a Banker
How Our Loan Serving area went from Non-Compliance to Complaint
I have always believed and preached that if you have no loan servicing reports you really do not have a Loan Servicing Department, you just have customer service. As I had done at each of my previous employers, I knew I had to start by putting together a report management program that would provide me with the tools and controls needed to service loans correctly and compliantly, so that is where I started.
The second challenge was learning the system. There was no help from my current staff, so I turned to Corelation, the owner and operator of our core system. Within one week of my joining the credit union I connected with our Client Rep Kurt S. That was when we started rocking and rolling! Kurt was a godsend, he had 30+ years’ experience working at a Credit Union, and we spoke the same language: Banking. He and Alicia did a fantastic job listening to my needs, understanding where I was coming from, and getting those needs met. They both had the patience of a saint, and they both were way more patient with me than I deserved. They were immensely helpful in getting our program to where it needed to go.
Kurt immediately set up a zoom meeting with our managers and their sales team. They gave us the full sales pitch. This was a great place to start, as we learned the key features of the system and its functionality. Kurt was a great partner and asset as he understood our needs, and more importantly to me, he also understood the inability of previous team members to address issues. He, Alicia, and I, immediately started improving our servicing area, one fix at a time.
Righting the Ship
As mentioned above, the first thing I did was create a Servicing Report Management Program. The program I put together consisted of seventeen reports, looking both forward and backwards, and they provided me information needed to manage a loan servicing department properly. These reports were pulled, reviewed, and signed off on monthly. Only by reviewing these reports and sampling the data, was I able to identify the deficiencies and weaknesses in our servicing area. Almost across the board, with the first printing and review of a report, a deficiency or issue was identified. These reports provided me with the controls I needed to ensure the Credit Union was meeting its regulatory servicing requirements, and that the transactions and maintenance being reported on them, was appropriate for the activity.
The Outcome
Armed with my seventeen reports, I identified, and remediated the following deficiencies:
- Adjustable-Rate Mortgages were not adjusting.
- Loans were not being discharged properly, and the discharges were not being recorded.
- Expiring HELOC's were not getting the proper notification.
- PMI expiration's were not being properly monitored.
- Late Fees were pyramiding, or not being charged at all.
- The Credit Union was only reporting loan histories to one bureau.
- Payments were not being applied as required by their Notes.
- Partial mortgage payments were not being put into an "unapplied" bucket, something created
endless service issues.
- FASB Balances and amortizations differed significantly from the accounting system data.
- Delinquent notices were being sent without backers.
- Returned ACH loan payments were not being assessed the appropriate return check fees or managed.
- The Non-Accrual System was not operating correctly.
Kurt and Alicia were instrumental and proactive in helping me address the above issues and were constant advocates for the Credit Union. After four months, and a lot of work, the Credit Unions Loan Servicing area was where it needed to be. I was rewarded for all my hard work when the first 3rd Party Servicing Audit since my arrival returned a final report with no findings. This success was duplicated a month later when Fair Lending and Mortgage Loan Compliance Audits also came back with no findings or suggestions.
Please note that a poorly handled core conversion is not the only cause of servicing weaknesses and deficiencies, all it takes is having an untrained or weak team member on staff at any point in the preceding 10 years. A couple of small deviations from procedures, a system setting change here and there, a loan booked and uploaded to the core with incorrect data, all of these scenarios can lead to long lasting deficiencies in a loan servicing area. Deficiencies, which in many cases, led to a reduction in income. To properly service loans, an institution must have strong management, a strong reporting program, proper system settings, and a procedures manual that covers every task done by the department.
If your Loan Servicing Area audits continually report findings and weaknesses, consider bringing SBorgerson Consulting in for a short-term consultation, to ensure your long-term success.
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