Loan servicing

Loan servicing refers to the ongoing management activities that a lender performs throughout the duration of a loan, from initially disbursing funds through collecting payments and closing the account. It’s a component of loan management, and comes after loan origination in the account lifecycle.

I. Introduction to Loan Servicing

Loan servicing is a broad term that applies to a wide range of activities. The common thread connecting these tasks is they are actions the credit provider takes in order to keep the account healthy, encourage repayment, and reduce the risk of delinquencies, defaults, or fines.

The importance of servicing and collections cannot be overstated. Weak servicing strategies leave borrowers disengaged, delinquent, and eager to find a new credit provider. By contrast, strong servicing can enhance borrower-lender relationships and significantly increase the likelihood of full repayment.

II. How Loan Servicing Works

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Loan servicing encompasses many tasks, but most fall into basic categories of customer outreach, customer requests, and compliance.

• Customer outreach and engagement. Creditors can see better returns and loyalty if they maintain healthy communication with their borrowers, giving payment reminders, offers for other credit products, and personalized messaging.
• Borrower requests. Borrowers may ask credit providers for minor alterations to their account, like adjusting a payment due date to better align with their pay schedule. More serious financial disruptions might lead borrowers to ask for hardship relief programs, refinancing, or other major changes.
• Compliance related tasks. Military Lending Act (MLA) and Servicemember Civil Relief Act (SCRA), not to mention bankruptcies. Card program managers will also need a process to handle disputed transactions, as mandated by the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act.
• Other servicing tasks. Other tasks include refunding overpayments, handling accounts when borrowers have passed away, or managing unpredictable circumstances, like natural disasters. For example, when the COVID-19 pandemic disrupted their borrowers’ income, some lenders launched more flexible repayment plans.

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An example of loan servicing in action

Here’s an example of how loan servicing might look in practice:

A borrower calls their credit provider and tells them that they were recently called to active-duty military service, and now qualify for a lower interest rate.

Before the agent lowers their rate, they need to verify that the borrower’s claim is legitimate. Some lenders might ask the borrower to submit a copy of their active-duty orders, or they might be able to pull it directly from the Department of Defense through a data integration with their loan servicing platform.

Once they’ve confirmed the borrower’s active duty status, the agent updates their account to align with SCRA requirements, lowering the interest rate to 6% and labelling the account to avoid unlawful actions, like recovering collateral items.

And while that example will likely be generally accurate to most operations, every lender manages these servicing tasks differently, perhaps by automating certain steps or by outsourcing them altogether to a third-party servicing team.

III. Structuring and managing loan servicing

This section examines how loan servicing businesses are organized, highlighting key players in the industry and the benefits they provide. It also explores how refinancing can be beneficial and how to optimize servicing operations.

Structure and organization of loan servicing businesses

Some credit providers manage and service their own accounts, and others hire third-party servicing and collections agencies to handle interactions with borrowers, back-office tasks, or both. When third parties are involved, credit providers need to ensure that their system has adequate access controls, allowing outside agents to perform their work tasks without over exposing borrowers’ personally identifiable information (PII).

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In either case, the staff who service accounts are typically broken up into frontline agents, escalation agents, and managers.

• Frontline agents are the first point of contact with borrowers, whether the credit provider is reaching out to them or vice versa. They typically have limited access to the loan management system, and will escalate complex cases up the chain of command.
• Escalation agents handle the cases that frontline agents lack the training or access to manage themselves. Any processes or decisions that require judgement calls or detailed policy knowledge are typically handled by escalation agents.
• Staff managers oversee frontline and escalation agents, and typically don’t directly interact with borrowers. They use reporting tools to analyze the portfolio’s overall performance, and assign groups of agents to service accounts.

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Strategies for effective loan servicing management

Effective loan servicing aims to improve the customer experience and maintain compliance while staying lean and efficient, ultimately enabling long-term success and growth. While precise management techniques differ from lender to lender, each of these goals is generally addressed with a common set of strategies and tools. Those tools can often overlap, addressing multiple areas of concern simultaneously.

In an effort to improve their customer experience, a credit provider might implement several tools giving borrowers more data direct access to and repayment flexibility. They might accomplish this through a website, app, or customer portal, where borrowers can view account details, make minor updates, log payments, or request more significant changes. While their primary aim is to improve the customer experience, these self-serve tools also help drive efficiency by eliminating repetitive tasks from their agents’ workloads.

Similarly, a credit provider might use guardrails and automations to keep their operations in-line with regulatory requirements and their own policies. But those same tools will drive efficiency, both by automating disclosures and updates that previously involved manual work, and by simplifying agents’ UI and workload.

LoanPro’s modern credit platform

Loan servicing requires a flexible system, able to keep up with borrowers’ evolving needs, ever-shifting regulatory requirements, and your own organization’s growth and momentum. Hundreds of credit providers trust LoanPro to power their account servicing, from streamlining the work of front-line agents to giving back-office staff comprehensive visibility and control over their operations.

If you’re looking to enhance your loan servicing, reach out to us. We’d love to discuss your operation and see if LoanPro is a good fit.