This is the first in a series of JRB eBulletins focusing on the Servicing side of Portfolio Management. We take a hard look at Servicing, why it’s important, elements frequently omitted or incomplete and areas meriting CDC management’s close attention.
Let’s start with a simple question. Your CDC just closed a loan with a $1million debenture. Out of total revenue your CDC will get from this transaction, how much will come from Servicing this loan? Answer: 85%.
Shouldn’t Servicing be a top priority for a CDC’s management?
Are you ready for a SMART Review? You’ve all been there: You get an email from OCRM informing you of an upcoming SMART Review and requesting documents for a few select loan files. You review the list with your Servicing Team: Surprise! You’re missing critical Life insurance and/or any of these coverages: Flood, Hazard, Business Personal Property, General Liability, or Malpractice. And what about Financials, UCC renewals, 2-Year Jobs Verification, and Risk Rating?
You wonder how they manage to ask for the stuff you haven’t got or can’t find. Your Servicing Team heroically scrambles: Ta Da!! You get your hands on the required document(s) just hours before they’re scheduled to go out. Crisis averted. Until next time.
And when a loan defaults? Loan defaults happen. When they do, you’ve got to have your docs in shape. Is this the case with all your loans? Do you know what docs are missing? Do you have a solid paper trail of attempting to get them? And when you finally get your docs: Do you consistently check ACORD forms for required assignments, endorsements, coverage dates, policy numbers, insured’s name, property address? Have you been obtaining all documents as required in the Loan Authorization? If you don’t answer a resounding, “YES!” to any of these questions, you’ve got some work to do.
Now, about metrics. Imagine: You’re in the middle of a festive holiday meal with your family, complimenting your mother-in-law’s cooking. Yet you suddenly wonder, “Is my Portfolio Servicing under control and compliant?” How will you know? Metrics! You’ve got to have metrics that are: #1 Accurate, #2 Transparent, and #3 Concise. CDC management and your Servicing Department must review them regularly. Identify any trends. Compliment your Servicing Team if they’re positive (holiday bonus, perhaps?) And if not, get to the root cause of the problem. It’s always about teamwork.
The Servicing buck literally stops at your CDC. You’re responsible for Servicing all active 504 loans in your portfolio. (SOP 50 55 Chapter 3, A, pg. 9) In certain cases, lack of due diligence in Servicing could result in serious consequences:
“If a CDC fails to properly service or liquidate its 504 Loan portfolio, the SBA Office of Credit Risk Management may take administrative action (e.g., non-renewal of ALP status) or enforcement action pursuant to 13 C.F.R. § 120.1400 and 13 C.F.R. § 120.1500” (SOP 50 55, Chapter 3, J, 2, pg. 32. See SOP 50 53 for information regarding SBA’s credit risk management policy and procedures.)
So work smart. Make sure your CDC is diligent in all required Servicing actions. We’re here to help. Contact JRB!
Your JRB Team