Managing Your Loan Portfolio with Computer Software

Published in The Journal of Lending and Credit Risk Management

by Traude Christeson

Some commercial bankers believe problem loan reduction begins and ends with loan origination. However, once a loan is booked, your loan management system is the only control you may have over delinquencies and defaults. You need to identify other cash flow drains such as interest miscalculation and inaccurate principal reduction. This article highlights current loan servicing software capabilities to reduce problem loans and outlines a plan to assess current systems and evaluate future needs.

Commercial lenders have had slim pickings among loan processing software while consumer lenders enjoyed an abundance of options. In part, this is attributable to the relative simplicity of consumer loans. For example, although a mortgage banker may have several hundred or even several thousand mortgage loans to service, few cannot be put into a general category and controlled.

Commercial loans, on the other hand, cannot be standardized, yet many bankers are processing them on systems that cannot handle specialized loans. As a result, commercial bankers have reluctantly joined the automation trend - with limited results. Unlike consumer lenders, loan officers are probably not ready to turn such decision-making processes as credit analysis over to an artificial intelligence computer system. Yet with the large numbers associated with business loans, errors and miscalculations are magnified. Without tight supervision, substantial losses in time and money are likely.

Bottom-line improvement for the bank correlates directly with loan portfolio control. Increased profits can be accomplished by scrutinizing current loan management practices to identify problem areas, automating or upgrading present systems, and effectively implementing the revisions.

Assessing Your Current System

The first step in improving loan servicing is to evaluate your current loan management system objectively. What are your current and long-term needs? Some commercial bankers mistakenly assume an automated loan servicing system will be a panacea. Unfortunately, if manual controls do not work - and the reasons are not identified - a computer only makes your mistakes faster.

Checklist for Evaluation

Should you hire an outside consultant for the evaluation process? Probably not. Much of the work can be done internally if you maintain an objective approach and use a checklist. The following list of questions reveals whether your present loan management system:

Calculates interest properly?
Accurately reduces principal?
Produces timely reports?
Waves a red flag on delinquent loans and first payment defaults?
Reacts expediently to changing prime rate?
Processes all loans?

Let us assume delinquencies are a primary problem. It is essential to uncover the cause, which is usually inadequate reporting. Since they are time-consuming and expensive, reports are drafted infrequently and lack precise information. If they cannot be processed into data you need to manage more effectively, they become useless and tend to be produced even less often and less accurately.

You might even make another list of those functions you are doing right. This will help you decide which part of the operation needs automating and which functions do not need improvement. This list can point out which problems can be eliminated or smoothed out with automation. Which problems must be solved immediately and which ones can be postponed with minimal loss also could be delineated.

A final list can be made of expectations - a wish list - as a result of automation. Set a time frame for the evaluation process - two months is ideal - so that you are compelled to make necessary changes, not merely to list obstacles.