As a finance lender, a certain amount of risk is inherent. After all, the nature of the business is to give money upfront. And while there are a number of different actions one can take to recoup money in the event that a borrower doesn’t follow the terms they’ve agreed to, it can be a tricky and arduous process. The seizure of assets can be quite complex, and if your borrower doesn’t have enough to recoup the loss, you can find yourself in an extremely difficult situation.
That’s why, as a lender, it’s important to take on as little risk as possible. By minimizing risk, you as a lender can maximize profitability, which in turn helps grow your business. But how?
Read on for our top tips for minimizing your risk!
Tip #1: Don’t forget to pre-screen borrowers
Lenders field requests from all types of borrowers. And while many are good and honest people who are simply seeking a bit of financial assistance, there are some borrowers out there who intend to take advantage of lenders.
That’s why it’s so important to perform thorough screening not only of your borrowers, but also of their guarantors. A thorough screening process can reveal any red flags or signs that your borrower or their backers may not be who they claim to be. This includes:
Be sure to thoroughly check the credit risk of not only your borrowers, but their guarantors or sponsors, too. Assess their financial history. Do they have a history of late payment? Are there any discrepancies or red flags in their credit history? Always, always run a credit check. Never rely on self-reporting alone.
Ensure that the assets that your client wishes to finance are, indeed, their own. Check property records. Keep an eye out for forged documents. Don’t only request documents from your borrower, but request official records, as well.
Does your borrower actually have the income that they report? If they make less than they claim to, you’re at risk for them defaulting on their loan. Verify their income documents and check for any red flags.
Tip #2: Properly assess your liquidity risk and your borrowers, too.
As a mortgage lender, you depend on liquidity to fulfill your loan as promised. If your institution depends on finances from investors to fulfill loans, then liquidity should be a top concern. Lending money without properly assessing or determining your liquidity can result in major financial damage to you and, in some cases, serious legal trouble. Be sure to utilize the net stable funding ratio and make sure you’re in accordance with all legal requirements for liquidity.
As for your borrower, is it feasible with their assets and income to pay off their loan? You should assess their liquidity risk, too. If their loan amount greatly exceeds their earning potential and they have no assets to liquidate if necessary, you can end up in a tricky situation. Don’t get into a contract with a borrower who is likely to default; it will be tough to recover.
Tip #3: Work with a reputable mortgage servicer
In order to minimize risk, lenders should employ assistance from a mortgage servicer. Working with a mortgage servicer can take much of the hassle out of lending. A mortgage servicer is contracted to handle the day-to-day management of a loan. They will manage tracking and receiving payments, field questions from borrowers, and ensure the ongoing management of your loans runs smoothly.
After a loan is signed, there is ongoing, regular management that can last anywhere from a few years to many decades. As your business grows and your roster of mortgages becomes more expansive, it can be life changing to employ the assistance of a mortgage servicer. That allows you to focus on selling mortgages, and get the daily hassle of management out of your hands.
Ensure your mortgage servicer utilizes top-of-the-line tools and services to streamline their service, like MSR valuation tools from MCT Trading. Not only should they have streamlined management systems and offer prompt and friendly service to your borrowers, but they should utilize technologies that help them with portfolio, creating grid pricing, running rate shock analysis, and more. By combining top-of-the-line tools and services with optimal servicing, your risk will minimize and your reputation will sky rocket.
Making every effort to mitigate risk can help you increase your bottom line and protect your business. Keep the above tips in mind to streamline your operational efforts.