Interest rate is the No. 1 priority for most businesses or individuals seeking loans. The behind-the-scenes activity the servicing component is largely overlooked. If you don’t ask about loan servicing, you may pay for it down the road.
“Business representatives and individual borrowers alike should ask this one simple question: If I have questions regarding my loan, whom will I contact?” says Vincent L. Cassano, assistant vice president of business development at Brentwood Bank in Bethel Park, Pa. If you don’t find out “what’s next” after signing loan papers, there may be more at stake than you realize, Cassano says.
Smart Business spoke with Cassano about loan services and the specific indicators of quality servicing.
What goes on behind the scenes at a bank after a loan is approved and processed?
Servicing begins once the loan deal is closed and documents are signed. It includes things like: billing you and collecting payments of principal, interest and escrow; disbursing funds from the escrow account to pay taxes and insurance premiums; and (in some cases) forwarding funds to an investor if the loan is sold in the secondary market.
If you have a problem or question about your loan, you call the entity servicing your loan. If your loan has been sold, this will not be the same entity you worked with to close the loan, since they sold the servicing obligation to another entity. This can be common when dealing with some larger financial institutions. They seal the loan deal and push the loan papers through the approval process, then they sell it off to another company for servicing. The disadvantage for you is when you must call an 800 number and track down a contact person to answer your questions.
Conversely, a portfolio lender processes the loan transaction, services the loan and, generally, holds the loan until its maturity. Your file stays in-house, and as the lender gets to know you and your business, he or she can serve as a trusted adviser. In many ways, it can be like having a private banker.
For you, this means you can associate a face with a name. When you have a problem or question, you go back to the source the same person who helped close the loan deal.
Other than service continuity, what’s the advantage of working with a portfolio lender?
Undoubtedly, the biggest benefit is flexibility. If you have unique circumstances that require special terms, or if you need to modify the terms down the road, the portfolio lender simply has more latitude to accommodate these (and other) situations. Once the loan has been sold off, there may be no recourse. The remaining and more costly option is to re-finance and start over.
Therefore, the real value a portfolio lender can provide (in keeping the loan in-house and providing the servicing) is in the flexibility he or she has in certain situations. This can be especially beneficial to a growing business in a dynamic and competitive marketplace. The more growth and growing pains you experience, the more ways servicing and flexibility can potentially benefit you as a loan customer.
What problems can arise for owners when a loan is sold to the secondary market?
First, when a loan is sold off, it means your business and/or personal information is circulated. Your file is sold and sent along to the new entity that will service the loan. Second, if you need an answer to a question, you contact the servicing company, which will have to locate and research your file. You don’t have any relationship with this company.
For example, say you’re building an office and you receive a letter saying that the loan for your construction financing has been sold to another company for servicing. This company will then manage payments for escrow and taxes. There could be interim tax bills, and if those slip through the cracks as the loan is transferred, you may get a call from the tax collection agency.
When a loan is sold, you must rely on the person on the other end of the line to clear up any problems or important issues, and he or she won’t know about your project or your business. The response time on servicing will probably not meet your expectations.
Can a business owner be sure that personal information is safe when a loan is sold to another company for servicing?
There should not be privacy issues but, in reality, the more confidential information is exposed or transferred into the hands of others, the greater the opportunity for something to happen. Identity theft is a significant concern. Borrowing from a bank that also services your loan is a way to minimize the exposure of confidential information, because the file is not being moved around.
Can a portfolio lender accommodate business owners with special needs, such as multimillion-dollar loans?
You may think that you need to go to a big bank for a large loan, but, as noted, some of these big banks sell their loans to other companies for servicing. Many portfolio lenders are capable of meeting the needs of clients that require large loans, and their associates are often involved in every facet of the loan process, from beginning to end. They originate the loan, help underwrite it, and then close and service the loan. Thus, they’ll be in a better position to help you down the road.
VINCENT L. CASSANO is assistant vice president, business development for Brentwood Bank in Bethel Park, Pa. Reach him at (412) 409-9000 or VCassano@BrentwoodBank.com.