Banks Benefit from a Third-Party Loan Servicer
December 9, 2010

Third-party loan servicers provide an array of benefits to investors, such as significant cost savings through reducing overhead and improving back office efficiencies.  In fact investors are the primary clients of these third-party loan servicers.   Despite this focus on investors, there is a valuable opportunity for a bank to improve the management and reporting of collateral and special assets by using a third-party loan servicer.

Traditionally, a bank takes a security interest in the collateral that is being offered against a loan or line of credit.  If the collateral involves a portfolio of cash flow notes, each note is typically transferred into the bank’s possession.  This creates an extensive process up front and will eventually require consistent employee research when a note is paid in full or at any time an amendment to a note is required.

Investor Loan Services is one third-party loan servicing company that offers banks a solution called custodial services that alleviates much of the burden of the collateral management through a custodial arrangement.  ILS becomes the custodian of the notes and is ultimately responsible for the possession and management of the notes while ensuring the bank’s security interest in the collateral.  This management includes the receipt of note loan payments, management of any required foreclosures, and the monitoring of the borrower’s real estate tax payments paid either by the borrow or through escrow

Traditional collateral transfer arrangements are time consuming and difficult to monitor.  This custodial arrangement provides for less risk and less cost and allows the bank to establish parameters as part of the loan agreement.  Such parameters may include LTV ratios, borrowing base monitoring, payment arrangements, and reporting requirements.  In addition, quarterly custodial audits aid the bank in monitoring these parameters to ensure the bank’s borrower is in compliance at all times.

Michael Lamon
Chief Lending Officer
Texas Regional Bank