REQUIRED READING: Loan servicers often assume that it is sufficient to have a general ledger accounting system to track loan payments received from borrowers and disbursed to lenders. This may be an adequate system if the servicer is also the single lender on the loan – but even in that scenario, it is not as effective as tracking the loan using subsidiary ledgers for each borrower.
In order to supplement the inadequacy of tracking loan payments with a general ledger system, loan servicers will add a spreadsheet and create several columns and pages to track borrowers, lenders, principal, interest, late fees, due dates, prior due dates, amounts, balances, loan amount, and even notes. Servicers will also setup macros in their spreadsheets for calculations to be done semi-automatically. And after the spreadsheet is created, the real work starts!Â
Even a general ledger system combined with a spreadsheet with page after page, and column after column offers no real solution to the problem of servicing loans. This is simply because both systems, whether by themselves or combined, do not provide an efficient method for handling loan payments.
Wouldn't it be more efficient if each client had his or her own ‘ledger card,’ with one column for credits for funds received, another for debits for funds disbursed to the lender on the loan, and one as a running balance column? Actually, there is such a method of record keeping, and it is called ‘trust accounting.’
Maintaining trust accounting records in servicing loans should be the foundational engine for tracking loan payments received and disbursed. Following strict trust accounting principles will provide better accounting for each borrower. The same separate ledger system should also be set up for each lender and payable, such as tax collectors, insurance companies, foreclosure companies, attorneys, and anyone else they need to pay out of the loan payment proceeds or from servicer advances.
Trust accounting subsidiary ledgers provides a better tracking method for escrow funds received per borrower client. They help determine whether there are enough funds in each specific client account prior to paying for his or her taxes and insurance.
Loan servicers that represent private investors have an added responsibility to maintain funds received from borrowers in a trust account at the bank. These funds belonging to their clients are considered trust funds. Many states have regulatory requirements over trust accounts, and loan servicers are required to submit reports along with copies of their bank statements to their regulatory agency.
Individual subsidiary ledgers for each borrower, lender/investor and payable should be positive, and the daily balances should end with a positive number. In managing a trust account, the loan servicer should account for each client's individual balance on a daily basis, and the trust account should be reconciled monthly.
Automated solutions
Although a manual ledger card system may work for a handful of accounts, for a new servicer the level of productivity will decline when servicing many loans while planning to build the servicing portfolio size. A loan servicing system that offers efficiency in payments collected and disbursed with a single key is the desired and clear solution.
Manual trust accounting systems only provide the ability to track individual ledgers. Trust accounting ledgers on the other hand, once they are computerized, have the ability to track multiple ledgers. The entire process includes reports displaying data in a variety of ways in order to better manage the loan collection's bank account and to be able to reconcile it daily and monthly.
Today, most loan servicing systems are equipped with the basic functionality of tracking principal and interest payments. However, they lack the record-keeping ability of trust accounting principles.
Loan servicers for private investor loans should seriously consider alternative solutions that offer a complete functionality to better serve their clients and to comply with state trust accounting and fiduciary laws governing their servicing operations.
Timi Pereira is president of Golden Omega, based in El Dorado Hills, Calif. She can be reached at timi@goldenomega.net.
