The life of a lender is full of crucial choices that require careful analysis and scenario planning. For mortgage companies, banks, and credit unions, one of these foundational decisions is choosing whether to service loans in-house or to outsource servicing to a subservicer. It’s an important decision, requiring the need to balance financial risk with opportunity.
So, what information does a lender need to make this decision? What are some advantages and disadvantages of each choice? Let’s explore the potential impact of both options.
The Pros of In-House Loan Servicing
When deciding whether to service their loans in-house, mortgage originators must juggle an array of important, and often conflicting, factors. These include internal and external risk, technology, and software needs, call center operations, infrastructure creation, risk management procedures, regulatory controls, consumer support tools, and more. Here are a few pros an originator might include in their rationale to service in-house:
Control and Self-Reliance: In-house servicing allows lenders to remain hands-on across the various servicing journey stages. They are in direct control over all aspects of their operations and the associated responsibilities. This tighter grip allows lenders to manage independently and adapt their servicing resources to fit evolving business models.
Single Thread Customer Relationship: By managing servicing in-house, lenders maintain the support point of contact with their homeowners. This can serve to provide additional touch points with customers and avoid perceptions of ‘sourcing out’ their loans to a third party. It does require call center operations and self-serve tools to achieve this, backed by a team of experts to help customers who may be overwhelmed by the complexities of the servicing process or face financial hardship.
Potential Scalable Cost Savings: For lenders with particularly large portfolios, in-house servicing might be able to overcome the high costs of maintaining a compliant servicing platform and lead to cost savings in the long run. To be successful, the lender must be able to scale servicing operations through efficient use of necessary technology investments.
The Drawbacks of In-House Loan Servicing
Although the independence believed to be afforded by an in-house servicing operation may be enticing, achieving, and maintaining it is easier said than done. There are many pitfalls inherent to the internal servicing option, as with any lending operation, careful, diligent planning and implementation are essential to sustained success. This not only holds true from a cost standpoint, but a risk standpoint as well. The following are a few challenges lenders might face if moving forward with in-house servicing:
High Initial and Ongoing Costs: Setting up in-house servicing operations involves a substantial upfront investment in technology, infrastructure, and staffing. This means having to manage and sustain significant costs before a single loan ever moves through their newly created servicing center. And that’s not all. After the initial investment comes recurring, typically increasing costs to service. Areas include staff training, compliance oversight, and necessary technology updates that will unavoidably drive costs for the lifespan of their servicing efforts.
Compliance and Regulatory Challenges: Working with a dedicated subservicing company means they’re responsible for staying within compliance boundaries when it comes to a lender’s loan portfolio. However, managing it in-house means that lenders are on the front lines of the complex and ever-changing regulatory landscape. And penalties for stepping outside the lines can be steep and severe. Complying with federal and state requirements is typically more burdensome for in-house teams as opposed to subservicers, as these are generally created ‘from scratch,’ and require a steep learning curve to train employees and ensure that all laws and rules are being strictly followed from the outset. Mistakes are costly, and this is one area where lenders should not rely upon “on-the-job” training. Proper compliance requires continuous attention, research, monitoring, and resolution, requiring robust technologies and resources which can be costly and challenging for lenders to set up and manage long-term.
Servicing is More Than Servicing: When a layperson is thinking about loan servicing, they most likely envision it in terms of guiding a loan along its process from concept to completion. However, a loan’s life and maintenance do not end when the documents are signed. Servicing also includes unforeseen potentialities, such as delinquency and loss mitigation. In-house teams must not only be adept at maximizing a loan’s success but also deal with fallout and damage control if things go wrong.
Resource Pressure: In-house servicing is a heavy lift for even the most prepared lenders and requires continuous investment in skilled personnel and technology. The housing market is famously turbulent with regulations and frequent changes to laws. Not only do industry requirements change at a rapid pace, but a lender’s success can also lead to an expanding portfolio, meaning more loans to service and bringing higher operational complexity and number of resources. Furthermore, as mortgage companies scale so does regulatory scrutiny which can threaten to divert focus from other business areas.
The Benefits of Using a Subservicing Company
If the pressures and pitfalls of handling loan servicing in-house seem daunting, loan subservicers stand ready to step in and fill the role. As with internal servicing, this method of loan management has its benefits and challenges. Now that we know what could go right – and wrong – when choosing to handle servicing in-house, let’s look at the upside of working with an experienced loan subservicer:
Cost Efficiency: While in-house servicing carries a large initial investment for infrastructure, training, and even in some cases proprietary technology development and system integrations, subservicing has no such requirements. Based on current market pricing, this option is far more cost-effective and scalable. An even stronger case can be made for those who would need to build these processes and best practices from scratch. Experienced subservicers like LoanCare® offer service-to-scale plans that significantly lower per-loan costs when compared to in-house servicing. In a fluctuating market, the ability to secure a fully variable cost structure through subservicing offers lenders more flexibility to handle volatility in other areas of their business.
Expertise, Compliance, and Customer Service Operations: The desire to keep loan servicing under the same operating umbrella can be compelling, thanks to the seemingly unknown factors involved in outsourcing service tasks to another company. This perceived loss of direct control can lead to meaningful and important questions: Will the subservicer meet the lender’s standards of excellence? Will they be able to adapt to market and regulatory changes appropriately? Will they treat customers with sufficient care and courtesy? Can they support end-to-end white-label capabilities to keep my brand top of mind with customers? Will they be able to ensure that I can retain or capitalize on my customers’ needs with respect to HELOCs, retention, and recapture?
When working with experienced subservicers, not only are the answers to the above questions a definitive ‘Yes,’ but for several reasons listed above, subservicers are already primed and ready to handle them more efficiently and successfully than an in-house team. Subservicers like LoanCare already have time-tested systems in place and maintain highly specialized teams that stay up to date with regulatory changes, and routinely manage loans and customers effectively while reducing the risk of penalties and fines for their lender partners.
Flexibility and Scalability: Subservicing allows lenders to adjust more quickly to shifting loan volumes without the need to directly scale their staff and infrastructure. With subservicing, lenders don’t need to worry about servicing labor fluctuations or rising technology costs. They don’t have to worry about being caught with a skeleton crew during times of rising loan volumes or draining unnecessary payroll when times are tight. Removing servicing volatility in lender operations offers the ability to better manage business outcomes and minimize financial risk.
Overworked employees or misaligned staff can spread negative, trickle-down effects to other aspects of the business, such as poor customer service or work errors. A seasoned subservicer can utilize their proven expertise and work with lenders to help them quickly adapt to a number of issues, from staffing levels to reputational risk and beyond.
Customer Retention and Recapture: The more advanced subservicers offer end-to-end white-label capabilities to help lenders keep their brand top of mind for years following origination. In addition to a white-label program, LoanCare also offers omnichannel marketing services to help its clients retain and recapture their customer base throughout their servicing journey. From account advertising, email campaigns, and direct mail to hold messaging, customer service scripts, and transfers, as well as an integrated marketplace option, LoanCare clients can continually engage their customers through communications, product offers, and financial programming. And because LoanCare is a subservicer and not a bank or originator, there’s no competition for a lender’s customer base. LoanCare is 100% invested in its clients’ customer retention goals with marketing tools and services to support them.
Advanced Technology and Analytics: For in-house servicers, staying on the leading edge of technological advances means having to put in their own time, energy, and money to keep their systems and procedures up to date. Subservicers with multiple clients make the investments on their end to ensure the insights and operational capabilities they provide take into consideration every single nuance and scenario needed to run servicing operations because that’s all they do. Subservicers like LoanCare take it a step further through the development of a robust analytics platform that supports servicer oversight by lenders. The technology crunches numbers in minutes to empower immediate servicing decisions without requiring a team of data scientists or days to conduct an analysis.
Making the Right Decision for a Better Bottom Line
For lenders without a sufficient scale (typically around 250,000 loans) in their mortgage servicing portfolios, partnering with a proven subservicing company can offer substantial benefits. It is not uncommon to see savings of over 50% using subservicers compared to the cost of servicing in-house. Not only are the potential cost and time savings easily trackable, but other servicing aspects like compliance management and operational flexibility can be improved without sacrificing quality of work or customer satisfaction.
Starting from scratch will almost certainly require a massive financial, staffing, and training effort that many lenders may find burdensome – if not nearly impossible – to undertake. For those already servicing in-house, having a fully variable cost structure can provide a financial and competitive advantage that mitigates volatility in other areas of your business. Partnering with the right subservicer to expertly manage the complexities of loan servicing allows lenders to prioritize their resources on core lending competencies, thus affording them a strategic advantage over their competition.
Jim Lauter is executive vice president and chief financial officer at LoanCare.