On January 20th, the White House established the Department of Government Efficiency –a.k.a. DOGE – to oversee cost reductions and the restructuring of certain federal agencies. Since that time, a hiring freeze has been announced and several federal agencies have been effectively dismantled.
Due to the new focus on efficiency, organizations at all levels of government are increasingly studying their own finances and staffing levels in preparation for leaner budgets and a potentially smaller workforce. Fortunately, agencies that issue loans have robust options available in the private sector to help them meet their goals with fewer resources.
Technology Upgrades Can Help Agencies Service Loans More Efficiently
Technology is evolving quickly and many of the loan management platforms that are popular today didn’t exist just a few years ago. These software solutions reduce the time and effort required for agencies to issue and service loans.
Modern software makes it simpler for agencies to:
- capture and record borrower data while reducing the prevalence of human error.
- approve qualified borrowers quickly with improved visibility throughout the approval, and if appropriate, future modification processes.
- release funds without unnecessary delays.
- manage paperwork and promote efficient storage, retrieval, and sharing of loan documents.
- foster positive borrower relationships with communications tools and effective collection strategies.
- improve visibility into key portfolio statistics with robust reporting.
While these modern innovations continue to help agencies offer loans that improve the lives of their borrowers, there are important challenges with implementation and maintenance that should be considered.
Challenges to Implementing New Technology
Two of the most obvious challenges to implementing new software are cost and staffing requirements.
First, new technology is usually expensive to purchase, but the larger costs arise during implementation and ongoing maintenance. Decision makers are often surprised that the costs of upgrades, recurring licenses and maintenance packages can exceed the initial purchase price.
The second challenge is the addition or retraining of staff required to operate the software. In some cases, technology can streamline processes enough to reduce staffing requirements. However, operating, maintaining, and troubleshooting the technology can become a burden on the company’s resources.
Outsourcing Loan Servicing Can Help Agencies Streamline Processes
Outsourcing loan servicing is an alternative that provides the benefit of proven and robust technology without the capital outlay and maintenance requirements that go along with running software on a day-to-day basis. Loan servicing is a high-touch, labor-intensive process that requires significant staff to accomplish. By outsourcing this function, an agency can quickly reduce its overhead costs, and the number of staff members needed for these back-office functions, while leveraging the scalability of a proven servicer.
The right loan servicing partner is able to handle every task after the loan is made including:
- collecting borrower payments.
- effectively communicating with borrowers and answering their questions.
- collecting past due balances and implementing an effective loss mitigation program.
- monitoring escrow balances and managing escrow accounts including the payments of tax bills, insurance, and other escrowed items.
- preparing tax forms and sending them to borrowers.
- reporting information about the loan portfolio and maintaining a robust reporting portal.
With these functions handled by a third party, agencies can reduce work for staff and even free up positions related to loan servicing. Despite the many benefits of outsourcing loan servicing, there are important considerations when choosing a partner.
Considerations to Outsourcing Loan Servicing
When outsourcing loan servicing, finding a trustworthy partner is very important. Agencies need a relationship with a company that treats borrowers with the same care and attention they would receive from agency employees. Does the servicer have customer service ratings that exceed those of its competitors? Can they explain how they support excellence in customer service? In addition to strong customer service, the servicer an agency partners with should have substantial experience meeting the extensive legal and compliance requirements of a government agency.
When searching for a loan servicer, agencies should consider several factors including experience, the level of borrower service, availability of borrower insights, and the effectiveness of a loss mitigation program. The right loan servicing partner excels in all these areas and makes life easier for both lenders and borrowers.
Outsourcing Compliance Functions Can Help Agencies Operate More Economically
Like loan servicing, managing compliance requirements is a specialized and labor-intensive process requiring a team of professionals to oversee. Fortunately, this function can also be outsourced to help agencies operate with a reduced budget and staff.
Ideally a loan servicing partner is experienced with the compliance requirements that often accompany government-funded loans. This includes the identification of applicable regulations along with designing and implementing monitoring requirements.
Monetizing Loan Assets Generates Cash
If a reduction in servicing costs isn’t enough, agencies can consider monetizing their loan assets – basically converting them to cash. There are several ways to accomplish this, such as recapitalizing with a 3rd party, securitization, or using loans as collateral to secure financing.
By recapitalizing a loan portfolio with a funding partner, agencies can receive immediate cash that can be used to supplement dwindling federal funding and allow them to continue to accomplish their mission. Packaging loans and recapitalizing them as securities also generates cash, but it is oftentimes more expensive and slower to implement.
Among other complications, securitizations involve dividing loans into multiple tranches with varying levels of risk and return, providing for credit enhancement mechanisms (like subordination or reserve accounts), and ensuring the structure meets investor, rating agency and legal expectations – making the securities attractive to investors. Selling loans for cash, on the other hand, is a relatively straightforward asset sale.
Alternatively, an agency could use their portfolio as collateral, thereby retaining ownership of the assets while generating immediate cash. However, this option requires repayment according to the terms of the loan or the collateral could be forfeited.
Considerations When Monetizing Loan Assets
Monetization comes with important considerations. In return for the cash up front, future income from the loan is forfeited. The agency’s finance officer will be in a position to weigh in on the financial benefits that are being gained. The process of due diligence can be efficient if run by an experienced government-agency loan purchaser. Counterparties without experience may have more difficulty getting through terms unique to agency requirements. Also, it is important to look at the experience of the counterparty in executing similarly-sized transactions.
When addressing the possibilities of continued pressure on fiscal resources, agencies should carefully consider their options for upgrading technology, outsourcing key functions, and generating immediate cash. An experienced loan servicing partner can help weigh the options and allow an agency to make wise choices that overcome short-term challenges without hindering long-term success.
Partner With AmeriNat for Loan Servicing and Compliance
At AmeriNat, we have been servicing loans since 1975 and have extensive experience with governments and government agencies. Our team partners with municipalities, state governments, housing finance agencies, and other public entities to manage their loan servicing and compliance needs.
With AmeriNat, agencies can focus on helping the people they serve while we handle the complex compliance requirements and labor-intensive loan servicing. To learn more about how a partnership with AmeriNat can benefit your organization, contact us today.
