(As published in ABF Journal)
In the second installment of a two-part series, Suzanne Konstance of Wolters Kluwer Compliance Solutions outlines some of the technological tools lenders can use to improve risk assessment and mitigation.
Risk officers hold a more perilous responsibility than perhaps anyone else in a commercial lending organization. They are responsible for providing input on key risk decisions, tracking risk across multiple business lines and underwriting compliance with their institution’s risk appetite statements and policies.
But today, research shows that right now, inside every lender’s loan portfolio, there are enough imperfect liens to have devastating effects for their organizations. Perhaps the most famous case involved a mistake in filing Uniform Commercial Codes some years ago resulted in a global bank losing its security interest on a $1.5 billion loan due to very simple — and extremely avoidable — lien error.
But what if there was a way to identify issues well before they negatively affect an organization’s overall loan portfolio risk exposure? That transparency could make a huge difference in bolstering an institution’s lines of defense.
In the first part of this series, we looked at how lenders can improve their risk management processes and portfolio performance by effectively managing liens. In this article, we’ll look at some specific examples of data variability and how advances in technologies such as artificial intelligence are ushering in a new era of data transparency and access to lien and debtor data.
The power of AI and automation
Data that can help better calculate secured lending risk exposure is not only available, but easy to understand when it’s filtered through the right lens. AI and other automation tools in particular make up some of the newer and evolving technology that is helping to improve data transparency and access. These technologies can help financial institutions better understand the nuances of their secured position and empower them to make more informed decisions. From loan operations to the chief risk officer, it’s easier to have the data that matters most in today’s environment than ever before.
The stage in the lifecycle of a lien that requires the most attention and contains most of the unresolved pain points is the “manage” part of the process. This includes all the activities that need to occur after the initial search and file activities. In short, these are the actions that keep the lien perfected. The right tool set can inform risk officers and enable processes that can create the sturdiest risk appetite statement a lending organization has ever imagined. That’s good for loan operations, the chief risk officer and the entire lending organization. Now, let’s look at some of the specific tools integral to implementing and effecting better risk mitigation immediately:
Portfolio monitoring systems
A portfolio monitoring system keeps track of changes in debtor names, mergers, dissolutions, loss of good standing, administrative cancellations and other alterations to UCC filings that may impact lien perfection and create risk. Recall that in part one of this series, it was noted that 16% of a lender’s entire portfolio will go through a name change event in a year’s time. Monitoring automatically captures these changes and updates one’s filings accordingly. The ability to identify issues well in advance of their negatively affecting the overall loan portfolio — or a institution’s risk exposure — can make a huge difference in bolstering the lines of defense.
Auto continuation technology
Auto continuation technology allows for automatic filing of a UCC-3 to continue a lien. This is a powerful tool for lenders because it ensures continued protection of the lien without relying on flawed manual processes. Depending on the size of a loan portfolio, a lender will have to file dozens to hundreds of continuations each year. The reality is, no matter the volume, even one lapsed filing can significantly and negatively impact a business. Auto continuation removes this variable and builds greater health of a lien portfolio.
Lien analytics can enable a broader understanding of a portfolio and help identify patterns and emerging trends. For example, the visibility that comes from analytics can help steer an organization away from lending further to underperforming segments or industries negatively affected by wider market forces. That foresight can be invaluable to a group responsible for managing risk.
Priority insight reports
Priority insight reports keep lenders apprised of their positions to collect. This capability is important because it can be the catalyst during a loan default, one’s mergers and acquisitions strategy and bankruptcy management activities, all of which play into a more focused risk analysis program.
Customized reports are a great tool for loan operations. But when a risk officer needs to have a good sense of the complete landscape of loans and their varying levels of risk, there’s really no better way to proceed than through the generation of automated, customizable reports that can be accessed on-demand or scheduled at appropriate intervals. Further, members of the lender’s loan operations team can see how the organization is performing and establish appropriate key performance indicators while providing the risk officer structured, tangible information to share with other top-level executives.
Portfolio synchronization uses public records data to match a customer’s secured party names and addresses with public records filings. It is designed to eliminate gaps in portfolio visibility due to public records filings that lapse without one’s knowledge or a debtor amendment on record of which a lender was unaware.
Put it all together
When taken together, the capabilities listed in this article can help lenders make more informed decisions about managing their loan portfolios, armed with data that helps them have a clearer picture through creation of a Risk Appetite Statement (RAS).
Many lenders use multiple entities to submit UCC filings. Some may use law firms or title companies to file their highest value or most complex filings. Others file a portion directly with the secretary of state or use lien service providers. But liens spread across different filers can be a massive blind spot in a lending operation, as not only will the loan operations team have an inaccurate view of the scope of lending, but a lending institution’s overall risk footprint can be skewed and make for false analysis and even more difficult-to-take actions that speak to risk appetite.
Leveraging technology and human expertise
It is essential to have a front-line platform with the power to inform risk officers and enable processes that can create a more robust risk appetite statement than many automated filing and lien management services to protect one’s security interests.
In part one of this article, we discussed a client with $900 million of loans secured by 3,600 liens. We were able to show the client’s team, using many of the tools listed in this article, 70% of its UCC liens were unmonitored, 41% were not in first position, 34% of debtor names were misspelled and 6% of its debtors were not in good standing. We were also able to estimate that this bank could save 75% of its work hours by implementing some lien management tools and it could save approximately $300,000 in operational expenses and a potential $190 million in risk associated with imperfect UCCs and insecure loans.
Ultimately, this lender grappled with the realities of the risk analysis results, implemented several of these management tools and today is in a significantly stronger lien position across its entire portfolio.
Wrapping it all up
What, then, are the takeaways for informing a stronger risk appetite statement?
First, lien risk exists in lender portfolios and it can be significant and impactful. There’s plenty of good work being done by the first line of defense in lending organizations, but even the strongest programs are beset by very common problems. And those problems, if not addressed properly, can grow into major threats to a lender’s financial health.
Overall, lenders benefit from greater transparency and automation in helping manage this risk. Determining what tools and capabilities can be added to one’s lending operations and risk management areas can go a long way in helping lenders capture insights into their loan portfolios and create a RAS structure for managing those assets more effectively.