The Quest for Perfection: Leveraging Lien Management Technologies
By Raja Sengupta
May 13, 2019
Raja Sengupta is executive vice president and general manager of Wolters Kluwer's Lien Solutions. He can be reached at Raja.Sengupta@WoltersKluwer.com.
Lien management is one of the most basic--but crucial--tasks in managing commercial lending operations. But if a lender hasn't taken the proper steps to manage their portfolio and recognize that there are many obstacles that can adversely impact commercial lending assets and overall portfolio health, then the assets in the portfolio are vulnerable. This is clearly unacceptable for all stakeholders: employees, customers, shareholders and ultimately, the communities the lender serves.
Consider, for a moment, the sheer number of events that can challenge a loan portfolio's perfection over the life of a loan. Will today's secured party names of lenders be the same tomorrow? If a debtor has a bankruptcy or a Uniform Commercial Code filing expires, will you know? And is your operation up to the challenges of an ever-changing lending regulatory landscape? Consider the chaos during the mortgage crisis of the last recession if there can be any doubt as to the impact poor lien tracking can have. Lax mortgage recording activities led to extreme losses for ALL stakeholders.
Given these considerations, the first priority for any lender has always been to perfect their claim on assets, and then to maintain the perfection of the asset portfolio over time. But every day brings changing circumstances that can impact the protections put in place, so lien portfolio management should be an active--and proactive--effort. On top of that, the lending landscape is changing, with increased demand for digital transactions, greater regulatory scrutiny, and an evolving competitive market. Those factors, together with productivity opportunities afforded by technology, are driving not only the need for more proactive lien management, but also the tools and methods for doing so.
Any serious leader in the commercial and alternative lending channels should, therefore, consistently think through these challenges and move aggressively to protect the integrity of their assets. Fortunately, technologies today can be a boon to ensuring a healthy commercial lending portfolio for the long term.
It's a New Day in Lending
Customers have certainly seen the digital transformations made at the front end of financial and commercial lending organizations, and that is changing expectations of what can be delivered on the back end. Back-end operations are feeling the pressure from customers--as well as from their own organizations--to catch up on how operations are coordinated, how due diligence is performed, and how risk is managed. This change occurs against a backdrop of continuing fierce competition, as well as unrelenting efforts to reduce the costs of servicing the back end.
Commercial lenders must also seek more innovative approaches to their operations to keep pace with the digitization that has so clearly transformed the front end of banking. When applied in alignment with one's current overall lending operations, automation, digitization, and technology can help lenders meet these new, increasing expectations. Given the right selection of new and emerging technologies, process improvements, and third-party resources, lenders can be more efficient, accurate and thorough than ever--becoming drivers of change to help achieve a more perfect approach to lien perfection across their lending portfolio.
Analytics and Reporting Capabilities
To manage a portfolio effectively, organizations also need consistent and accurate access to key metrics and insights. That means being able to ask and promptly get answers to some fundamental questions and receive accurate and speedy responses. What information do you need to evaluate risk in your lien portfolio? What information will help you streamline the operation and make it more efficient and automated? What type of filing trend information is important to research costs? And are there quality insights that you don't have today?
In an ideal world, robust analytics goes hand in hand with having a reporting system that is flexible, customizable, and can pull data simply and in real time--letting you choose which data you want and when you want it. Robust analytics also provide visibility into a portfolio, generating metrics and insights on the costs, efficiency and quality of your lien operations as a whole. Such analytics provide visibility into processes and risks, enabling the generation of reports across all liens on demand--and on schedule. Whatever system a lender opts for, it should offer both comprehensive monitoring and portfolio-wide reporting so you can act faster to protect investments.
Lien Management: Back to Basics
The risks for not protecting a commercial lending portfolio are very real. Initial filings are only the first step. A whole range of variables can and will impact how well portfolio interests are protected over time. Uniform Commercial Code filings that initially establish interests will, of course, expire. Debtor names and locations can change, thereby weakening or even defeating the effects of a lien. Errors in spelling and other alphanumeric information can also weaken and even void perfection. And borrowers can take on additional debt without a lien holder being aware if it is packaged in certain ways.
Any of these events can increase risk, and when lenders often have thousands of outstanding loans and leases in play, keeping track of and updating them is a significant drain on precious time and resources. As a result, once filed, many UCCs simply go unattended, raising risks that they'll become imperfect. The days of "file and forget" UCCs are over, and the need for better securitization--in almost real time--has arrived with a vengeance.
Some lenders have addressed these risks through the development of internal, often manual systems, with checks and balances. This sort of capability is arguably resource-intensive, costly and error-prone. However, some lenders remain convinced that their existing systems work. And they are unwilling or unable to invest in the technology that would strengthen their lien management capabilities. Although technology investment can strengthen their capabilities, the investment amounts needed are often prohibitively expensive.
Many large organizations outsource this capability even though they have the resources to build their own. Why? These organizations have made the decision that to keep track of changing regulatory and jurisdictional requirements and continuously monitor portfolios is simply outside of their core competencies, electing to devote their resources elsewhere in the organization.
Outsourcing is a difficult and important decision for any organization, and lien managers must be completely clear about what attributes are critical to their needs. Essentials include having comprehensive UCC management capabilities, deep domain expertise, and a record of innovation that can handle any volume of liens. Reducing the risk of losing perfection and the potential for error, while improving internal productivity in ways that free staff to focus on the challenge of growth activities, are key considerations as well.
Recent technological developments can deliver robust monitoring systems that can constantly check the status of debtors and business entities, providing alerts regarding debtor name changes, mergers, dissolutions, loss of good standing, administrative cancellations and other issues that arise. Automation can strengthen and streamline lien management by reducing manual steps-while ensuring that critical tasks or developments are not overlooked.
Auto Continuation for Managing Liens in the Long-Term
One thing is certain about any UCC filing: it will expire, often before the loan is paid off, because UCCs have a five-year lifespan--and many loans extend beyond that. To remain perfected, lenders must file a "continuation" on expiring UCCs. But many simply don't have the capacity to track and keep up with all their UCCs. Rudimentary "tickler" systems or manual checks inevitably lead to oversights and missed opportunities to maintain perfection.
An automated continuation capability can monitor dates, prepare forms, and file continuation statements automatically, based on predetermined criteria the lender sets. It can also dramatically reduce time spent managing continuations, ensuring that key dates and required actions won't be missed. Such capabilities translate into less risk, and a more secure position versus other creditors. Automation also reduces manual intervention, which increases productivity and helps ensure accuracy.
Desired State? A Holistic View of Your Liens
From monitoring to reporting to analytics, each component of a lien management system needs to work in concert to provide a better understanding of the portfolio, deliver greater control in anticipating and taking necessary actions, managing and mitigating portfolio risk and providing the confidence that comes from taking a holistic and proactive approach.
The result can provide enormous benefits for employees tasked with responsibility for the portfolio, for their customers, who will benefit from better and more accurate service, and for shareholders, who will see a significant improvement in the quality of the asset portfolio.
Even as technological change accelerates, the critical role of securitization will remain a critical core element of one's commercial lending program.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)