The Need for Automation in Loan Servicing and Why

Automation is not an entirely new concept in banking services. For some time, financial institutions have relied on artificial intelligence (Al) to detect suspicious card activity. Further, many of these entities use loan automation systems to underwrite credit facilities.

However, the adoption of automation ends more or less with security and loan origination. Loan servicing is still bogged down by old technology, manual processes, and slow adoption of Al technology. Many lenders still rely on paper-based procedures that are clearly outdated in today’s digital world. The integration of automation into loan servicing has much room for optimization.

Consequently, loan servicing remains riddled with slow decision times and data management issues that create unwanted opacity for bankers and borrowers alike. Such issues underline the need for automation in loan servicing and why now is the best time to adopt it.

What is loan servicing?

Loan servicing refers to the managerial facets of a loan, from the time it’s dispersed to the borrower until that borrower pays it off. From the lender’s perspective, loan servicing involves the collection of principal, interest, and (in applicable cases) escrow payments from the borrower.

The process entails various activities like collecting payments, maintaining records, following up on defaults, approving loan restructures, etc. It also involves many different people. This necessity to coordinate several activities and people brings the need for automation in loan servicing.

Automation in loan servicing

In loan servicing, Ai allows financial institutions to reduce employee error rates, save on operation costs, remain compliant, offer transparent services, and create a friendly customer experience. Even so, only about 31% of banks use it.

Despite that obviously small percentage, nearly two-thirds of executives in the financial service industry agree that Al is quickly becoming a business driver in the sector. It is necessary for many reasons, including:

  • Process automation in loan servicing
  • Risk management when evaluating existing borrowers (e.g., the potential for default)
  • Customer service delivery
  • Managing delinquencies and foreclosures
  • Determining how to keep a loan performing

When applied effectively, automation brings multiple benefits to loan servicing processes.

Top 5 benefits of automation in loan servicing

1. Saves costs and time

A large part of loan servicing involves monitoring. The servicer must check borrowers’ compliance, loan performance, and so on. All this requires examining multiple documents on a weekly, monthly, or quarterly basis – which may take days, weeks, or even months to complete.

The situation is worse if a loan portfolio has a hundred or more credit facilities. Rather than spending spare time analyzing this data manually and entering it into a servicing system, servicers can turn to Al for quicker processing. By cutting the time spent monitoring loans, financial institutions may further save on monitoring costs.

2. Reduced operational risks

Human processes are prone to errors. One wrong keystroke during manual loan servicing could jeopardize the integrity of an institution’s data and liability exposure. Automation solves this by improving accuracy.

Digital machines are more precise and consistent when capturing, analyzing, and storing financial information. Many of them will even identify anomalies and provide warning notifications.

3. Improved security and compliance

Bank criminals don’t use guns as much as keyboards and code in today’s world. Cases of loan servicing fraud (such as mortgage servicing fraud) are now virtual. The only way to fight this tech crime is with equally superior tech like Al. Automation may further help with fraud detection to improving the security of loan servicing processes.

Beyond that, laws such as the SOX (Sarbanes-Oxley Act of 2002) impose hefty penalties for organizations (and individuals) who flout compliance requirements. Implementing AI and automation is a good way of ensuring that loan servicing procedures are well within the law. A reliable decision management system (DMS) can help with this.

4. Increased transparency

One invaluable advantage of automation in loan servicing is that now financial institutions can use tech to share data with borrowers in real time. Thanks to apps and software programs that create intuitive dashboards, clients can check and verify records as they happen, increasing transparency and building trust.

5. Better customer experience

Al and automation often include customer-oriented features like chatbot functionality. Such services make it easy for borrowers to access help and support around the clock. They can set appointments, generate quotes, provide loan status updates, and even give borrowers deadline reminders. In doing so, automation improves customer service and, thus, user experience.

Final thoughts

With a good investment in the correct type of automation, any financial institution can cut down employee error rates, save on operation costs, remain compliant, offer transparent services, and create a friendly customer experience. However, it’s still worth mentioning that many people still prefer face-to-face interactions. So, while automation and Al are here to enhance user experience, they are meant to replace only some aspects of human interactions. As fintech continues to vanguard the world of finance, AI and improving technology will continue to be fine-tuned to work in tandem with human intervention to create an efficient, compliant blend.