How To Reduce Risks In Loan Closing

How To Reduce Risks In Loan Closing

A lender wants to close more deals in less time to increase profit. However, the lender needs to collect many documents and analyze data to make the final decision. You can use loan origination software and other tools to speed up the complete process. A lender wants to earn more profit and offer the best possible customer services.

The following are the key factors that affect the income of a bank: 

  • Federal rate interest rate 
  • Competition 
  • Yield curve 
  • Political uncertainties 

Loan Risk and Closing Speed 

Banks can increase commercial loan closing speed in a number of ways. These are simple ways that are easily available to banks and other lenders. This does not require any additional systems or costs. 

  • Explain steps to closing in written. Decision-makers such as counselors, brokers or borrowers need to be aware of timelines. Make the third-party appraiser aware of the underwriting procedure and documentation process.       
  • Get the timeline signed-off by the decision-makers. After the borrower acknowledges the timeline, agree to a funding date. 
  • After the borrower agrees upon the closing date, if there is any loan origination fee, make it non-refundable. This can speed up the closing process.
  • Try to avoid a fix rate in advance. If you agree on a fixed rate, this can lead to the following four outcomes:

Check the following table: 

Rates Fall  Rates Rise 
Borrower rejects the loan  The bank loses the borrower  The bank must look for another earning asset 
Borrower accepts the loan 
  1. The borrower has no other option 
  2. The borrower is not sensitive to interest rate 
The bank is undercompensated 

Tying the interest rate to an index is in the best interest of the bank because of the following two reasons: 

  • The bank can reduce the risk and maximize yield.
  • In order to eliminate interest rate risk, the borrower also tries to close the loan as soon as possible.
  • There is a cost involved in booking a new commercial loan. The cost involved in the amendment or modification of an existing loan is low. It takes less time to amend a loan as compared to booking a new one. As a bank can close an amendment faster than booking a new credit, it should try to extend and amend existing credits. The bank can make more profits.
  • Don’t try to sell a product. The bank should focus on providing a solution. A borrower approaches you because he knows that you have different loan products to offer. The borrower assumes that one of your products may address his needs. However, to be a successful lender, you must understand the industry and the goals and circumstances of the borrower. Selling a product without understanding can slow down the closing process. If you tailor a solution for the borrower, you can tell the exact closing date. 

Conclusion

A bank can make much more profit if it closes loans faster. This also increases customer satisfaction. While you make the best use of available technologies such as loan origination software, the way you work can also increase or decrease loan closing speed.

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