By: Selina Stoller
Many people ask “What is loan servicing?”. When you get a loan, be it a mortgage, a car loan, or an unsecured consumer loan, you are actually being provided two services. You’re being given access to the funds you were seeking, and you’re also being provided an ongoing service that takes care of the background administrative functions involved with the loan. This second process is loan servicing.
A loan requires servicing from the moment funds are released until the day the final payment is received. The administrative functions covered by loan servicing include preparing and sending monthly statements, collecting payments, maintaining payment records and loan balances, transferring funds to the current note holder, and pursuing delinquent accounts.
The note holder and the loan servicer are frequently the same entity, but they need not be. A bank or other lender can service their own loans, loans can be handled by a non-bank loan servicing specialist, or lenders can hire a third-party vendor to handle loan servicing for them. AmeriFirst Finance falls into this last category. We’re a subservicer that handles loan servicing for major lending institutions.
How Loan Servicing Works
Traditionally, loan servicing was viewed as the responsibility of the institution lending funds. Because the banks making the loans were the primary noteholders, it was sensible to keep the origination and administration of the loan under the same roof.
This situation began to shift in the ‘70s and ‘80s as mortgage-backed securities and related financial instruments began to transfer loans off of the bank’s books and into private investment portfolios. Increasingly, banks found themselves servicing loans they no longer held. Compared to a bank’s other activities, the paperwork and recordkeeping involved in loan servicing weren’t particularly profitable. And so they began releasing the function to other entities, and the third-party loan servicing industry was born.
One of the fastest-growing segments of the loan servicing market is consumer unsecured loans. These include credit cards, home improvement loans, personal loans, and any other type of loan that isn’t secured by collateral. Over the last ten years, servicing these loans has blossomed into a sizable business.
This has been driven by investment in the personal loan market from a number of sources, including the usual suspects — banks, credit unions, and other lenders, as well as venture capitalists, and novel investment technologies from the fintech sector. This unprecedented capitalization has generated double-digit growth rates in the once sleepy industry.
While diverse investment made this explosive growth possible, it was galvanized by a marked reduction in endemic risk.
This is driven primarily by technological and philosophical shifts in the unsecured personal loan market. Today, the risk of default can be assessed fairly accurately on a per borrower basis thanks to the volume of easily accessible credit information available to lenders. New software tools and the centralization of consumer data has removed much of the guesswork associated with risk assessment.
As of the third quarter of 2018, a low 3.41% of unsecured consumer loans were 60 days or more past due. This lowered risk, paired with a reduction in the paperwork necessary to assure credit-worthiness has made underwriting these loans less expensive, more efficient, and more profitable.
Further Growth Is Expected
Over the last five years, the unsecured personal loans sector grew by a staggering 269%. This unprecedented growth rate has slowed recently, but the sector is expected to continue showing healthy gains for the foreseeable future.
Improved economic conditions for the majority of consumers is the primary factor responsible for this rosy outlook. Both GDP and real disposable income growth, along with historically low unemployment rates are driving consumer demand for credit access.
TransUnion’s 2019 consumer credit forecast concluded that, for nearly all credit products, consumer balances and loan originations are anticipated to rise. At the same time, the industry will see serious delinquency rates continue to drop, or at worst remain unchanged. This indicates that consumer confidence is growing, matched by an ability to maintain higher debt levels.
Confidence is growing on both sides of the market. Lenders are equally heartened by prevailing economic conditions and are working to meet consumer demand by increasing loans overall as well as exploring new ways to expand the market. This includes investments in riskier loans in subprime and near-prime instruments. But lenders are cheered by the constant decline in delinquency rates, rendering these riskier loans less dangerous.
This is a win for consumers, lenders, and the loan servicing industry.
Because of the lowered risk of lending overall, a greater share of consumers, even those with heightened risk factors, are gaining access to a wider range of credit options at lower interest rates. As things stand, average interest rates on personal loans are 4% lower than they were two decades ago, and rates continue to decline. This is helping more people improve their credit ratings, allowing them to prove they can responsibly handle the increased debt load.
For their part, lenders are doing more business, more profitably, while decreasing their overall exposure. And more loans means more business for the third-party servicing companies that administer all of this debt.
Loan Servicing is a Growth Industry
Loan servicers should continue to expect solid growth numbers in the coming years, both in the secured and unsecured markets.
The value of all consumer loans in the United States, across all commercial banks, was estimated by the Federal Reserve to by $1.49 trillion, as of the third quarter of 2018. Unsecured consumer loans represent a fairly small percentage of that total, valued at only $132.4 billion in the same time period. This was 59% higher than three years earlier.
This means there is plenty of room for growth, and loan servicing providers will continue to expand. AmeriFirst Finance is helping to lead the charge forward, offering innovative products and services. With instant, in-home loan approvals, we’re helping businesses, consumers and lenders connect in meaningful ways.
If you’re interested in more information about how AmeriFirst Finance can help you, please give us a call or drop us a line. We’re excited to speak with you.