Issue No. 9

Over the past 5 years we’ve seen a dramatic shift in business models away from broad based lenders who try to serve a universal product to various types of borrowers. No longer is the strategy to go after the masses but to target a very specific borrower with a product that is hyper customized to their particular needs. This leads to loan products that may have unique servicing considerations. When providing a credit facility to these types of loan originators, it’s critical to understand unique servicing considerations that may not be able to be handled by a traditional servicer. Many of these specialized loan originators still use one of these traditional servicers for its payment railways and reporting – and build integrated specialized components on top.  This provides a much more active and nuanced master servicing responsibility on the borrower.  

The portability – said another way, the ease of ability to sell the portfolio—is inverse to the amount of master servicing needed. The universe of buyers shrinks and also the purchase price is discounted to reflect the ongoing people and technology costs associated to master service.

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-Jillian

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A word of advice for new lenders: start with a shorter duration loan product.

Too frequently we see a great new business, with a loan product that is 5, 7, 10, 15, or even 20 years in maturity. Or, the loan has a 6 or 12 month interest-only component. In either case, you are collecting very little capital back in the first year or so.

Unless you have very deep pockets, this is a problem. Your equity investors want to see progress. You can originate more loans, but anyone can give money away. If the loans have barely paid off, it's tough to show you've been able to get that money back.

Additionally, you haven't had a chance to iterate yet. You may be waiting years before you have even partial data in order to iterate. Trust me, your first vintage will be your worst. Do you really want to sit on that for a decade?

My suggestion, start with a loan product that is 12 months or less. Shrink the size, reduce fees, speed up payment frequency...whatever you can do to make a short duration loan work. Then, you can slowly extend duration as you learn what works and what does not.

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- Conor