In today's market environment, measuring the potential for loans to decline to non-performance status has become vital. The measurement of loans is approached from two perspectives - compliance to covenants that were set within the loan agreement, and the trending and forecasted analysis of the underlying assets' ability to continue to support the underlying debt.
The management and measurement of loan covenants requires the ability to automate the request and tracking of the required documentation to be submitted by the borrower or other designated parties of the loan. These can consist of financial statements, verifications, ratings, valuations, and so on. One of the early signs of a potential loan issue is the party's delay or unwillingness to provide the documentation, knowing that sharing such information may result in certain actions by the servicer. Therefore, a strong tracking and receipt management process of required information is important so that potential issues are identified early.
If the requested documentation is received, then the provided information has to be analyzed to determine the ongoing credit worthiness of the loan. Typically loans will have covenants that imply specific Loan to Value ratios, minimum Debt Service Coverage Ratios, Insurance coverage, or credit ratings that need to be maintained. The analysis results can provide insight as to whether certain thresholds are being met or trends are declining to an extent that raises concern. The servicer can then determine which loans may need to be placed upon watch as a potential risk.
Measuring loans within the portfolio has to be an on-going proactive process. The earlier a potential problem loan is identified, the greater the ability to work with the borrower to address the issues and minimize any financial impact to the lenders or investors.
LMS Servicer provides the ability to automate the requests and management of documentation from borrowers, track financial analyses, and report on covenant compliance or trending performance. The servicing and loan administration function provides a comprehensive toolset to measure on-going asset performance, portfolio concentrations, exposure, and risk analysis.