The asset-backed security (ABS) industry has experienced sustained growth in the last decade after emerging from the 2007-2008 financial crisis. As innovative platforms for businesses continue to shape growth in the financial services market and various channels of credit open up across industry and asset class, the ABS industry continues to play a key role in the success of investors and various market stakeholders.
Though the industry has been at the forefront of change, many companies are reluctant to innovate processes, especially when it comes to some aspects of operations, compliance and reporting. Yet streamlining these traditionally manual processes would increase efficiency, reduce costs and mitigate risks.
This lack of innovation can be a challenge in any ABS deal where various participants and stakeholders do not use similar platforms to share, process and report on data. There are key risks inherent in various manual processes; fortunately, there are benefits to be gained through the use of innovative technology platforms that promote more automation.
Risks and volume of manual processing
Manual forms of data entry and manipulation pose risks for any organization. Simply, the physical retention of customer documents could lead to a multitude of issues, including incorrect filing or loss of important documentation. Within ABS operations, there are many instances of manual processing, including:
- Credit agreements: Credit agreements contain multiple performance metrics to monitor the quality of the collateral and confirm that it is within the lender's risk tolerance. The performance metrics trigger values for employees to enter into the monthly servicer spreadsheets to confirm compliance with the covenants during each reporting period. There is, however, a risk that individuals may overlook specific metrics when creating and updating servicer reports, or that they will incorrectly enter values.
- Calculations of eligible loans: The calculation of eligible loans used to calculate borrowing bases must encompass all eligibility criteria mentioned in an agreement. Compliance with the eligibility criteria is usually determined manually and is based on manipulating data exported from a loan servicing system. This creates the risk that the eligibility criteria entered into the servicer report calculation will be incomplete or incorrect.
- Cash collections: The amount of cash to transfer to a special-purpose vehicle is generally determined via a spreadsheet that contains collections of the portfolio codes to which the loans are pledged. There is the risk that cash collections may be unidentified in this process if portfolio codes are inappropriately or incorrectly entered into source data files or systems.
- Loan terms: The loan terms in credit agreements are based on a lender's review of the company's credit policies and procedures in relation to a borrower’s creditworthiness. The borrower’s creditworthiness is constantly being determined by evaluating key documentation during the underwriting process and, subsequently, during evaluation periods. As a result, obtaining and retaining proper documentation is critical for effective underwriting and ongoing credit administration.
Companies sometimes fail to obtain and maintain proper documentation to evidence strong underwriting processes (e.g., proof of income, residency, insurance or legal agreements) or strong credit administration (e.g., current and reliable financial documentation) as operations staff sometimes obtain paper copies of documentation and inaccurately scan or store it. In some cases, documentation received is outdated, unreliable or does not comply with the credit agreement.
While many companies still maintain paper records, paper is becoming increasingly obsolete. These records are critical to supporting underwriting decisions, ensuring compliance with company lending policies and regulatory requirements in the ongoing credit administration process, and maintaining an audit trail. Human error can compromise a company's credibility.
The benefits of automation
Process automation allows companies to reduce errors and operating costs by eliminating expensive and inefficient manual processes. Integrating automation into an organization’s environment can result in a wide range of benefits, including accurate and real-time data, accurate record keeping and increased transparency among various stakeholders. Furthermore, automating a function can help reduce certain risks by relying on a system where processes are linked and errors are automatically detected.
There are many software and database options that companies can use to facilitate their asset-based lending and underwriting loan processes, and credit administration functions. Automation software creates a standard of organization and simplifies the process for uploading the necessary documentation to apply for a loan. Creating accounts and mailing copies of countless amounts of paperwork and documents can be tedious and stressful. If companies transition to automation, it will be easier for employees, consumers and other stakeholders engaged in a transaction to view the status of the loan and to communicate with each other.
So what types of automation technologies are being used to facilitate a more efficient asset-based lending process? Company executives can consider many options to automate their underwriting loan and asset-based lending processes, along with the associated post-closing credit administration process. Following are some of the choices:
- Electronic document management: This digital solution allows lenders to securely process and manage paperless loan documentation. Benefits include
- Automates loan file auditing for appropriate disclosures and compliance requirements
- Allows borrowers to sign and submit documents via a secure site; manages documents to avoid manual searching and handling costs
- Stores all documentation related to one customer in one place; all relevant parties can access the documentation at the same time
- Underwriting automation: This technology produces computer-generated lending decisions. Benefits include:
- Compiles basic information supplied by the customer, runs searches on credit history and provides a decision
- Flags applicants to manual underwriting where appropriate, saving employee resources time for more complicated decisions
- Provides quick decisions for a better customer experience
- Asset-backed securitization tool: This securitization tool helps banks alleviate the tedious process of implementing complex eligibility criteria and reporting requirements. Benefits include:
- Automates reporting and calculations to aid in asset-backed securities transactions
- Allows employees and customers to access their profiles and view the status of their loans
- Allows new customers to easily create profiles in the ABS system
- Interfaces with various credit insurers, and includes interpretation rules for the allocation of approved limits
- Provides solutions for meeting future securitization requirements
- Smart contracts: This type of contract has the terms of the agreement written into the software code, allowing transactions to occur per the terms of the agreement without third-party intervention. Benefits include:
- Acts automatically based on preprogrammed criteria to reduce or eliminate resource time
- Processes secure and reliable transactions that cannot be changed or deleted and are visible to all relevant parties
- Allows for quick transactions
Eliminates the need to process paperwork manually and consequently, reduces operating costs
Implementation considerations and automation best practices
While moving toward implementing automated processes is beneficial, it is important to validate the accuracy of the execution of these processes. To be successful, companies should consider the following best practices:
- Research: It is imperative to perform external and internal research prior to making any significant shifts in information technology strategy. Management should understand what other companies in the industry are using and how technology is benefiting their performance.
- Assess: Management should perform an analysis of each potential tool and determine how it would benefit the organization as a whole as well as on an individual job level. The organization should focus on picking tools based on the employees’ and stakeholders’ use and needs.
- Plan: Prior to implementing an automated process, the organization should plan appropriately for the ongoing operations and maintenance of the automated process. Automation is rapidly changing, which means organizations need to be aware of and have the ability to keep up with constant change.
Automation helps to address one of the most important industry challenges: human error. In the move to a more technologically driven world, it is important for industry executives in the asset-backed securities industry to keep current on automation and continue to explore technology options that will benefit their companies, consumers and external stakeholders.