Digital lending platforms have improved in recent years, creating more efficiency for credit officers and administrators. As access to integrated loan origination and portfolio management technologies has increased, loan participation processes have become more streamlined, allowing more institutions to get involved. Participations demand a more complex credit management strategy, requiring a high level of trust between institutions and deeper due diligence. The good news is, technology is improving the quality of the loan participation process and increasing the level of transparency between the lead institution and the participants. That transparency makes the process more seamless and helps to meet FDIC expectations.
Sharing credit obligations between two or more institutions is desirable when lenders face limitations in either their legal lending or their in-house limits, and the ability to share credit exposure will be a major focus for lenders moving forward. This is especially true for smaller organizations. For institutions with less than $1 billion in total assets, loan-to-deposit ratios have grown from 74% to 81% over the last four years.
In recent months, the number and size of participations within our asset-based lending platforms has increased. We also have seen multiple cases in which more than two financial institutions have successfully shared in the funding of loans ranging from $4 million to more than $20 million. While most of the emphasis from 2010 through 2016 was on CRE lending, ABL is picking up steam due to stronger economic growth in key sectors such as transportation, staffing and manufacturing. Loan origination and portfolio management systems are paving the way for more effective sharing of credits.
Next Generation User Interfaces
Elegant user interfaces and portfolio management dashboards allow for a more streamlined approach to daily credit risk management. While this is true for all forms of commercial lending, it is especially so for asset-based lending vehicles, which require daily collateral exposure tracking. These interfaces expand opportunities beyond the originating financial institution, offering a greater ability for any participating institution, through read-only access, to manage individual exposure more effectively. This enhances an institution’s experience as a participant and lessens the burden placed on the lead institution to provide reports and status updates.
Access to information provides a greater level of comfort for all participants and increases transparency regarding loan management, making it easier to facilitate the settlement process. Since asset-based lines may change daily, many institutions settle income once per month and outstanding obligations once a week or more. This allows the lead institution more room to finance draws without bumping up against its own limit.
Integrated Data Stores
In the past, data maintained in silos placed an extra burden on financial institutions wishing to share loan information with participants. One of the greatest benefits of recent technology is the seamless transfer of data from loan origination through portfolio management without the need for dual entry. More importantly, these systems have eliminated reliance upon Excel spreadsheets and other independent reporting systems. This paves the way for more effective data sharing between participating institutions. Since data integration typically includes the collateral management system, this factors in effective management of ABL facilities. What’s more, the technology provides executive-level data oversight in a high-level dashboard, allowing both C-level and compliance teams easy access to summarized risk data.
As recently as two years ago, participants depended on the lead institution for updates on the status of each relationship. Today, participants can receive credentials to review and understand the credits on their own. While the lead institution is still in the driver’s seat, all parties now have much-needed transparency. The next generation of lending platforms is likely to enhance the participation settlement process itself, seamlessly presenting each institution’s share of the loan and calculating appropriate income and fee splits. In terms of software development, this is also an area where mobile technology is likely to play a significant role.
Smart Pipelines and Work Queues
The newest origination systems have integrated pipeline and workflow management components to help facilitate the onboarding of loans. This technology is expanding to include work queues to assist with mission critical loan management tasks such as exception tracking, financial statement covenants and annual reviews. These enhance lender effectiveness in monitoring credit quality and show a would-be participant it can trust the lead institution’s ability to stay on top of a large credit and act quickly if the credit begins to deteriorate for any reason.
Participating institutions understandably need some assurances regarding the credit exposure they face during participations. This is especially true for ABL facilities, which are more fluid regarding collateral value, age and validity. While each party is involved in the initial underwriting of the relationship, participants want to know the lead institution is actively managing the relationship, effectively monitoring loan covenants and remaining diligent about any financial exceptions. Automated credit management platforms allow for a higher level of oversight and enable all participants to more easily evaluate the relationship.
Enhanced Profitability Modeling
Some technology vendors have also begun to incorporate robust pricing and profitability management components into their commercial lending systems. This is critical to facilitating an effective loan participation. After all, how do you expect to offer a participation if you do not understand what your own profitability is within the scope of a commercial relationship? This knowledge allows the lead institution to fine-tune its pricing and fee structure, including any processing fees charged to the participating institutions for serving as the lead. The result is both the lead and the participants have a more focused view of their own profitability within the participation.
These exciting financial technology options are just the beginning. Next generation loan management systems will likely include participation dashboards, not just relationship dashboards. These dashboards would more fully automate the participation process for both credit analysis and settlements, boosting efficiencies for the institutions.
The key to success in any relationship is effective communication, and it is the same for financial institutions participating in large ABL facilities. The most recent generation of loan origination and portfolio management systems has been focused on enhancing communication between financial institutions and their business clients. As lending platform development progresses, the ability to share credit exposure among multiple institutions will be a major initiative. However, this can only happen through strong vendor relationships.
Financial institutions actively involved in participations must engage their lending platform partners and challenge them to advance their technology to help facilitate stronger participations. Only through financial institutions’ guidance as power users of technology can vendors create systems to truly meet the industry’s needs. This starts with effective communication and requires forward-looking vendors committed to helping their financial institution clients succeed.