As many commercial banks undergo large-scale transformations to replace their core banking platforms — such as loan origination or loan accounting — technology transformations are often thought of in silos, leading to missed timelines and excessive cost.
In order to enhance any collateral management ecosystem at a high level, all collateral management systems and capabilities should:
- Establish a services-based model aligning to the lending lifecycle.
- Utilize the following foundational capabilities as technology leading practices: integration, data, document management, workflow, automated controls and rules engine.
Collateral management lending lifecycle
The primary stages in the collateral management lending lifecycle are eligibility, booking, maintenance, valuation, monitoring and perfection.
Eligibility
Eligibility is tightly coupled with the credit review process since collateral ratings are used as key inputs for overall credit approval. Many banks lack integration between eligibility and origination systems, leading to manual interventions and data quality issues.
We recommend that banks utilize structured business rules and logic to automatically determine what types of collateral may be proposed for a deal. For example, a team member would be guided by workflow to select eligible collateral types based on the deal and would be prompted to complete corresponding requirements for that specific collateral type (e.g., valuation amount, haircut schedules). The resulting collateral data would then be automatically integrated with the loan origination system(s) for credit approval.
Booking and maintenance
Many banks utilize multiple collateral maintenance systems that are separate from, and not integrated with, facility booking systems — forcing manual entry of related details.
We recommend having the systems supporting booking and maintenance of collateral integrated with the corresponding servicing systems in both standard and cross-collateralized cases. This will support automated linkage of collateral and associated facilities and serve as the target integration point between collateral eligibility, valuation and flood systems. For example, if interest payments need to be processed for cash and securities collateral, the booking system can trigger workflow to process payments; calculate expected interest; and, once complete, update the payment and outstanding balance details directly in the servicing system.
Valuation and monitoring
Many banks follow inconsistent practices when performing valuation calculations — some automated and some more hands-on — leading to varying inputs and results. A major pain point observed is the lack of ability to extract details required for valuation calculation (much of it is done manually today vs. using OCR technology to intelligently collect the correct attributes). This leads to additional operational overhead, incorrect valuations and poor customer experience. We recommend:
- Leveraging a document management solution that can help extract the required data from various input sources (e.g., cash flow PDFs, third-party data feeds) to complete collateral valuation.
- Grouping and consolidating valuation systems based on collateral types serviced and valuation methods required (e.g., cash and securities vs. physical assets) but being cognizant of the need for niche valuation systems (e.g., specialized system for capital commitments collateral).
There are various types of monitoring performed for collateral (e.g., valuation, lien, insurance and tax, limit and flood monitoring). To allow for more efficient processes and better data quality, it is recommended to leverage dynamic rules and event-based notifications to facilitate monitoring processes. For example, a team member will be notified if a valuation changes that affects the borrowing base of a collateral or if a flood zone changes that requires additional insurance to take the appropriate next steps.
Perfection
Currently, many banks leverage their operations teams to manually support lien research, create and verify filings, update and track filing statuses, and prepare and send necessary documentation (e.g., insurance letters, renewals), causing many process inefficiencies. There are multiple third-party vendors that specialize in perfection activities for different collateral assets, and it is recommended to consider delegating these activities based on collateral assets to focus on core business activities.
These third-party vendor systems can be coupled with a shared workflow tool to facilitate additional perfection activities. The workflow tool should be able to independently guide perfection activities such that no dependency on a perfection vendor is required. On the off chance that there is a time-sensitive or high-risk deal, the operations’ users should be able to leverage the workflow to complete perfection steps and manually intervene where required without relying on a vendor system.
