At your service: Outsourcing loan agency work

January 11, 2021

At your service: Outsourcing loan agency work

January 11, 2021

For lenders short on loan servicing expertise, outsourcing helps ensure the work gets done without the in-house headaches.

 

Aside from a lull in the aftermath of the Great Recession, The leveraged loan industry has grown steadily over the past 20 years, with outstanding loan volumes topping $1.33 trillion in the fourth quarter, according to Refinitiv.

Given the industry’s expansion and increased regulation on the traditional banking sector, a number of new non-bank lenders have entered the field. However, many newcomers have struggled to manage all that’s required after a loan closes.

 

The complexities of lending

“Administrative tasks associated with loan servicing can often shift a lender’s focus away from what they do best – credit monitoring,” says Jim Hanley, vice president at U.S. Bank Global Corporate Trust.

Meanwhile, as investors contend with consistently low interest rates, the market wide search for better yields has led to some tangled loan structures for nontraditional lenders.

To ease such headaches, many loan providers — especially those of the nonbank variety — are turning to third parties to take on a host of loan agency services.

“Many loan providers — especially those of the nonbank variety — are turning to third parties to take on a host of loan agency services.”

“We’ve been brought in by large lending firms that have been syndicating loans to other funds. They realize they need to lower their risk profile as well as streamline some of their back-office responsibilities so they can concentrate on other things,” Hanley says.

 

Servicing a key element of the loan landscape

For many in the leveraged loan industry, the enticing part of the business is origination. What’s done afterward, however, could make the difference later between a repeat customer and a disgruntled borrower.

From processing the transaction through administering collections and payments — and handling all communications throughout — it’s critical to smooth out the inevitable bumps.

Yet, related expenses can add up. According to the Loan Syndications and Trading Association (LSTA), loan service costs are tied to:

  • Direct costs related to working with borrowers 
  • Unreimbursed expenses related to foreclosures and real estate owned properties 
  • Corporate costs such as technology, legal and finance

chart showing institutional loan volume rates
“Plus, there are a limited number of experts in the field. So, finding them, hiring them and training them takes a lot of time and manager bandwidth that could otherwise be focused on growing the firm’s business,” Hanley says.

As for lenders wary of handing off a hard-won customer to another financial entity, a quality outsourcing partner will offer a customizable solution that allows the lender’s identity to remain front and center.

“Some firms want to keep it in-house because they value the many touchpoints this model brings to the lending relationship,” says Mike Oliver, vice president at U.S. Bank Global Corporate Trust. “In a white-label solution, the lender is still the administrative agent and retains the same relationship touchpoints. The operational mechanics just shift to a third party that does the heavy lifting behind the scenes.”

 

An adept third-party partner adds value

Since the Great Recession ended, a host of bank regulations have been enacted to better protect borrowers. As a result, many large banks have reduced their exposure to the loan servicing industry, opening the door for many smaller entities to enter the field.

While the competition has sparked innovation and responsiveness within the space, a number of key considerations have remained constant, including:

  • Flexibility in designing and implementing services that meet a lender’s needs for speed and accuracy while ensuring client compatibility and complete alignment with compliance matters. 
  • A comprehensive suite of service offerings that can address the full life cycle of the loan — from origination through securitization — including the complexities inherent in collateralized loan obligations, other investment structures and distressed debt.
  • Customizable reporting options that may be tailored to any customer need, including consolidating reporting across facilities.
  • A dedicated relationship manager who provides a single point of contact for any deal-related matters.
  • Financial strength and stability rooted in a solid base of committed capital that helps ensure smooth sailing from an institutional risk standpoint.
     

“Many non-bank lenders are very cost-conscious, and they don’t want to hire a staff of 10 people or more to handle all of these back-office duties,” Oliver says. “So, it makes sense to outsource the role to process the operational items that they don’t want to deal with.”

 

Partnering with a sound financial institution 

As you weigh your third-party options, look for a partner that is dedicated to following the rules and regulations around loan agency services.

“There’s a built-in trust factor because we, as the highest rated bank by the rating agencies, have significant scale and follow a sound operational and risk profile,” says Matt Clarkin, CFA and vice president in product management with U.S. Bank Global Corporate Trust. “Many non-bank lenders that don’t have their own internal capabilities find U.S. Bank to be a natural partner.”

Clarkin added that U.S. Bank offers its customers a number of benefits including:

  • Expertise with a broad spectrum of companies across a wide variety of transactions. 
  • Extensive technology infrastructure including standard industry software platforms deployed on fully redundant and reliable data systems. 
  • Longstanding risk assessment protocols honed to be quick and accurate. 
  • Seamless wire transfers with other institutions. 
  • Commitment to serving as a one-stop shop for lenders on any type of transaction. 
  • Additional services such as corporate checking accounts, custody services and experienced credit professionals.

“At U.S. Bank, we offer true plug-and-play solutions, so customers don’t have to find and hire experienced people,” Hanley says. “And going forward, we can scale up with them as they grow.”

 

U.S. Bank has a sound financial history and extensive expertise in servicing loans. To learn more about our loan agency services, visit usbank.com/corporatetrust.

Related Content

7 diversification strategies for your investment portfolio

OCIO: An expanding trend in the investment industry

What is a home equity line of credit (HELOC) and what can it be used for?

5 financial benefits of investing in a vacation home

7 year-end tax planning tips

Money Moments: How to finance a home addition

Common unexpected expenses and three ways to pay for them

4 ways to free up your budget (and your life) with a smaller home

A guide to tax diversification in investing

New technology streamlines M&A transactions

How to open and invest in a 529 plan

How grandparents can contribute to college funds instead of buying gifts

Tailor Ridge eBill case study

5 times you may need a financial advisor

How do interest rates affect investments?

Effects of inflation on investments

How to use debt to build wealth

4 benefits of independent loan agents

The unsung heroes of exchange-traded funds

Middle-market direct lending: Obstacles and opportunities

What type of investor are you?

How I did it: Deciding whether to buy an RV

Take the stress out of buying your teen a car

Retirement expectations quiz

Streamline operations with all-in-one small business financial support

Managing complex transactions: what your corporate trustee should be doing

Beyond Mars, AeroVironment’s earthly expansion fueled by U.S. Bank

Emerging trends in Europe: An outlook from multiple perspectives

Key considerations for launching an ILP

Personal loans first-timer's guide: 7 questions to ask

Evaluating interest rate risk creating risk management strategy

Opening a business on a budget during COVID-19

What’s a subordination agreement, and why does it matter?

Understanding the true cost of borrowing: What is amortization, and why does it matter?

Parent checklist: Preparing for college

What are conforming loan limits and why are they increasing

Should you get a home equity loan or a home equity line of credit?

Understanding yield vs. return

Retirement income planning: 4 steps to take

How to start investing to build wealth

How much money do I need to start investing?

Can fantasy football make you a better investor?

Investment strategies by age

Investing for beginners

Bull and bear markets: What do they mean for you?

Avoid these 6 common mistakes investors make

4 strategies for coping with market volatility

5 questions to help you determine your investment risk tolerance

How to establish your business credit score

4 times to consider rebalancing your portfolio

4 major asset classes explained

What are alternative investments?

What is a CLO?

When to consider switching banks for your business

Easing complex transactions: Project finance case studies

Get more home for your money with these tips

How I did it: My house remodel

Is it the right time to refinance your mortgage?

4 questions to ask before you buy an investment property

Is a home equity line of credit (HELOC) right for you?

10 uses for a home equity loan

How to use your home equity to finance home improvements

What to know when buying a home with your significant other

Webinar: Mortgage basics: What’s the difference between interest rate and annual percentage rate?

Webinar: Mortgage basics: How much house can you afford?

Webinar: Mortgage basics: Buying or renting – What’s right for you?

Webinar: Mortgage basics: What is refinancing, and is it right for you?

Webinar: Mortgage basics: Prequalification or pre-approval – What do I need?

Webinar: Mortgage basics: How does your credit score impact the homebuying experience?

Webinar: Mortgage basics: Finding the right home loan for you

Webinar: Mortgage basics: 3 Key steps in the homebuying process

8 steps to take before you buy a home

These small home improvement projects offer big returns on investment

What is refinancing a mortgage?

How do I prequalify for a mortgage?

6 questions to ask before buying a new home

Student checklist: Preparing for college

Webinar: Uncover the cost: College diploma

The A to Z’s of college loan terms

Co-signing 101: Applying for a loan with co-borrower

Practical money skills and financial tips for college students

How I did it: Paid off student loans

Everything you need to know about consolidating debts

Your quick guide to loans and obtaining credit

Test your loan savvy

Is a home equity loan for college the right choice for your student

How to apply for federal student aid through the FAFSA

Be careful when taking out student loans

Your financial aid guide: What are your options?

ABL mythbusters: The truth about asset-based lending

Collateral options for ABL: What’s eligible, what’s not?

Employee benefit plan management: Trustee vs. custodian

High-yield bond issuance: 5 traits lawyers should look for in a service provider

Renewing your custody contracts? Negotiate the fees.

Case study: U.S. asset manager expands to Europe

How jumbo loans can help home buyers and your builder business

Capitalizing on growth in the private equity space

How liquid asset secured financing helps with cash flow

Top 3 considerations when selecting an IPA partner

When small companies buy big: The potential of asset-based lending

How to maximise your infrastructure finance project

Questions to ask before buying a car

What you should know about buying a car

How to choose the best car loan for you

What you need to know before buying a new or used car

Can you take advantage of the dead equity in your home?

How to get started creating your business plan

How to fund your business without using 401(k) savings

Costs to consider when starting a business

How a small business is moving forward during COVID-19

Prioritizing payroll during the COVID-19 pandemic

5 tips to help you land a small business loan

Investing in capital expenditures: What to discuss with key partners

Interval funds find growing popularity

Can ABL options fuel your business — and keep it running?

ESG-focused investing: A closer look at the disclosure regulation

4 questions you should ask about your custodian

Tech lifecycle refresh: A tale of two philosophies

At your service: Outsourcing loan agency work

Maximizing your infrastructure finance project with a full suite trustee and agent

An asset manager’s secret to saving time and money

An investor’s guide to marketplace lending

A first look at the new fund of funds rule

3 innovative approaches to ESG investing in Europe

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.