Servicing is crucial for new lenders

Much has been written about the new entrants in the sub-prime market with a focus on the front-end activities of these lenders. Products, technology and distribution channels have been covered in detail but little attention has been paid to how they operate behind the scenes. How will they service the assets they generate?

The servicing element is critical. Whether new entrants service inhouse or outsource to a third party, the servicing platform will be responsible for contact with customers post-completion, the collection of monies due and the reporting of performance information.

These vital tasks are difficult enough in the prime market but in the sub-prime market additional specialist skills are required. Sub-prime loans produce much higher levels of communication between customer and servicer. And of course, while many customers pay on time each month there are those who do not. It is the servicer that must contact the borrower and manage the collections process. Will the new entrants service inhouse or outsource?

To set up a servicer from scratch is tricky. There are substantial costs involved. Initially, the new lenders will not be able to deliver the volumes required to justify the expense of establishing a servicing platform. Even if high volumes are forecast the effort required to set up a platform is immense and entrants are unlikely to dilute the resources they are using to create their lending platforms.

So third party administration is likely to be the choice of the new entrants. Oakwood’s new lender edeus will be using Homeloan Management Limited. HML has nearly 20 years’ experience and around 38bn of assets.

Another element of servicing merits consideration. As competition increases customer retention will become important. The two key strands to retention are sales and service post-completion. Lenders should provide excellent products and service to customers to keep them satisfied at all points in the process.

This is different from a defined retention strategy which treats existing customers differently from new ones. I agree with Stephen Knight’s recent rebuttal of the idea that defined retention strategies have anything to do with Treating Customers Fairly. It is a broker’s job to match a client’s needs.

The lender’s job is to treat customers fairly by completing and servicing the loan efficiently. If a third party administrator is doing a poor job customers will go elsewhere.

If new lenders can get the front-end proposition and the servicing platform right new business will come in and satisfied customers will be retained. Lenders that fail to invest the time and money in an efficient servicing platform will quickly realise their mistake as their customers remortgage elsewhere.