Loan Closing & Servicing

Presented January 12, 2010 by Cheryl Fatnassi, Opportunities Credit Union Loan Closing & Servicing

Loan Closing • Loan Servicing • Loan Review/Quality Control • Perfecting Interests in Collateral • Insurance • Loan Reporting/Guarantees/Life Events • Death, loss of income, bankruptcy, divorce • Late payments • Collateral damage/losses It’s approved ! ... now what?

In person Via the mail Online The Loan closing…

Loan Closing should include: • Review the loan agreements • Promissory Note and TIL • Security Agreement • Collateral Insurance Agreement • Credit Life and Disability Insurance Coverage • Notice To Co-Signers

Credit life insurance Credit disability insurance • Premiums may be added monthly to the loan or financed as part of the loan up front depending on the insurance company/state laws • Upon death of the insured, generally pays the loan in full or up to the limit of coverage • Premiums handled same as life insurance. • Makes monthly payments in the event the insured is disabled following any excluded period (i.e. first 10 days of disability). • Requires paperwork from the borrower and doctor validating disability claim. • Payments can be delayed on loan while borrower files Credit insurance

Security Agreement and other docs… • Security Agreement • Describes any collateral on the loan • Requirements for maintaining collateral • Must be signed by all owners of the collateral even if they are not responsible to repay the loan/note. • Perfecting your interest in the collateral: • UCC Filing • Title • Mortgage Deed

Promissory Note and reg Z. … • Promissory Note is the agreement to repay a specific amount and identifies the terms of payments:due dates, default/late fees, collateral description, etc. • Truth In Lending disclosure (TIL)/Regulation Z • TIL ensures borrower knows the cost of the loan and can compare different financing options=“The Boxes” • Amount Financed • Annual Percentage Rate • Finance Charge • Total of Payments

Loan Servicing… • Payment options: • Coupon Book or Monthly Bill-manual payment by borrower • Automatic payments (ACH/EFT –bank automatically takes payment from borrowers account at a bank or credit union) • Recurring bill payment • ACH/EFT • Borrower authorizes lender to take their monthly payment on a specific date until further notice. • Good option for borrowers who keep money in their account and want to avoid mailing payments/forget to mail them • Not good option for borrowers who fail to keep money in their accounts, forget to track their balance who will incur Returned Item/NSF fees from lender and bank where deposit is held

Other loan servicing issues… • Damage to collateral • partial or full loss-generally insurance will pay for damage less deductible • lender will expect repair estimates • lender will hold money in escrow until repairs are done or may payoff loan if balance is less than loss. • Life Events • Loss of /reduced income • Divorce • Death • Illness • Other (gambling, drugs, alcohol, shopping or other unplanned strains on the budget)

When the borrower doesn’t pay… • Guaranty Agreement covers terms of your guarantee: • % of loan guaranteed (100%, 75%...) • Length of guarantee (i.e. life of loan, released after 2 years of timely payments) • What you agree to payoff: principal balance, late fees, interest, legal costs to dispose of the collateral, other • Do you own the collateral after you pay the loan off or does the lender have to sell it and give you back any recoveries? • If there are very few loan losses and you have built up a history with the lender, can you reduce the guarantee for certain types of loans or after they “season”?

Loan workout options… • Loan modifications: • Reduction in rate (you might subsidize the cost of this for a period of time) • Reduction in monthly payment-increase in # of payments • Forbearance (period of time when borrower does not make payments –from 1-3 months-then modify payment or term) • Borrower’s income and expenses going forward • Temporary or permanent change in income or expenses • Borrower’s payment history prior to this late payment event • Lender’s willingness to work with you and the borrower

Loan Modifications… • Agreed to in writing-changes terms of original loan • May require a hardship letter and budget showing borrower can make payments going forward • Good option for temporary hardships

Loan workouts… • Borrower voluntarily surrenders the collateral • Borrower sells the collateral for full or partial settlement of the loan • Borrower agrees to a lien on property that is paid at time of sale of the asset

Reports for you-the guarantor… • Monthly Trial balance shows loans outstanding, balances, due dates • Past Due/Aging-tracks late payments and due dates • Delinquency/Charge-Off History Report (build this yourself and update monthly) • Use good performance to leverage your loan pool • Delinquency <2%-reduces lenders cost to collect and service the loan • Charge-off % <1%- lender may be willing to release your guarantees on some loans allowing you to make more loans with a smaller reserve ratio (start with 90% and go from there.)

Thanks for participating today… Questions?

Loan Closing & Servicing