San Francisco-based Patelco Credit Union, like other large credit unions, has taken advantage of cyclical pullbacks in small business lending by banks by purchasing more business loans. But growth in those holdings and heightened regulatory scrutiny of lending in general has forced the $3.9 billion-asset credit union to doff its manual ways of handling aspects of its commercial loan portfolio, and automate the processes to share more informative views into the credits it carries with senior managers and regulators.
Patelco announced in December that it selected SS&C's commercial loan origination and servicing platform, LMS Loan Suite, to make managing the commercial loans (called member business loans or "MBLs") it buys more efficient.
Patelco's core and its legacy loan origination system "pre-dated the MBL boom," explains Cory Schwab, vice president of commercial and secondary market loans for Patelco. "The loan system was probably better built for consumer lending. So we had to implement not only a number of manual processes and spreadsheets, but also internal control procedures to verify its calculations are accurate."
Specifically, the old system would not automatically amortize the discounts or premiums at which the commercial loans were purchased across the life of the credits, which made calculating true yields for them under U.S. accounting standards more time-consuming than need be.
"What LMS provided to us was a system that out of the box already integrates those premiums or discounts within the actual loan systems, whereas most of the traditional banking systems do not," Schwab says.
Also, the old system was restricted by the size of the loans it was originally purchased to handle - commercial credits are often larger than the typical home or auto loan amounts. Plus, the legacy platform "has a hard time accounting for all the underlying loans in the pools we buy, which makes it more manual to administer the actual pool on the back side," Schwab says. "Whereas with the LMS system we can more easily administer underlying loans, if and when issues arise with those."
Because each business loan has unique aspects endemic to relationship banking and small business lending in particular, the credit union sought a system that was flexible enough to intake the specific details of these credits, as provided by the banks, credit unions and originator-servicers from which Patelco buys the loans.
"We provide liquidity to those institutions," Schwab says. "But obviously, in purchasing those loans we're relying on our servicers to provide a lot of information. So one thing that LMS brings to the table is a calculations of interest rates and different variables within the loans to help provide us with peace of mind that the payments we're receiving are actually in balance with what we should expect. Because our current system has some limitations on the number of calculations that it can do, we've had to manually verify a lot of that to ensure they are accurate."
Robust workflow and customizable reporting features are also included. "The LMS system is going to act almost like a process flow and a one-stop shop for all the people in my department for all information," Schwab says. "An approval workflow process is built in, and it also has the ability to load appraisals and financial information within the system itself. So it'll recalculate key ratios for us like loan-to-values and debt service coverage ratios. So the reporting on the back side is going to include all those key matrices that we have to calculate by hand today."
LMS will allow Patelco to set up specific reports and automatically transmit them to designated user groups. "We can send those without me even touching a button," Schwab says. "And it's going to be real-time, whereas with manual reporting we may update those weekly."
Specifically, Patelco expects to be able to provide reports to the chief credit officer regarding which loans are in the pipeline and which level of approval they've received. "That can be pulled down by him at any point in time," Schwab says. "We can also set up reporting that regulators require, so hopefully we make that process more efficient for them and us."
Reports sent to senior management and regulators can include risk ratings, debt service ratios, loan-to-values and the actual zip codes where the properties are located. "So they'll have a kind of master sheet with all the specifics behind the loan before they even touch a file." Patelco is currently drafting its business processes and data requirements with SS&C; a yearend review is expected to determine the implementation timeline.
FINANCIAL INSTITUTION: Patelco Credit Union
PROBLEM: A growing business loan portfolio highlighted a legacy system's inadequacies.
SOLUTION: Upgrade to a newer, more automated loan system.