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By: Joe Gillen, CEO of Pinnacle Financial Strategies
07/01/05
Loans can be the single most important component of a bank's assets, with their earning power largely held in the hands of bank management and loan officers. In particular, construction loans are among the riskiest, yet most profitable, ventures that banks undertake. While recent technological advances should allow banks to create an automated construction loan process, most loan software fails to provide for automated loan loss calculation and reporting, reduction in financial exposure, increased operational productivity and efficiency, and production of a variety of reports with real-time information in a single overview.
When banks manage a large volume of construction loans, monitoring and managing accounts manually can become problematic and may lead to losses. Losses from loan management inefficiencies are preventable when the appropriate software and loan policies and procedures are in place. All too often, many rely on existing software to provide information and reports on credit risk, project profitability, and potential exposure. These software programs fail to take into account the additional risks of lending on real property not yet complete. Manual controls used by operational personnel do not effectively lend themselves to the roll-up or reporting and management oversight. When operational procedures fail or fall out of compliance, typically the only indication of the problem occurs once losses are experienced. This is where technology must adapt to the business of construction lending as opposed to the existing paradigm where lending procedures adapt to the existing software.
Timely and accurate reports are essential to effective loan management. The report data helps anticipate potential problems and identify distressing trends. Loan automation mitigates risk and helps resolve other common issues associated with construction financing, such as balancing the budget, performing due diligence on each account, 'human error' and continually monitoring each account.
When the construction loan process is automated, the budget of each loan is constantly balanced and monitored through line item budgeting and continual monitoring of the actual budget versus projected budget. Not only does automation ensure balances will be correct, it allows banks to administer budgeting, disbursement, balancing and posting simultaneously for hundreds of active construction loans. Software provides instant information and account reports, promoting faster and more effective decision-making.
There is a lengthy set of checks and balances that must be performed before any funds are disbursed. The construction loan processor must verify that all loan requirements are current, such as risk insurance and permits, before taking any action on payment with the loan. When done manually, this process can make managing a large portfolio time consuming and inefficient. With automated systems, managers can have an instant snapshot view of the loan, verifying that all components are in place and up to date.
Typically construction loans are often managed using Excel spreadsheets, and information may be entered incorrectly with no checks and balances to ensure accuracy. Automated software helps to eliminate mistakes and cuts down on wasted time, allowing banks a simple and timely review of the construction loan portfolio whenever needed.
Automation software provides seamless and constant monitoring for all loans, including:
- Monitoring change orders and retainage
- Project accounting for A&D and revolving loans
- Monitoring of inspection percentage complete against the percentage disbursed
- Tracking of all pre-closing direct costs and customer funds
- Tracking of customer construction funds received and used
- Automatic posting of daily new loan setup and ongoing loans to the core processing system
- Automatic posting of all monetary transactions
Automation provides a real time view of a bank's complete construction loan portfolio, providing increased control over budgeting. Automation also provides faster review and service for customers and builders, allowing a bank to quickly access loan status reports for customers, and providing timely and accurate service. Ultimately, this creates a better partnership between the customer, their builders and the bank.
About The Author
Joe Gillen is CEO of Pinnacle Financial Strategies. Founded in 1997, Houston-based
Pinnacle has evolved into a bank consulting company. Pinnacle delivers practical, turnkey solutions that help financial institutions improve
customer service, productivity, performance and profits. For more information, contact
Pinnacle Financial Strategies at 866.737.1235.
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