Garnet Capital Advisors Blog

July 23, 2015

Banks Benefit From Outsourcing Loan Production & More

Banks are increasingly contemplating outsourcing their risk management and loan origination functions.

Boost in-house staff, or outsource tasks? That is the million dollar question for banks across the US.

With tight regulations, a high level of competition, and low interest rates, the challenges facing banks today are causing them to contemplate outsourcing certain functions as opposed to keeping them in-house.

While larger banks might hesitate to outsource in an effort to control their reputation and handle regulators' concerns about risk management, smaller banks are more likely to outsource certain tasks. This comes as a result of the challenge of hiring professionals who are skilled and trained well enough in specific fields, including computer security and loan origination.

In fact, plenty of industry experts feel that outsourcing such tasks can be done successfully.

Not only does outsourcing certain responsibilities help take this job off the table for smaller community banks, it can even be a more affordable and compliant way for these tasks to be handled. This is what makes outsourcing attractive as opposed to bringing and keeping these experts in-house.

Considering how much more frequent cyber attacks are occurring - both on an individual and corporate basis - smaller banks are finding it more and more difficult to keep up with managing such risks. Instead, there is a plethora of industry experts who are highly capable of tackling this issue without having to bring them on as employees.

These experts can be extremely expensive to keep on the payroll, making outsourcing an even more viable option. Not only that, but the need to comply with audits makes bringing these professionals in-house even more expensive. Community banks that have less than $1 billion of assets would probably be in a better position to outsource risk management and loan origination because of their smaller size.

Even if certain banks become large enough that they can afford to handle its own affairs, these bigger institutions might still choose to supplement certain in-house operations with expertise from the outside.

There are definitely certain benefits to outsourcing, aside from saving money. By getting outside expertise, banks have the chance to learn from industry professionals and harness a true understanding of what the best practices are according to today's standards. This is critical within the financial realm, as regulatory requirements have recently become more complicated and far-reaching.

While regulators are certainly dedicated to ensuring that consumers are protected, that shouldn't necessarily stand in the way of community banks choosing whether or not to keep certain functions in-house or outsource them.

By outsourcing specific functions, banks can cut costs while still upholding relationships with clients and vendors.

However, community banks will still need to pay close attention to upholding their relationships with vendors and their reputation with consumers. As long as the greater good of the public is upheld, regulators shouldn't be too rigid in their influence over the decision that community banks make regarding outsourcing certain tasks.

The Loan Sale - Boosting Business Without Incurring the Cost

Outsourcing or purchasing loans and mortgages can also help to keep costs down for banks, while keeping consumers satisfied and happy. Banks have been increasingly burdened by regulations and increased origination costs. As a result, many community banks are discovering the hard way that they can no longer have a profitable business in certain products.

Of course, these banks still want to be able to offer consumers their loan products, while trying not to lose the relationship with their clients to competitors. One viable solution to this issue is to outsource loan origination functions to outside parties.

Community banks are increasingly turning to loan purchases from private-label lenders. While there are specific concerns involved in these transactions, an important one in particular is that these outsourced lenders do not snag the bank's clients. And with the burden of cost and regulatory compliance, turning the loan function over to another party has become increasingly attractive.

Banks might not be able maintain full-time origination functions, but they must still accommodate their borrowers and clients. While they might want to offer lending services, they don't necessarily have to take on the compliance or investor risk that goes along with such functions.

These burdens, including the additional employees required for compliance, are what is driving smaller banks to reassess their place in the loan business.

The move by community banks to outsource loan service providers will likely accelerate as the mortgage and other markets continue to normalize and become increasingly dependent on purchasing business.

Services like those from Garnet Capital can mitigate the compliance responsibility associated with loan originations. Outside lenders can originate the loan, which can also be serviced on an outsourced basis.

If the outsourced loan program is run properly, banks can still continue to build and strengthen customer loyalty without having to incur additional costs and regulatory burdens.

Garnet Capital - Helping Banks Outsource Risk Management and Loan Origination

Outsourcing is the wave of the future for banks. In an effort to comply with regulatory requirements and cut costs, outsourcing specific functions - including risk management and loan origination - can help banks boost profitability while at the same time retain relationships with clients and vendors.

To find out more about how Garnet Capital can help your financial institution develop an outsourcing plan for loan sales and risk management, visit today.