Don’t “Set it and Forget it”: The Value of Loan Surveillance
By Harbor Group Consulting
In many ways, cooking can be used as a metaphor for managing complex loan transactions. Closely following a recipe, completing taste tests and plating the final product mirrors the proactive due diligence and decision-making that goes into finalizing a deal.
However, most commercial real estate (CRE) lenders aren’t following a strategic recipe for risk management after their deals close; instead, their loan surveillance strategy is akin to the famous rotisserie chicken infomercial, advertising you can “set it and forget it!” Failing to complete post-close due diligence can leave lenders vulnerable to lapses in coverage that threaten the life of the loan.
In this article, we’ll discuss the biggest mistake lenders make after closing a deal and how they can proactively protect their financial interests.
The Biggest Mistake Lenders Make at Loan Closing
Most CRE lenders will complete a review of insurance prior to a loan closing. This often involves redesigning the borrower’s coverage to meet the standards set forth by the lender and/or government-sponsored entities, such as Fannie Mae or Freddie Mac.
While this is a critical step that should be undertaken prior to any loan closing, a strong risk management oversight strategy does not end when the deal is finalized. A costly mistake lenders make is failing to construct a robust post-close due diligence strategy, which can result in:
- Misalignment between the lender’s unique requirements and the borrower’s insurance coverage
- Exposure to uninsured events and unprotected collateral
- A greater risk of loan defaults
- Substantial financial losses
By continuing due diligence after a deal is closed, lenders can ensure renewal compliance for borrowers and identify any potential gaps in coverage before they lead to uninsured risks.
How to Create a Post-Close Due Diligence Plan
To avoid lapses in coverage, use these best practices to construct a well-designed post-close due diligence plan:
- Stay on top of insurance renewals: On average, borrowers renew their coverage every 11 months, meaning most borrowers do not complete a full year of an insurance contract without “resetting” the insurance program. This creates a greater need for a lender to stay on top of the insurance that protects the collateral of a loan.
- Review policy documents: Many lenders prioritize reviewing certificates of insurance in their surveillance strategy, but fail to review actual policy documents. As certificates of insurance may not highlight critical components of an insurance policy, it is important that lenders read through the actual policy documents if policies change.
- Promote clear communication: Borrowers and lenders should maintain open communication channels so issues can be identified and resolved quickly and effectively.
- Work with an insurance advisor: As the foremost insurance advisor for commercial lenders, Harbor Group Consulting works as a true partner in achieving lenders’ risk management objectives. Our team of specialists ensure that lenders are protected throughout the entire lifecycle of a loan, from pre-close to post-close.
Harbor Group Consulting has streamlined insurance surveillance for its CRE lender clients by collecting and monitoring insurance policy information for the life of a loan. We ensure lenders’ portfolios are protected from risk by aligning all insurance policies associated with the borrower’s collateral with the lender’s specific requirements. Additionally, our proprietary dashboards give lenders 360-insight into the health of their loans, allowing for more informed decision-making.
Contact Harbor Group Consulting today to learn how our team can safeguard your organization from exposure to risk.
