Loan Portfolio due Diligence Gives Holders Clarity of Inherent Risks in Portfolio

Loan portfolio due diligence is very important for any person who wants to have clarity of her financial risks and credits. Hence, for any servicing company that provides this service along with acquisition review of the loan portfolio, it becomes very important they maintain certain standard procedures and methods.

Due diligence therefore is a very important part of any financial transaction such as financing secured by a mortgage loan portfolio, purchases of mortgage companies and financial institutions with servicing portfolios, and acquisitions of mortgage loan portfolios or mortgage servicing rights.

Reasons to have loan portfolio due diligence

One of the reasons why it is beneficial for banks to have this review is that it provides clear vision regarding the target’s credit risk before closing. It is all the more important when target is supposed to be weak and there is a limitation to information and time. The failure of proper assessment may jeopardize buyer’s prospects to generate profit.

Another benefit of undertaking this process is that it gives a great boost to the entire process of decision making. The correct and methodical valuation gives these things:

• Inherent credit risk
• The outlook for future performance of different segments

This in turn makes room for more detailed discussions among management and directors for proposing the offer to the target and estimating the pro forma impact on capital ratios and earnings from the acquisition.

The thorough acquisition review also frees human resources in the financial institutions. These resources then can be utilized in other matters such as mergers and all.  

Benefits of loan portfolio due diligence

Taking thorough loan portfolio due diligence may uncover a multitude of financial and operating risks to the client including significant bank account outages, potential unpaid taxes or hazard insurance, incomplete or incorrect loan fields, improper adjustable rate mortgage changes, re-purchase risk, losses due to improperly managed loan default, loans missing mortgage insurance, and investor penalties.

Generally, professional companies providing the due diligence service also provides acquirers with valuations of other financial assets and liabilities acquired in a bank transaction, including depositor intangible assets, time deposits, and trust preferred securities. The experienced companies make sure that the reviews comply with underlying agency and investor requirements, and with federal requirements for mortgage loan servicing. They aim to review servicing practices to determine whether the servicer is performing in accordance with industry-accepted prudent servicing standards, and whether it is applying best practices.