In my experience, all the recent storms, wildfires and winter weather we’ve been seeing suggest servicers need to better prepare for insurance claims and increased risk of collateral losses. However, stories abound of disaster-damaged properties going through disorganized insurance claims processes, causing delayed repairs, angry borrowers, and increased expense and reputational damage for servicers. Everybody loses in these cases.
The loss draft process—the management of funds from borrower-filed hazard insurance claims—is generally viewed today as frustrating and expensive due to inefficient communications, inflexible business rules, and an outdated, paper-intensive environment. This frustration, which compounds an already emotionally-charged situation for the storm victim, can poison the lender-borrower relationship and increase the risk of default.
A loss draft is a multi-party check issued by an insurance company to both the borrower and the lienholder when a collateral property is damaged. The intention is for the funds to be used by the borrower to make repairs on the property, as opposed to being absconded or diverted to other purposes. To make sure these funds are used correctly, lenders or servicers will require inspections and make progress payments during each step of the process.
Ideally, the loss draft process should end with the claim paid in full, the house repaired, and peace between the borrower and the lender. Unfortunately, I’ve seen many cases where this is handled today through a very paper-intensive process of mailing among the borrower, inspection companies, repair companies, and other parties involved in the process. Multiple documents and verification forms are required to protect both the lender and borrower, and most companies don’t have a technology solution with the ability to process these documents and to communicate the status of repairs and collateral condition electronically.
The biggest concern with the loss drafts process is the delay in resolution stemming from the back and forth communications via phone or letter between the lender and borrower. Since most borrowers generally don’t understand or appreciate the need for the inspection, repair, and loss draft negotiation processes, they may not know what needs to happen next, causing delays and leaving them with feelings of anger and frustration.
In the meantime, the servicer bears considerable risk when it comes to a damaged property. Asset protection is always important, but particularly in the case of a borrower who may be delinquent or who may become delinquent if they decide that repairing the property will require too much effort or additional out-of-pocket expenses. Servicers should therefore do all they can to ensure the process is swift, intuitive, and easy for the borrower to navigate.
Unfortunately, most loan servicing systems do not have robust tracking options for following the status of a loss draft request. Additionally, because natural disasters are unpredictable and the skills needed to deal with insurance-related issues may be concentrated in relatively few seasoned employees, servicers often find themselves shorthanded in storm seasons. In the meantime, traditional outsourced loss draft management models are priced on a monthly basis for the life of the claim, adding to expense and making it impossible to accurately predict costs of servicing due to the unpredictable timeframe to resolution.
Finally, due to the specificity in the requirements, banks and other investors have often adopted the Fannie Mae loss draft guidelines for use on their portfolios. However, those guidelines may not be what is best for all circumstances, such as higher-value properties, low balance loans, and high wealth customers, as the levels of scrutiny can add further aggravation to a process no one volunteered to go through.
We responded to these challenged by building an online Loss Draft portal that allows borrowers to register claims, upload documents, and request inspections in real time.
Lenders can use the Loss Draft portal to review claim reports and configure risk models to allow for heightened flexibility, ease of processing disbursements, and full visibility into the status of the claim action. The automated system also has the potential to significantly reduce call volumes.
In the meantime, after we review the loss draft request and all documentation associated with the claim, our claims administrator will either endorse and release the funds back to the borrower or deposit them with the lender into a designated restricted escrow account to be released in progress disbursements. We can then manage the process through the portal, including ordering and inspections releasing draws until the repairs are completed and all funds have been disbursed. Our claims management solution is priced on a flat fee per claim, which better aligns with the incentive to resolve cases quickly and doesn’t penalize the lender for delays outside of their control.
The purpose of the loss draft process should be to provide a secure funding method that expedites the remediation of the property. Loss draft systems that leave little guesswork involved increase collaboration and transparency between borrowers and servicers while ensuring the efficient application of available insurance claim proceeds to the repair efforts. The end result should be a fully-restored property and an ongoing, mutually beneficial relationship between the borrower and the servicer.
About The Author
Denis Brosnan is the president and chief executive officer of Dallas-based DIMONT, provider of specialty insurance and loan administration services for the residential and commercial financial industries in the United States. Additional information is available at www.dimont.com.