Borrowers can now make mortgage payments online, over the phone, in person or by mailing a check. With so many payment options available, the question becomes, what’s the best payment option for servicers to extend to their borrowers?
This is a trick question, of course: The best option is for your borrowers to have several ways to pay.
To ensure that making loan payments is accessible and convenient for borrowers, servicers should provide a comprehensive range of options to accommodate a variety of preferences and capabilities. To maintain the highest level of quality and compliance, servicers also need to meet requirements that take place behind the scenes, such as investor and remittance obligations. To put it simply, optimizing mortgage payment processing requires an even balance of flexibility and convenience for the borrower and operational accuracy and efficiency for the servicer.
Here are the advantages to borrowers and servicers of several common mortgage payment methods.
24/7 online payments
Submitting payments online through the servicer’s website or mobile application is the most popular, convenient and efficient method for most borrowers. As long as there is an available Internet connection (a nearly universal presence these days), borrowers can make payments anytime, anywhere, using their computers, tablets or smartphones.
Online payments give borrowers control over when their payment is processed, as they can select the exact day for their payment to be withdrawn. The withdrawal date for some payment processing methods depends on varying degrees of human intervention and thus can be influenced by several factors, such as transportation time. Paying online is an excellent option for borrowers who may not have a regular income schedule and require flexibility for when their payment is withdrawn.
Online payments are typically submitted as automated clearing house (ACH) payments. Online payments may also be set up as an automatic draft withdrawn directly from a savings or checking account associated with the financial institution servicing the loan, if the borrower also holds a depository account with the same institution.
ACH payments are essentially electronic payments by which funds are withdrawn directly from the borrower’s savings or checking account. According to NACHA, the ACH network is now one of the largest, safest and most reliable payment systems in the world, with 25 billion transactions in 2016. ACH is also the most efficient payment method for borrowers submitting loan payments electronically. The borrower can either log into the servicer’s Web portal or mobile application each month to initiate the payment and specify the withdrawal date or set up automatic recurring payments on the same day each month.
Recurring ACH payments guarantee that the borrower won’t accidentally miss a payment and suffer negative consequences, such as late charges or a derogatory item noted on his or her credit report, as a result. From the servicer’s standpoint, this method reduces delinquencies – particularly important for mortgage-backed security loans – because a reduction in delinquencies also reduces the amount of money the servicer would have to advance to the investor.
ACH payments are the most cost-effective method for both the borrower and the servicer. Because they’re highly efficient and provide added benefit to the servicer, ACH payments usually come at no cost to the borrower if the payment withdrawal date is within a certain number of days of the payment’s due date. Servicers can also incentivize borrowers to make payments early in the month by charging a fee if borrowers select a payment date toward the end of the grace period. Additionally, the efficiencies achieved with this method significantly reduce processing costs for the servicer.
If borrowers also have a checking or savings account with the financial institution servicing the loan, they can set up automatic drafts, authorizing the financial institution to automatically deduct the payment from that account each month. This method is similar to ACH, except ACH payments can be deducted from other financial institutions’ accounts and are processed through the ACH network.
Automatic drafts limit the borrower to just those accounts under the financial institution servicing the loan and are processed within the institution’s core banking system. This is another convenient option for borrowers and is also beneficial to the servicer, as it encourages borrowers to maintain depository accounts with the same financial institution, providing an additional opportunity for customer engagement that can make the relationship more profitable.
While online and mobile payment methods are more efficient, cost-effective and convenient for borrowers, servicers should also have alternate payment processing options available for borrowers who don’t have reliable Internet access or aren’t comfortable submitting sensitive information online.
One such option is collecting payments over the phone. This can be either an automated solution, in which the entire transaction is conducted by a computer, or a convenient means for borrowers to have live human interaction without visiting a physical branch. Borrowers who prefer this method may be looking to interact more personally with their financial institutions, especially if they aren’t in close enough proximity to visit a branch. Therefore, they may prefer to speak with a real person. However, paying by phone and engaging with a live person usually require a convenience fee, so this method is often more expensive for borrowers.
Automated solutions are more cost-effective for servicers because they don’t have to increase their staff to manage routine transactions. Furthermore, automated solutions are available 24/7.
In-person teller or servicer payments
If the borrower originated the loan locally and the lender retained the servicing, the borrower has the option of face-to-face contact when making payments and the ability to leave the premises with a physical receipt. The borrower also has more payment source options, such as cash, check or bank account transfer.
In-person payment also allows borrowers to conduct other business while at their financial institution. The financial institution also benefits because the face-to-face personal interaction with borrowers allows for cross-selling of other services and products.
Stamp, seal and send on its way
The most old-fashioned method of making mortgage payments is by sending a personal check, money order or cashier’s check through the mail. This is an excellent – and sometimes the only feasible – option for borrowers in a number of situations. For example, borrowers who don’t have an established checking or savings account and thus must use a cashier’s check or money order may need to pay by mail if their servicer isn’t local to them. Borrowers who’ve grown accustomed to this method, who aren’t as tech-savvy or who would feel more secure submitting their payments through the U.S. Postal Service as opposed to online might also prefer this option.
However, this payment method presents a few challenges for borrowers and servicers. First, borrowers must remember to mail their payments for receipt within their grace period to avoid incurring a late charge, considering weekends, holidays and other potential delivery delays. Borrowers will also incur the costs of postage, check and envelope (if not provided by the servicer).
This method results in additional handling costs for the servicer, including the process of opening the envelopes and processing the payment coupons and checks. The cost to the servicer depends on whether this process is manual or automated. Software automation is the most cost-effective and error-free method to capture the loan payment information and create a lockbox file for automated posting in the servicing system.
Servicer payment processing requirements
Much of our examination of payment processing has revolved around how to enhance the payment processing experience for borrowers, but what about for servicers?
Servicers have additional regulatory and investor requirements, many of which aren’t borrower-facing, to keep in mind while collecting and processing borrower mortgage payments. Servicers must also factor in the additional obligations of each payment to maintain loan quality while also optimizing operational efficiency and keeping costs low.
Servicers that own only the servicing rights of the loans they service have additional investor requirements and must adapt their payment processing to ensure their investors receive any required reporting and cash remittances.
Servicers must calculate the service fee for each payment, retain that amount and any other amounts not due to the investor, and remit the required payment funds and reports to the investors and/or security holders on the established remittance dates. Reporting requirements and remittances vary depending on whether the loans are Actual/Actual loans or Scheduled/Scheduled loans, as well as if remitting payment funds to multiple lenders with ownership of participation mortgage loans.
Servicers should also note that Fannie Mae’s Changes to Investor Reporting went into effect on Feb. 1 of this year, requiring additional payment reporting, and be sure they’re using servicing software that’s up to date with these changes.
Servicers should make multiple mortgage payment options available to accommodate various borrower preferences and capabilities. However, to reduce costs, servicers should educate borrowers on the different options and their benefits to encourage more convenient and cost-effective payment processing for all parties involved. s
Susan Graham is president and chief operating officer of Financial Industry Computer Systems Inc. (FICS), where she is responsible for the overall management of the company’s day-to-day operations, customer relations, and product timelines and deployment.