1. 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:
2. • 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.
