Construction loan administration leaders have always shouldered a heavy load. Whether you’re doing a final double-check of your team’s work or pulling together documents for more frequent audits and reporting, the responsibility is only becoming more high-stakes. According to The Federal Reserve, banks and lending institutions are tightening their standards for commercial real estate lending, and for good reason—everyone is attempting to minimize exposure. With the mounting pressure on CRE lending, centralization and standardization are more important than ever.
Why Standardization is Critical for Construction Lending Departments
Standardization is key for ensuring that the information you’re approving is error-free. Without standardization, you have to trust that all of the supporting documentation is the most recent version and that the loan checklist and covenants have been rigorously followed.
However, two equally experienced CLAs may have two different ways of organizing their loan administration processes. They might each submit a polished draw approval package, but when it comes time for you to review it, how do you know that they’ve remembered to include the most recent documentation for everything and faithfully completed every item on the checklist? It’s impossible for you to know for sure. If you can’t see the “paper trail” of change orders and lien releases, how do you know that they double-checked those areas? If you have any doubts, it’s up to you to do the digging. Not only is this time-consuming, but the lack of standardization makes the role of “final approval” very risky.
Why Construction Lending Departments Need Centralization
Centralization is a common challenge in lending institutions, too. If your CLAs don’t have a central platform to store documentation and house project data, audits and reporting are incredibly difficult. How do you know what your project or even portfolio exposure is at any given moment? Most CLA leaders can’t know without requesting updates from their CLAs. Synthesizing all the requested information into a spreadsheet is time-consuming and doesn’t give stakeholders the immediate answers they expect. And with increasingly frequent audits, CLA leaders might find themselves requesting updated documentation again and again, trying to keep up with scrutiny from the board.
These disjointed processes used to suffice, but not anymore. With a tighter economic environment and increased scrutiny, construction loan departments need to safeguard their processes from potential errors more than ever. It’s not a matter of if these systems will change; it’s a matter of when. Fifty-eight percent of commercial real estate lenders are planning to invest in technology this year to improve their risk mitigation processes. The disjointed systems of the past are proving ineffective for the challenges of the present. To learn more about what other lenders are planning this year, download the State of Construction Finance Report.
