Streamlining Mortgage Collections: A Lender’s Guide to Automating Payment Exception Handling

American consumers are currently struggling to balance bills, credit card payments and other financial responsibilities, as demonstrated by total credit card balances reaching a new height of over $1 trillion in 2023, according to the U.S. Government Accountability Office. While mortgage payments aren’t as subject to elective delays and delinquency as credit card bills, as consumers are motivated to make payments to maintain stable housing, recent reports show the financial challenges consumers are facing are driving increased mortgage delinquency rates, according to the Mortgage Bankers Association, making it more difficult for lenders to ensure successful collections.

It’s inevitable that borrowers who are unable to make payments on time or in full will increasingly make mortgage payments that do not align with the amount due, also known as payment exceptions, which can be unsustainable for mortgage lenders that depend on manual intervention for exception handling. Automation for exception management, enabled by modern payment technology, reduces the time, costs and headaches associated with manual operations.

Manual Payment Exception Handling Poses Problems

At a high level, the mortgage lending and repayment process appears straightforward: A consumer requests a loan to purchase a home; a financial institution approves and provides the loan, expecting regular payments over a certain number of years to recover the cost of the loan; and the consumer submits payments of a specified amount each month, eventually paying the loan amount in full. However, the realities of economic dynamics and financial obstacles complicate loan lifecycles and payments.

While consumers can typically take advantage of modern payment options, including Automated Clearing House (ACH) and wire transfers, mortgage servicers often use manual processes to handle exceptions when borrowers submit insufficient payments. Resolution of payment exceptions eats up valuable time, budget and human resources when workers need to manually track and report updates or communicate to borrowers how the insufficient payments will be applied to the loan. Communicating payment updates and changes to the borrower is especially problematic in manual operations. Explaining how insufficient payments will be processed and will contribute to paying off the mortgage in full often requires human analysis and intervention, adding unnecessary steps to accounting and customer communications. It’s difficult to know whether the homeowner is aware of the issues and the impact a payment exception has on their loan status by simply using outbound calls, letters and emails.

Automating Payment Exception Handling Drives Productivity & Efficiency

While the mortgage industry has embraced technology advancements in recent years, automating and optimizing underwriting, secondary marketing transactions, due diligence reviews and other key tasks associated with loan servicing and collections, the same cannot be said for widespread adoption of payment exception handling automation. However, there are tested technologies and tools that financial institutions can leverage today to automate many of the critical functions for loan and payment management:

Paper Check to Digital Translation and Processing: Some financial institutions and lenders only accept paper checks for mortgage payments. Historically, there have been limitations on tracking paper checks due to their incompatibility with digital tools and the manual efforts necessary to log and apply paper-based payments. However, financial technology tools today enable loan management systems to read, process and apply paper payments to loan accounts. When payments from a single check are associated with multiple accounts, automation technology can trigger a process that identifies the specifics of an individual loan account to speed the payment processing procedure. This removes the risk of human error in entering payment amounts, and significantly reduces the risk of faulty payment applications as a result of complications caused by paper checks.

Automated Payment Application and Tracking: When a borrower submits payment in the form of a physical check, if the payment doesn’t match the amount due, the funds are typically placed in a suspense account. Automation technology skips that process and removes the need for manual intervention by using custom business rules and logic to determine how the payment should be applied to escrow, principal and other payment buckets, and execute the applications accordingly. When an automated payment processing platform is integrated with the lender’s system of record, updates are tracked in real time, ensuring accurate reporting and keeping the borrower informed of the payment status.

Bankruptcy Payment Coordination and Communication: Mortgage payments made via a trustee typically require manual efforts to process and research how the funds should be applied as pre-petition and post-petition payments. Today’s payment processing tools can automate the exchange of data and information with the trustee’s database to coordinate and apply the funds correctly.

Automation Improves Lender-Borrower Relations, While Optimizing Payment Processing

The primary objective throughout the life of a mortgage loan is the repayment of the debt. Servicers should streamline this process for borrowers, and their internal teams, by leveraging automation technology available today to ensure smooth acceptance and application of payments. But that’s nearly impossible to do with manual efforts alone, given the stark increase in mortgage delinquency in recent years and the sheer number of payment exceptions that must be managed.

Servicers must enable exception automation capabilities to take advantage of the reduced time and resources associated with collections and payment processing. Not only will this minimize the cost and time associated with collections operations, it will also improve the relationship between borrowers and lenders. When both parties can receive accurate updates and are notified of payment statuses in real time, trust inevitably increases.

Jeff Osheka is SVP, Mortgage, REPAY, an Atlanta-based payment technology and processing provider.