Cross Collateralization
Collateral is an asset pledged by a borrower to secure a loan. Cross collateralization occurs when a borrower utilizes the same asset to secure multiple loans. In many cases, cross collateralization can streamline the lending process for borrowers and financial institutions. However, additional tracking obligations may create complexity for banks and credit unions.
Benefits of Cross Collateralization
Cross collateralization can be mutually beneficial for borrowers and lending institutions due to:
- Less Documentation: By holding an existing lien against a certain asset, a financial institution should already possess the documentation that is needed for collateral perfection. As a result, less documentation may be required from the borrower.
- Reduced Friction: Leveraging existing documentation allows lenders to focus on meeting borrowers’ financing needs instead of collecting more information.
- Accelerated Decisioning: Deciding to lend against an existing piece of collateral could result in a faster time to close, as financial institutions may have fewer uncertainties to account for during the lending process.
- Expedited Access to Funds: Faster time to close means that borrowers can access necessary funds sooner, setting the stage for elevated customer satisfaction and brand loyalty.
Challenges of Cross Collateralization
Cross collateralization has its share of challenges, especially from a financial institution’s standpoint. Examples include:
- Risk of Overlending: Perhaps the biggest risk for banks and credit unions is the possibility of lending too many times against the same asset. Financial institutions must institute careful practices to prevent overlending against cross-collateralized assets.
- Complex Tracking & Reporting: Crossing collaterals creates a complex web of recordkeeping. Maintaining a clear picture of how collaterals are tied to different borrowers and loans is difficult—especially for financial institutions with large commercial portfolios.
- Unreliable Data: Loans get paid down, collateral values fluctuate over time, and relationships change. Relying on manual data entry for cross-collateral reporting can be time-consuming for staff and error prone.
Cross Collateralization & Tracking
To avoid risk of overlending, many financial institutions have implemented dedicated workflows for tracking cross-collateralized assets. Using a cross-collateral tracking spreadsheet is a common approach, however, such methods involve manual recordkeeping practices. Some core systems offer solutions for tracking collaterals, too.
AccuAccount, Alogent’s ECM software that’s optimized for commercial lending, offers a convenient solution for tracking cross-collateralized assets. AccuAccount makes it easy to identify collaterals that are tied to multiple loans. The software also streamlines exception reporting and management, allowing users to clear cross-collateral exceptions with a single action.
Contact Alogent to learn about our cross-collateral tracking solutions
