Tips for Investment Success – IOU Loan Servicing
A practical guide to protect your investment in promissory notes
Writing a check to invest in a promissory note starts the investment process that will provide you with future income and possibly capital gains. After your check has cashed, numerous administrative functions are required, on an ongoing basis, to protect your investment and maximize your profitability. The administrative functions are called “Loan Service”.
Unfortunately, the Loan Servicing function is poorly understood by many and neglected by most. This carelessness causes a discount and depreciation of your investment. Let’s learn how to increase the success of your note investment and protect the investment through smart lending services.
Definition of ‘loan service’
The Note Loan Service provides administrative services for the loan from the time funds are distributed until the loan is paid off. Loan servicing includes: sending monthly payment statements, collecting monthly payments, keeping records of payments and balances, collecting and paying taxes and insurance, managing escrow accounts and seized funds, remitting funds to the note holder, and follow up on delinquent payments.
Note Loan Servicing Reports
Monthly and Annual Reporting: Gross revenue collected, actual revenue collected, taxable income collected, and principal repayment collected must be tracked and reported separately. Regular payments, partial payments, late payments, late payment fees, and service charges must be recorded and reported.
Year-End IRS Report Forms: 1096, 1098, 1099-A, and 1099-C must be prepared and submitted.
Errors and traps in the loan service
Realizing the specialization and complexity of the Loan Service function is the first step in managing it intelligently. Realizing that neglecting it will discount and devalue your investment is your wake-up call to handle it professionally and carefully. Servicing loans on scratch paper or the back of an envelope will not comply with local state laws, federal laws, or IRS rules and regulations; a good loan servicing software program is needed.
Many uninformed note investors do not realize their exposure to being sued by disgruntled borrowers, State Attorneys General, or federal law enforcement agencies. Legal expenses to defend a lawsuit, or an investigation, can wipe out a year or more of investment income, even if you win; if you lose, it can be many times more expensive.
Tips for investing successfully
The first rule of successful investing: understand the details of investing; understand your risks and rewards; understand your responsibilities and your rights; understand what you will do when an unexpected negative event occurs.
The second rule for successful investing: understand the details of investment management. Who does the loan service? Is that person or entity experienced and capable? How often will you receive reports on your investment? If you intend to service the Loan yourself, you should realistically and objectively assess your own experience, capabilities, and computer software capabilities.
Don’t underestimate the time and effort required; do not overestimate your own abilities.
In summary
• Fools rush where angels fear to tread.
• There is nothing more difficult to plan, more doubtful of success, or more dangerous to manage than a new system.
• Prevent a small problem from getting worse by stopping it soon after it starts.
• Life has its problems, so learn to be alert, be alert.