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Financial R&R: Specialty Lending Practice - Solutions for Lending Firms Operating in Niche Markets

By Alliant

What is specialty lending? Ron Borys and Ryan Farnsworth welcome two new colleagues, Michael R. Smith and Caroline Keener, who are spearheading Alliant’s recently announced specialty lending practice. They discuss the goals and focus of the practice and the importance of tailored risk solutions for non-bank lending institutions, along with the market dynamics and strategies for maximizing coverage while minimizing costs.

Intro (00:01):
Welcome to Financial R&R, a show dedicated to financial insurance and risk management solutions and trends shaping the market today. Here are your hosts, Ron Borys and Ryan Farnsworth.

Ron Borys (00:13):
Welcome everyone. This is Ron Borys. I'm here with Ryan Farnsworth, and this is the latest episode of the Financial R&R. Really excited to record today's podcast, formally announcing, formally welcoming two new colleagues to Alliant, Mike Smith, Caroline Keener. These two individuals have recently joined Alliant, and they are going to lead our new recently announced specialty lending practice. We thought it would be great for our audience to hear from Mike and Caroline, a little bit about their background, talk about what is a specialty lender, right? Because I've got a lot of those questions over the last 30 days. And talk about your careers, your goals, and objectives here at Alliant. What can we do for this particular industry class. Ryan, does that sound like a good plan?

Ryan Farnsworth (01:01):
It does, and we're thrilled to have Mike and Caroline here because it's another foundation of what Alliant is trying to build for our clients. As risk continues to evolve, as insurance needs, especially for those of lending institutions change with regulatory or market driven changes, we identified a clear need to have a specialty lending practice. We look forward to growing that platform in the coming years. It's really another indication of how Alliant, as the leading specialty broker, truly finds ways to help our clients find more rewarding ways to manage risk. By offering these tailored solutions that Mike and Caroline are going to talk more about today, it's truly filling a need that so many clients don't know what to do with, or perhaps there are risks that are presented for lending and non-bank institutions that they look around and say, “What do we do now?” Now we have a platform and a team that can help us and help them find those solutions. Mike and Caroline, welcome. Get it from Ron. You also get the formal welcome from me too, and we're really excited to have you with Alliant.

Ron Borys (02:10):
Yes. My mother raised me right. We're going to go ladies first. Caroline, why don't you introduce yourself to our audience and talk about what brought you to Alliant.

Caroline Keener (02:20):
Sure, thanks so much for the introduction. My name's Caroline Keener, brand new to Alliant. Really excited to start up and help lead the specialty lending practice. I think my primary job is a shark wrangler for Mike, but also help lead the client experience. Coming over from a shop, about eight years there. Helped lead our specialty lending practice there, really focusing on, again, delivering a top tier client experience and looking at clients where we tend to see risk a little differently. We tend to assess what the largest asset for that client is, which is their loan portfolio, so excited to do that here and grow the practice and see how much we can help. I've got a sports background prior to my life in insurance, and we're competitive and like to get out there and do the best job that we can. Mike and I are ready to grow this.

Ron Borys (03:14):
I've heard you be called a lot of things, Mike. Shark is definitely a new one. And Caroline, you've certainly been the shark wrangler since you've joined Alliant. So, we'll now shift gears to the other piece of the specialty lending practice. Michael R. Smith, why don't you tell us a little about you, your background, and what brought you to Alliant?

Mike Smith (03:35):
Awesome, thanks Ron. Well, you know, the R stands for Risk. That's my nerdy insurance joke by the way. I have a really generic name of Michael Robert Smith. So, despite having the initials of "Mrs.," I do get a cool email address that looks like Mr. Smith, but it's really because my middle name is Robert. But I tell people it's risk anyway because it fits the insurance mold. Super stoked to be at Alliant. When I got out of college, I spent some time at the infamous Countrywide Home Loans, now Bank of America. So, I was on the operator side and then spent 15 years at a prior shop doing very technical things of E&O, D&O, cyber liability placement. Roughly about seven or eight years ago, I launched a lender services practice, which is really what the specialty lending practice is today, and that we're looking to continue to build on here at Alliant. As Caroline mentioned, we see risk very differently, specifically in this environment as it relates to commercial real estate when you look at all the defaults and how these banks and non-banks have to handle these pre-foreclosure assets or always hand back the keys. We really focus on solutions there, but there's also a very complex regulatory framework that residential lenders have to follow. Starting once again about eight years ago, I really recognized the need for specialists in the non-bank sector, right? They don't have checking accounts, the certificates of deposits, et cetera. Just a very different risk profile and candidly, very different insurance policies and insurance program structures that those corporations could achieve in the marketplace. Knowing the regulations, knowing the GSE or the Fannie and Freddie guidelines and coming at it with a compliance first approach with a very heavy hand in client service and quarterly touch points and monthly open items calls as those loan portfolios evolve, was really the foundation for us building out this practice. We are stoked to be here, continue to use our mortgage nerdiness in the space and help Alliant grow the FI practice as a whole.

Ron Borys (05:39):
I've been in this specialty lending segment for a large portion of my career. I remember when Mike and I first met a long time ago, feels like eons ago, it was really cool to be able to talk to somebody who understood this space because I can tell you, having done this for a long time, also in some other organizations, I really haven't come across a person like Mike who knows this segment as well as people need them too. And then of course, Caroline, we met at the ABA, great to meet you. Really intrigued by the fact that you shared a similar passion as our brokers and financial institutions with regards to taking care of our clients, servicing clients, really giving them that great experience. As we know, there are all sorts of requirements when it comes to lenders and a lot of them are very time sensitive. They need certificates, they need contracts reviewed, they need all these things in a very short period of time. And understanding so far, you've been here with us about 30 days now, seeing your values and how you share that commitment to delivering for clients is really special. I think you're going to be a great fit in the leadership ranks of our financial institutions team.

Caroline Keener (06:52):
Appreciate that. I think something that we do well is not only do we understand the lending space, but we understand the vernacular that's used there and how it can be confused with some of the words used in the insurance space and how that can be confused overall between other retail brokers. We're able to break that down and tell you what's actually being requested from a secondary market or a warehouse lender or regulatory oversight. I think that's where a lot of our value lies is understanding the subtle nuances there.

Ron Borys (07:25):
Right. So, understanding that a lot of different people listen to our podcast, including a lot of Alliant colleagues, I can tell you from the moment we put out the press release, internally and externally, that we were launching this national specialty lending practice, the first question I've been getting is what is a national specialty lender? What falls into the specialty lending category? I tell them we intentionally left it very broad. You all can talk from your perspective, what is a specialty lender? Who is the type of customer that would benefit from the work that you are going to be doing for us?

Mike Smith (08:00):
Ron, I think you phrased that up well. That's my brown-nosing comment for you for the afternoon, which is who can benefit? I would answer that by saying anyone who owns, invests in or services loans. This could be commercial real estate loans, could be mortgages, could be auto loans, et cetera. I would say most of the market is going to be your traditional banks who have a loan portfolio. It's going to be a lot of your non-banks since the rise in 2013, both on the commercial and the residential side. Big need there because they've taken on roughly 55% of the residential market. I think it's even a lot more now, but the non-banks are big and then whole loan investors. Those whole loan investors could be hedge funds, could be private equity funds. Some of those institutions let third parties, third party mortgage servicing companies, handle a lot of the borrower insurance and these master programs when they have all of the control, if they want to take it back, and can control their ROI as it relates to each of those loans. Anyone whose got a loan portfolio or dabbles in that space could be a great potential fit for our practice. Understanding, we're going to break down the loan portfolio, we're going to look at the loan loss provisions, we're going to look at the odds of repurchase demands on that portfolio. We’re going to wrap insurance around not only the loan portfolio but look at everything from a loan level and carry it all the way up to the enterprise level so that these firms are not just looking at corporate insurance and if we get sued or if we have a cyber breach, what all happens. What happens at the borrower level that can then translate up to the corporate insurance level, all the way through pre-foreclosure of that loan, all the way through REO disposition. We really understand that process and can help any institution, once again, that touches that loan, invests in that loan. We can help them increase their ROI but more importantly reduce all their regulatory exposure throughout that entire chain.

Ron Borys (10:02):
What I think is cool about our financial institution's platform is the fact that we have both financial lines capabilities and expertise and property and casualty expertise within a single financial institution's business. When you look at the various exposures, you have errors and omissions, you have fidelity bond coverage and requirements, you have surety compliance bond requirements. You certainly have tons of exposures at the asset level. These loans are backed by an asset, whether it's a property, a vehicle. We've seen opportunities in the large industrial machinery type industry where people are financing those types of assets. It’s really cool. Caroline, maybe you can talk about the products and the market. We live in a world of D&O experts and while I'm not going to suggest D&O and E&O is not important in this segment, it's the tail wagging the dog for all intents and purposes because mortgage impairment and those types of products. So, maybe you can talk about some of those products that we're offering.

Caroline Keener (11:09):
Sure. A lot of the things that we like to focus on, as Mike was saying, is looking at the borrower level and how we can address that enterprise wide. We've had a lot of success in managing lender placed insurance, force placed insurance, whether that's from the resi side or the commercial real estate side. Any type of mortgage impairment, mortgage bankers bond, fidelity bond, any of your seller servicer requirements, we can look to craft that and unique structures to best fit whatever your risk tolerance is for your organization. It’s not just the residential or commercial loans. We also look at, we've got master programs for auto finance lenders or any type of open lot lenders or open lot financing solutions. We have a lot of capabilities there and a lot of experience in that marketplace and consistently keep our finger on the pulse of how that marketplace is changing so that we're able to be a lot more dynamic with our clients and suggest and be more proactive and less reactive in terms of what might be coming down the pipeline so that they're not surprised from an insurance solutions perspective.

Ryan Farnsworth (12:19):
Caroline, to take that a step further, what types of insurance companies or marketplaces are involved in ensuring these types of risks? Are we going to London, Bermuda, predominantly in the US or help us understand more about where that insurance is eventually transferred?

Caroline Keener (12:34):
Sure. It really depends a lot on the product. We've had a lot of success in London from a mortgage bankers bond and mortgage impairment lens. That group of underwriters out in London really understand the American mortgage market better than anybody else in the world it seems. We’ve spent a lot of time with those underwriters, and they really get it. I think what you'll see a lot of times in the domestic market is people still have a little bit of PTSD from 2008. So, when you're out in the marketplace, you get recoil when you start talking about non-bank lenders. When it comes to a mortgage banker's bond or mortgage impairment from a lender placed insurance, a lot of that is all domestic, and there's some large shops that we work with and that marketplace is ever changing. I think there's some interesting potential new entrants into that market that Mike can expand on, but we're always looking for creative solutions around the lender place, force place insurance or REO insurance.

Mike Smith (13:31):
Yes, definitely different marketplaces for the residential side. You’ve got a couple players who are national carriers that have built out large technology and tracking platforms. You've got some MGAs that make up the space who go out to Lloyd's and got some domestic and global carriers on that. So, as Caroline mentioned, there's people who have perked up their ears, and I think you're going to see people sharpen their pencils on some of that because the loss ratios have been good here over the last several years. That’s on the LPI side. The other thing that I think is fun, and dare I say sexy about insurance, is when you look at insurance, it's just capital. That's all it is, right? When you have these banks that are out there, or even a non-bank, it all depends on how you want to recapture that servicing portfolio or keep that borrower for life, if you will. I think insurance can play a massive role in that. These lenders are lending out millions and billions of dollars to dare I say, a captive audience, for a lot of folks. But what we've really stepped into with the recent property insurance market being so crazy the last few years is working with commercial lenders on a master insurance program where for their borrowers, whether it's five borrowers, whether it's 10,000 borrowers, they can have access to their own master insurance program where we, as the Alliant Specialty Lending Practice, act as the administrator of that program. We will talk to the borrowers, we will offer them rates, and they can have the option to enroll in our program or not. They can still go to their State Farm buddy or their Geico buddy, it doesn't really matter. But we believe that we can leverage a large borrowing base on behalf of our lending clients to get that borrower very sticky so that when they go buy their next property or when they look to refinance, they're sticking with that lender for life, and they're using insurance as a mechanism to keep them stickier. We're really pushing that a lot because once again, I think there's a lot of runway there. Borrowers are craving cheaper insurance candidly, that will not cut the coverage in half at the end of the day. So quality price, quality product.

Ryan Farnsworth (15:38):
You're telling me buyers want more coverage at the lowest price possible? That's a shocking revelation, but as you think and break it down, just in this conversation, we've gone from specialty lending 101 to 401, back to 101, and it underscores the importance of having an expert in your corner to first understand the risks and the risk profile before you jump to the market. Because there's no possible way you can maximize coverage at the lowest possible price if the broker doesn't understand the risk and what you're trying to address as a company. What underscores the importance of Alliant as a platform is our first step in any process is to understand the client's risk, but also understand the client's priorities. We feel very confident in our people and, just in talking with you and Caroline today, Mike, knowing that we have the right specialists and experts within the financial institutions group to make sure that our clients' risks are understood, but that their priorities are prioritized, and we can find the solutions in the marketplace wherever they may be at the greatest coverage for the lowest price possible. Jumping back from 101 to 401, I had one other question for you, Mike, and then perhaps we can wrap it up for today because I feel like this is a topic we could talk about for hours and still never quite get to it. You mentioned at the beginning, when you're talking about when a client manages a loan portfolio that comes up with, whether it's acquired through an acquisition or just going through the life cycle of owning and managing loans, when they have pre-foreclosure or post-foreclosure items, what are some key points that clients should understand or that listeners should understand when they think about the initial steps, how to manage that type of portfolio?

Mike Smith (17:24):
Love it. I almost feel like I wrote that question for you. It was so good, but I think you just nailed it. I think these banks and these non-banks have way, way, way more control than they really think. Historically for the last 10, 20, 30 years, business has been done a certain way. Not to say people have been complacent, but there are better ways to do things. There are better ways to dissect things based on the scenario, specifically as it relates to commercial real estate. You can do things that protect the balance sheet for way cheaper when it comes to insurance, while still protecting that collateral and protecting your UPB, your unpaid principal balance, to make sure that that loan gets paid back. To me, this is all about giving lenders, giving non-banks, banks, hedge funds, private equity firms, anyone that dabbles in that loan scenario, giving them control to where, look, you've had this one stop shop, it's been the easy button, but you're paying for it, right? I think if you can pull it apart, we can do that seamlessly. We can do it for way cheaper, and at the end of the day, you're going to find that with us involved, your ROI is going to increase and we can be a lot more strategic with your risk transfer decisions.

Ron Borys (18:33):
That’s great. I know we've said welcome a bunch of times, but you're not officially an Alliant Financial Institutions employee until you've been announced or presented on the Financial R&R. We really appreciate the opportunity for you two to join Ryan and I today. I'm sure there will be a number of follow-up segments that we will be recording because I know again, just from the interests I've heard to date, there's a lot of colleagues within Alliant who are really interested in learning more about this space. As Ryan said before, trying to help our clients find that more rewarding way to manage risk. For those who are listening who want to learn more about Alliant and our specialty finance platform, you can visit our website at, but for now, that's it for today. Again, Mike, Caroline, super excited to have you here and really looking forward to doing great things together.

Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.