Loan Workout Optimization Engine

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Solution Overview

Problem

The increasing volume of loan workouts due to recent recessions strains the infrastructure of investors and servicers, necessitating improved systems for managing loan defaults and facilitating workouts that meet both investor and borrower financial requirements.

Innovation Solution

A computer system with a loss mitigation decision engine that determines an optimum loan workout by considering investor and borrower outcomes, using an objective function that maximizes net present value of cash flow while accounting for re-default rates, and allows for configurable tradeoff factors and business rules to adjust the workout scenarios.

Engineering Contradictions & Design Principles

VSEngineering Contradiction Analysis

1Productivity

If manual processing methods are used for loan workouts, then flexibility in decision-making is maintained, but processing capacity and efficiency deteriorate under increased workout volumes

Engineering Contradiction:

Improveprocessing capacityVSAvoidsystem complexity

Core Design Contradiction:

ProductivityVSDevice complexity

Solution Approach 1:

The system enables automated self-service processing of loan workouts through the optimization engine that automatically evaluates workout options, calculates NPV metrics, and generates recommendations without requiring manual intervention for each case, thereby scaling processing capacity while maintaining consistent decision criteria

Inventive Principle:

Principle #25Self-service

Solution Approach 2:

The patent replaces manual mechanical processing with an automated computational system that uses objective functions, NPV calculations, and algorithmic optimization to evaluate and select workout scenarios, substituting human decision-making processes with systematic automated analysis

Inventive Principle:

Principle #28Mechanics substitution (Replace mechanical system)

2Productivity

If automated decision-making systems are implemented, then processing efficiency is improved, but adaptability to individual case nuances deteriorates

Engineering Contradiction:

Improveprocessing efficiencyVSAvoidcase-specific adaptability

Core Design Contradiction:

ProductivityVSAdaptability or versatility

Solution Approach 1:

The system incorporates dynamic configurability where investors can adjust objective function parameters, tradeoff factors, and business rules based on changing market conditions and portfolio strategies, allowing the automated system to adapt its decision criteria while maintaining processing efficiency

Inventive Principle:

Principle #15Dynamics

Solution Approach 2:

The system implements feedback mechanisms where workout performance metrics and re-default rates are monitored and fed back into the optimization process, allowing continuous refinement of decision algorithms and adaptation to emerging patterns in loan performance

Inventive Principle:

Principle #23Feedback

3Manufacturing precision

If comprehensive analysis of multiple workout scenarios is performed, then workout quality is improved, but processing time increases

Engineering Contradiction:

Improveworkout qualityVSAvoidprocessing time

Core Design Contradiction:

Manufacturing precisionVSLoss of time

Solution Approach 1:

The system performs preliminary filtering and prequalification of workout scenarios using business rules and threshold criteria before conducting full NPV optimization analysis, eliminating obviously suboptimal options early in the process to reduce overall processing time while maintaining comprehensive evaluation of viable scenarios

Inventive Principle:

Principle #10Preliminary action

Solution Approach 2:

The optimization engine dynamically adjusts analysis parameters such as discount rates, re-default rate penalties, and scenario grid resolution based on loan characteristics and investor preferences, optimizing the balance between analysis comprehensiveness and processing time for different case types

Inventive Principle:

Principle #35Parameter changes

4Reliability

If the system considers both investor and borrower outcomes in optimization, then overall workout effectiveness is improved, but computational complexity increases

Engineering Contradiction:

Improveworkout effectivenessVSAvoidcomputational complexity

Core Design Contradiction:

ReliabilityVSDevice complexity

Solution Approach 1:

The system incorporates investor and borrower outcomes through configurable parameters in the objective function, such as NPV weighting factors, re-default rate penalties, and affordability thresholds, allowing comprehensive multi-criteria optimization through parameter adjustment rather than structural complexity

Inventive Principle:

Principle #35Parameter changes

Data Source

PatentUS8768827B1System and method for optimizing loan modifications

Publication Date: 2014.07.01 FANNIE MAE

AI summary

A computer system for managing defaults that includes a loan investor platform associated with a loan servicer platform. The loan investor platform provides a loss mitigation workout type decision engine that receives from the loan servicer platform a first set of data associated with a loan loss mitigation case, determines an optimum loan workout for the loss mitigation case based on borrower criteria, prequalifies the loan for the optimum loan workout based on at least one investor set business rule and the first set of data, and communicates the loan workout that the loan is prequalified for to the at least one other computing device.