Hello intelligence, goodbye process
Debt management and collections strategies are evolving and lenders need to focus on their borrowers’ credit profiles. Barry Meeks explains
Most of us working in the residential mortgage market have, at some point in the past, been involved in the chasing of arrears and collecting overdue debt. It’s not always the nicest job, not always the most stimulating or rewarding and can at times be very emotional, but without doubt it’s becoming more and more of a critical process and increasingly in these challenging times, a very costly process.
With the regulators’ focus on Treating Customers Fairly (TCF), collections work also has to be whiter than white and transparently reasonable as well as accurate and sympathetic to the individual needs of the borrower. In other words it needs to be “fair” and lenders themselves know and appreciate fully that taking an unfair approach opens up the organisation to criticism and reputational risk. The question is, what is ‘fair’ and how is it implemented? That has still to be tested in the courts, but clearly understanding more about the borrower before devising a collections strategy will help lenders’ avoid accusations of being anti–TCF.
The traditional way
When I was first let loose on arrears collections back in 1979 while working for a major
At over three months things got more serious and we actually asked people into the branch office for interviews, insisted they fill out budget planners and to put it simply we pressurised borrowers until they paid up. The process was not aggressive, but the focus was on collection of cash and the “process” from early through to serious arrears was documented and audited, often leading to repossession.
There were concession rules, guidance on making arrangements to pay and the process was, in all fairness, not ignorant of sympathy for the borrower. However, it did not encourage us to be too “borrower focused” in terms of treating each situation as individual and the solutions we could apply to differing problems were few and far between.
Borrower focus
The key term here is borrower focus. Obviously not all borrowers are the same, not all are suffering identical problems and challenges with the credit position, credit hunger, and credit accessibility of borrowers differing from consumer to consumer. In addition the income/expenditure position of borrowers in arrears is almost always totally different to the position when the loan was granted. The problem with process is that invariably it ignores these variations. And so a solution that may work for borrower A almost certainly will not work for borrower B, but process dictates that they may both get the same approach, at the same time and be offered the same compromise - if any.
All of that ignores the fact that the science of collections and recoveries has come on greatly over the last 30 years. A number of elements have improved the collections process: collections driven by technology (such as power diallers); a better appreciation of historic problems and mistakes; and service providers creating new solutions.
In addition to these factors the comfort generated by rampant house price inflation since 1995 has also meant that the whole collections approach has developed considerably. Even so we still hear the horror stories. Cases of families cast aside by lenders applying a rigid approach to debt recovery, and consumers not paying their mortgage but still getting credit cards and paying their store card debts first. The latter often results in people on mid to low incomes racking up a vast multitude of unsecured debts and then defaulting on all of them.
Credit intelligence
In order to address these issues the next stage in the evolution of debt management and collections has got to see lenders or asset owners more effectively combine process with the application of greater credit intelligence.
1. Monitoring credit profiles
What is the credit status of the borrower today? Is the last real information the lender has on the borrower one month or even ten years out of date? Has the borrower got other debts and if so how many and for how much? Are those debts up to date as of today? If the borrower has multiple mortgages with multiple lenders (maybe buy-to-let) what is the payment position on all those debts? If you are chasing payments from borrowers who are in arrears, or indeed monitoring payments from borrowers who are not in arrears but you know are income stressed, are you receiving real time up to the minute credit change notifications and warning flags?
So if your borrower slides into over-indebtedness you need to know that as soon as it happens, not some weeks later. Daily monitoring resulting in early contact with that borrower may make the difference between getting them back on track and them slowly slipping into even greater problems. It also sends such borrowers a warning that you are on the case.
2. Affordability and credit scoring
Taking account of the income stress position, how do lenders validate what the borrower can afford today? How can income be validated and claims of expenditure be proven? What priority is being given to balancing debts to income? What is being paid first each month and what should be? Is the borrower telling the truth about their income and outgoings? This gives lenders a greater insight into a borrower’s current account details and monthly cash movements, ensuring they can kick start new lending with confidence.
3. Fraud scoring
Is the borrower or property on any known mortgage/loan fraud database? Is the property in an area of proven valuation fraud? Has the valuer, solicitor or broker (if applicable) been suspected of being involved in fraud? Are they listed as professional suppliers on any acknowledged fraud database?
4. Collateral security
What is the position today with the underlying property security? Is it in good condition and what is its current valuation? Is it in a street, a district or of a type that has suffered extraordinary volatility in value? If it’s a buy-to-let what do we know today about rental yields on that type of security, determined both by area and type and cost of maintenance? Do we need to undertake a new valuation or would an AVM suffice? Is the property properly registered at HM Land Registry and do we have secure title?
5. Re-underwriting
Can lenders effectively “re-underwrite” every loan and if so what is it telling us? Across an arrears pool how many of these borrowers would we lend to today and if so how much? Can we create risk layers in the arrears pool that will allow us to devise and apply different collection strategies to differing borrowers? Some may require a soft touch and need organisational help or advice on their finances. Some may need to consolidate debt and that may be in the mortgage lender’s interest. Some should be actively encouraged to remortgage and applying a debt reduction incentive to make this happen may be the lesser of several evils against a “do nothing” approach. Assessing how the value of the underlying collateral is moving in this market of fast falling HPI will also affect such decisions.
6. Tracing
Has the borrower been recently credit active at the mortgaged property? Are affiliate, linked and associated names still at the property? If not are transactions in that borrowers name arising elsewhere in the credit market?
No lender in my experience can do all this work alone. They need strong relationships with specialist suppliers of data tools, data interrogation and segregation techniques and above all have a proven mortgage market expertise. Within this mix of partnerships and special service providers, lenders will also need access to an effective credit reference agency that have the technology to identify, classify, score and monitor delinquent accounts in the manner described above.
Such associations can be part of a multi-bureau strategy using the agency that has the most powerful products to fit with lenders’ needs. Callcredit is one of those agencies and through its market leading affordability initiatives, daily alerts service, and segmentation and tracing products can work with lenders and their advisers to ensure that the correct intelligence is applied to the collection process at the right time and in the right manner.
Barry Meeks is a consultant
