This blog is part of a series, which includes recommendations for a robust and comprehensive collection strategy. These blogs serve as a guide to help lenders protect their organization and mitigate losses by preparing for a downturn in advance. Read part 1, part 2 and part 3.
In our last article, we discussed strategies for serious delinquency, how to efficiently contact the customer, and improve account prioritization and treatment strategies.
This article will examine the last phase of the delinquency continuum: loss mitigation. We’ll provide strategic recommendations for lenders to work accounts in this stage efficiently, while aiming to minimize expenses and charge-off losses.
Loss mitigation: 60 days past due to charge off
Once accounts become 60 days past due, lenders should identify those that warrant additional effort and those that should be deemed uncollectible and charged off. At this point in the account lifecycle, the probability of curing is typically extremely low. As a result, lenders should not introduce new tools to support collection efforts, but instead aim to maximize the return on resources by working those accounts the lender has identified as most likely to pay.
Acknowledge the diminishing returns of efforts at this stage
In the prior two delinquency stages (early and serious delinquency), incremental efforts generated additional recoveries. At this stage, the population of customers who have the ability to pay has (or should have) been significantly reduced due to earlier efforts, resulting in a small percentage of high priority accounts, and a large percentage of low priority accounts.
Using collector resources to apply a treatment to the whole population will likely result in a negative return due to the high volume of low priority accounts. It is critically important to recognize that not all accounts can cure prior to charge off. Lenders that apply additional resources to all remaining accounts will likely see quickly diminishing returns, and a strategic application of resources is generally required to ensure maximum return. Therefore, resources should only be applied to high priority accounts. With an optimal allocation of resources, lenders would transition the collectors and resources initially assigned to loss mitigation to accounts in early delinquency. This strategy should help increase the intensity of efforts and stop delinquency progression. The early efforts are more likely to succeed, as customers are able to meet the financial requirements to cure the delinquency.
Identify low priority accounts, and evaluate for charge off
Lenders should consider evaluating the large percentage of low priority accounts for charge-off decisioning and then warehouse and monitor accounts for changes. As part of the monitoring, financial institutions should generally only work an account again if a change on the credit file indicates an ability to pay, or new contact information is found.
Many lenders recognize that applying an intensive treatment to these accounts isn’t beneficial, yet still apply a passive – or what they believe is an economical – treatment strategy, such as letter dunning or email blasts. An important consideration at this stage is thatproactive effort, even if economical, needs to consider the customer responses to the effort, and the resources required to handle them. If lenders identified these customers as low priority due to no or low ability to pay, then any resources assigned to answer these responses will naturally see low recoveries and may have high phone talk times as the customer explains their situation. Thus, this strategy has a low return on investment and a high opportunity cost when considering the impact these resources could have made on early or serious delinquency.
After all recommended steps are completed, the ideal approach to consider is to evaluate the accounts for charge off, determine a charge-off decision date, warehouse the accounts until charge off, and engage only if there has been a change in the customer’s external credit data, such as a new tradeline that could indicate a new job.
Within the low-priority population, there is natural variance between accounts. With more accounts, lenders will typically see more variance. Many lenders set a charge-off date based on a delinquency threshold (e.g. 180 days delinquent), but this approach inflates delinquency unnecessarily. The recommended approach is to leverage a recovery score, which indicates the likelihood of any payment in the next 90 days. Lenders can generally use the recovery score to rank order the population of low priority accounts. Accounts with high scores should have the longest possible period before charge off, and lenders should consider charging off accounts with low scores. While this will likely increase the short-term charge-off rate, it should further reduce delinquency and the volume of accounts that require oversight.
Apply limited resources to high priority accounts
Lenders must then consider and determine the appropriate efforts to make on the small population of remaining high-priority accounts. The primary goal is still to contact the customer. If prior efforts weren’t successful, lenders should leverage advanced locate tools. Lenders have many options for advanced reports and searches that offer creative and comprehensive insights on subjects, from specific reports such as vehicle registration and servicing records, or phone payment records to intensive reports on social media usage, and holistic reports that offer lenders all data on a subject. As any skilled skip-tracer knows, often the tangential information found in searches yields clues that ultimately connects the collector with the customer. The benefit of high quality contact and locate resources and tools cannot be understated.
Once all resources have been applied, then the few collectors working high priority accounts at this stage should continue their efforts until the account establishes a repayment plan, changes to low priority, or reaches the charge-off date.
Leverage a triggers program to be aware of changes
Combined with a limited team of collectors working high-priority accounts, and a high volume of low-priority accounts warehoused, a daily triggers program can identify accounts with new contact data (phone, email, address, etc.), or accounts with changes in their external credit file that may indicate a new or improved ability to pay. Triggers generally allow collectors to efficiently and rapidly engage identified customers to establish repayment plans before competing creditors have made contact.
Loss mitigation encompasses more than maximizing recoveries; it requires collectors to work efficiently and effectively to minimize costs and increases returns. Lenders should evaluate their strategies now – and on a periodic basis – to strengthen their operations before a downturn occurs.