Calling on IT to help clients
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At the recent Lending Strategy arrears and repossessions round table there was a considerable amount of discussion about the fallout from the credit crunch and the impact of rising arrears and repossessions on lenders and their ability to lend.
But less was said about the practical ways in which the lending industry is responding to the current environment.
There are two main objectives, the first of which is the strictly commercial goal of enhancing cash flow within lenders' mortgage books which will allow them to maintain the financial stability of their balance sheets and the funding vehicles into which the securitised assets have been placed.
This will also help them offer mortgage finance to new customers and rebuild the market.
Second is the softer but no less legitimate objective of keeping borrowers in their homes, ensuring repossession is the last resort and treating customers fairly throughout the arrears process.
A variety of opinions were expressed on how and when markets might return, what could be done to improve liquidity and the likely role of the private rental sector.
There were mixed views about the responsibilities of the government, the Financial Services Authority and the lending community, and how we can all learn from the mistakes of the past.
But there was a broad consensus that in the current market the default management areas of businesses need enhanced tools and techniques that can respond to the demographic and social changes we have seen in the past couple of decades.
As our chief executive officer Brian Brodie emphasised, a key difference between the last housing market recession and this one is that back then most mortgage lending - indeed, most retail financial services business - was handled by contact between banks or building societies and customers.
Of course, the branch manager's 'first name terms' relationship with customers has not existed for some time. The traditional model of face-to-face contact has been removed, rightly or wrongly, and business is increasingly conducted via third parties.
The switch to technology and intermediary-based origination has allowed the mortgage market to grow quickly but it has also spurred changes in the way lenders approach customers who get into financial difficulties.
The decade of low arrears between 1995 and 2005 led to a dwindling of lenders' investment spend in their default management and recoveries departments.
Borrowers who got into trouble could generally remortgage or sell in an environment of strong house price inflation, while commercial executives and IT managers at lenders believed making their origination technology more smart and efficient was the best way of adding value in a competitive market.
While technology successfully contributed to the pace at which lenders grew their loan portfolios it might have also affected their ability to know customers at a personal level.
But the flip side was that with the advent of technology came better customer profiling, credit scoring, product design and data capture.
Even so, when the going gets tough the lack of personal relationships or contact with customers can be a key issue that needs to be addressed when implementing effective default management and recoveries strategies.
In the early 1990s the ways in which lenders dealt with arrears were not as sophisticated as they are today - I know, I was an arrears manager back then.
Most contact processes were driven by letters or basic telephone campaigns, and if letters were ignored or calls unanswered frustratingly slow progress was the result.
Also, less information was available with regard to customer contacts, with few individuals having mobile phones and work numbers not easily accessible.
And apart from it being more difficult to get in touch with customers, when lenders did succeed in contacting them the number of options and solutions available to them was more limited than today.
The growth in arrears in recent years has necessitated a more sophisticated and refined approach, delivered by a combination of technology and enhanced people skills.
Customers have become more aware of the complexity of mortgage transactions and are better informed about their options if they default.
Today's customers also demand a wider variety of means of communicating with lenders, reflecting technological and social changes over the past 20 or so years.
While so-called baby boomers may be happy to communicate in traditional ways, Generation X and Y customers are likely to want to communicate by more up-to-date means such as email and text message.
So these days it's a matter of tailoring contact options to meet customers' needs and preferences, the objective being to open a dialogue as early as possible which will maximise the chances of a successful payment resolution.
Indeed, building lenders' knowledge of borrowers and starting a dialogue before payments have stalled is critical in many instances.
An advanced analytics capability uses predictive analytical tools to great effect, based on pooled industry information combined with individual lenders' data.
Such a capability makes use of a number of scorecards covering various elements including propensity to default, affordability projections and, if appropriate, enhanced tools to support the repossession and sale of properties.
So credit management tools ranging from identifying risky accounts within performing portfolios to assisting sale decisions on repossessed properties have become key components of effective collection and credit management processes for lenders.
It's just as important to analyse and understand accounts likely to default as to manage those that already have.
We can now look at accounts with a higher than average likelihood of default so pre-emptive action can be taken if appropriate. Alternatively, individually designed collection strategies can be implemented should payments be missed.
This ensures compliance with Treating Customers Fairly requirements as it supports an individual approach to borrowers' problems.
There is also evidence that by gaining a better understanding of customers' psychology lenders can tailor their customer service and collection strategies to likely behaviour patterns.
In the US we have seen an increasing amount of investment in the area of customer psychology.
This helps lenders and servicers gain an understanding of what drives customers and what they are looking to achieve from their interaction with lenders so they can be dealt with in a non-confrontational way.
In an environment where repossession is genuinely the last resort and where borrowers are stressed, if professionals are able to get the empathy factor right they may be able to achieve first-time resolution of cases that might otherwise draw out over weeks or months.
Increasing expectations for lenders to exercise greater forebearance adds a further layer of complexity to servicing technology platforms and procedures.
Credit management staff must have the tools to offer the most suitable solutions, tailored to customers' needs and within lenders' rules.
These tools include payment arrangements and loan modifications such as product switches, rate reductions, reduced instalments, payment holidays and debt forgiveness.
More demanding and better informed customers, a wider range of collection options plus the requirements of the TCF regime mean staff need a new set of competencies, and this means significantly enhanced training.
It is essential that staff fully understand how their roles fit into the overall structure of the organisation, why the work they do is important and what their objectives are.
They must be fully conversant with the requirements of the regulatory framework as well as their employer's rules and policies. They need to understand the sort of difficulties customers are likely to be facing at the moment and how to handle conversations in a consensual and empathetic manner.
Often, customer service agents of a similar age and background to customers are able to build a stronger rapport and achieve better outcomes.
One of the key goals of any customer contact is to resolve the case first time if possible. In the past, one of the key metrics regarding the performance of collection consultants was length of phone call but now the industry recognises that what matters is not how many calls a consultant can handle in an hour but what the outcomes are.
And using technology to record calls, log contacts and ensure customers are contacted in a proactive manner provides an audit trail for TCF needs. Given the burden of proof required under the pre-action protocol - whereby lenders must show they have taken all appropriate steps before moving to repossession proceedings - these records are vital.
In summary, modern collection strategies must involve a combination of technology and people-based components.
Analytics tools help identify accounts with a higher than average propensity to default and facilitate the efficient implementation of collection strategies.
Understanding customer psychology allows lenders and servicers to target borrowers in the most effective way while effective communications that are tailored to the preferences of individuals allow borrowers to be contacted quickly, maximising the chance of successful and speedy resolutions.
Technology supports all these processes and gives collection and credit management consultants the tools they need. Meanwhile, high quality training can motivate those at the sharp end.
As lenders and outsourced servicers up their game in this important area, we as an industry can improve collection revenues, keep more individuals in their homes and ensure that we are treating customers fairly. And I'm pretty sure that everyone at the round table would concur with those goals.
Source:
Lending Strategy
