Banks are using advanced collections systems to spot troubled loans before they go bad and to help their employees determine which borrowers might be receptive to modification offers.
"The industry has forgotten how to collect. The [boom] economy had allowed it to lose that skill," said Dennis Moroney, a research director at TowerGroup in Needham, Mass. "Today that's a bad thing."
To adjust, tech firms and banks are viewing collections as a customer relationship management-style task, using new credit decisioning technology, data aggregation and predictive modeling products, or leveraging acquisition tools repurposed for collections.
The goal is to quickly identify candidates for workouts and modifications, improve the execution and pricing of restructured loans and ensure that one loan isn't modified at the expense of another loan.
Moroney said this approach to collecting on past-due loans takes a customer's entire financial condition into account. "The challenge is that banks need to manage the full customer relationship pertaining to collections."
Some banks are also looking for specialized expertise. Zions Bancorp. of Salt Lake City has expanded its staff of SAS (Statistical Analysis System, a product from the software firm SAS) specialists by about 30% to handle the increased data management workload required by an increased focus on loss mitigation. "We've definitely stepped up our investment in data and data management," said Jason Brock, a retail lending and credit risk manager at Zions.
Zions is also asking for more data when it requests credit scores. This additional information, such as property values and other economic information, can help Zions assess borrowers' health.
The difference between the most recent downturn and prior recessions is the sheer volume of loans that are now past due or in some stage of the collection process. Collections, modifications and workouts are now a full-fledged line of business at many banks, some of which are handling delinquency volume that has climbed 1,000% since the financial crisis began.
"A year ago, you had collections departments with less than 10 people that now have 100 people just working on modifications. A typical chargeoff rate used to be 40 basis points. Now it's 4 or 5%," said Vytas Kisielius, the chief executive of Collections Marketing Center LLC, which offers a "flex mod" product, developed out of its "flex collect" platform, to automate the processing of loans in collection from initial contact through modification.
The credit decisioning tech firm Zoot Enterprises Inc. is positioning its Credit Risk Lab product as a portfolio management and collections tool as well as a customer acquisition product.
The product performs payment simulations of loan portfolios to identify risky accounts, and it leverages broad demographic data, such as whether a borrower is an auto worker or a health-care worker, or whether the borrower has had a sudden uptick in credit card balances or has recently taken out a payday loan.
That helps lenders determine which borrowers will go though the entire collections process (presumably to default, sale or outsourcing to an external agency) and which clients can be moved to a modification or payment plan that retains them as current borrowers.
The system evaluates, among other things, reports from credit bureaus, use of payday loans, property valuations and behaviors that might indicate a medical issue that could temporarily impair a borrower's ability to pay.
Tom Johnson, a vice president of product development for Zoot, could not say how many clients have shifted from using its technology to assess new borrowers to collections-related use. But he said that at one client, 70 of 100 credit risk analysts recently shifted to collections.
In addition to denting a bank's balance sheet, the increased volume of collections also creates obvious workflow challenges.
Matt Scarborough, managing director for international business at Bridgeforce, a U.K. consultancy, said that since collections and loss mitigation have gone from nonexistent to sometimes thousands of loans a month, workflow has become more difficult and must rely more on automation.
"Once you've had the conversations and know the best way to keep someone in their home, the customer needs to provide documentation and the bank needs to do a title search, etc. Making sure that happens is where a lot of folks fall down," Scarborough said.
CMC's product attempts to overcome workflow and document management issues by tracking loans through processes like modification and collection, providing automated reminders on the Web site for borrowers and collectors in attempt to improve execution.
"There's a great need in the financial services market to be able to deal with fresh data and do decisioning on the fly, and with a much more simple set of workflow steps for staff and consumers, stuff, like, 'Did I get a W2? And did I verify it was the right W2? And did I get the "hardship statements" with all of the blanks filled in?' " Kisielius said.
As a loss-mitigation and collections tool, CMC's product leverages a consumer's different debts and current income and the bank's current parameters for working out distressed loans.
This data is aggregated and used to help the bank formulate a modification and a series of steps such as letters and other documents needed to close the new bank/borrower loan arrangement.
Experian PLC offers its Tallyman product, a workflow and rules engine that is in wide use in Europe and was recently reconfigured to be used in North America and elsewhere.
Tallyman, which has about 50 clients, segments customers and uses business intelligence to monitor the effectiveness of a collections system, identifying areas that require further enhancement. The system is designed to be easily updated by clients. "Business users can make changes without IT participation," said Mike Sutton, the director of collections solutions for Experian and Tallyman.
Chordiant Software Inc. uses credit decisioning technology to drive its collections efforts, and uses the company's CRM expertise to allow customer information to be updated rapidly as an institution engages with a potentially troubled account in real time. Information such as employment status can be taken into consideration as a bank rep conducts a collections-related conversation to form a customer-specific profile.
It's a deeper-dive alternative to the traditional method of dealing with blanket categories such as 30- or 60-day late payments in mostly the same manner — which can result in a borrower paying off one loan while another falls behind.
"You can get a complete view not just on a delinquent account, but you can take the entire relationship into account when you do a strategy for a restructure of a loan," said Scott Andrick, a director at Chordiant.
