The New Reality In Loss Mitigation

Most of us would like to believe a new, brighter day has dawned. Part of creating that reality for banks requires improving collections systems to locate troubled loans that can be prevented from hitting the default dustbin, then helping overburdened staff reach a resolution that gets the borrower paying again. There's also a bit of amnesia that has to be cured.

"The industry has forgotten how to collect. The [boom] economy had allowed it to lose that skill," says Dennis Moroney, a research director at TowerGroup. "Today that's a bad thing."

To adjust, tech firms and banks are viewing collections as a CRM-type task, utilizing new credit decisioning technology, data aggregation and predictive modeling products, or leveraging acquisition tools repurposed for collections. The goal is early-cycle identification of candidates for workouts and modifications; smooth execution and accurate pricing of the restructured loans; customer-specific service; and ensuring that one loan isn't modified at the expense of another loan.

"Products like Chordiant and [Experian's] Tallyman integrate multiple loan products," Moroney says of the approach that takes a customer's entire financial relationship into account when collecting past due loans. "The challenge is that banks need to manage the full customer relationship pertaining to collections."

Some banks are also looking for specialized expertise. Zions Bancorporation has expanded its staff of SAS (Statistical Analysis System, a product provided by software firm SAS) specialists by about 30 percent in credit risk operations to handle the increased data management skills necessitated by an expanded focus on loss mitigation techniques. "We've definitely stepped up our investment in data and data management," says Jason Brock, retail lending/credit risk manager for Zions, adding the bank has broadened information obtained when it requests bureau credit scores. This added data, such as property values and other economic information, is used to assess the health of borrowers, allowing the bank to build quantitative models.

Brock says the bank isn't expecting to invest heavily in new vendor-provided collections technology because the bank's network of affiliated institutions presents a learning curve derived from nuances in how the different affiliates store and manage data.

"It takes pretty long to get a vendor up to speed," he says.

The Big Dig

The difference between the most recent downturn and prior recessions is the sheer volume of loans that are now "past due" or in some version of the collection process. Collections, modifications and workouts are now a full-fledged line of business at many banks, tasked with handling volume that's often 1,000 percent higher than a short time ago.

"A year ago, you had collections departments with less than 10 people that now have 100 people just working on modifications. A typical chargeoff used to be 40 basis points, now its four or five percent," says Vytas Kisielius, CEO of loan servicing tech provider CMC, whose new "flex mod" product, developed out of its "flex collect" platform, automates the processing of loans "in collection" from the initial contact though modification.

Credit decisioning tech firm Zoot Enterprises has also expanded its data accrual reach and is positioning its Credit Risk Lab product as a portfolio management and collections tool in addition to a new customer acquisition product. The product performs payment simulations of a loan portfolio to identify risky accounts. It leverages broad demographic data-such as whether a borrower is an auto worker or a healthcare worker, or whether he or she has a sudden uptick in credit card balances or has recently taken out a "payday" loan-to help 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 on to a modification or payment plan that retains them as "current" borrowers. The system is connected to 40 data providers, ranging from credit bureaus to payday lenders, to property valuations to behaviors that can include medical issues that can temporary impair a borrower's ability to pay.

Tom Johnson, vp of product development for Zoot, did not say how many clients have shifted from using its technology to assess new borrowers to collections-related use, but noted that at one institution, 70 of 100 credit risk analysts had been recently shifted to collections.

Busy Staffers

Beyond 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 UK-based consultancy, says that since collections and loss mitigation have gone from non-existent to doing thousands of loans per month, workflow has become more difficult and reliant 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 says.

CMC's product, for example, attempts to overcome workflow and document management issues by tracking loans through processes like modification and collection, providing automated reminders on the Website 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 says. As a loss mitigation/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's Tallyman is also a workflow and rules engine with an active presence in Europe that 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 an existing collections system, identifying areas that require further enhancement. The system's use of JAVA is designed to allow it to be changed with relative ease at the user level. "Business users can make changes without IT participation," says Mike Sutton, director of collections solutions for Experian and Tallyman.

Rival firm Chordiant uses credit decisioning technology to drive its collections efforts; and its CRM expertise to allow customer information to be quickly updated 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 day" 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," says Scott Andrick, a director for Chordiant.

Bank Technology News is a Collections & Credit Risk sister publication.