When dealing with borrowers in arrears TCF must be taken into account. Early contact and person-to-person counselling is proving to be more effective than just sending letters, says Clarity’s Mike Perry
More often than not, people don’t notice a job done well. They don’t notice that there’s nothing to complain about. They do notice when something goes wrong. And in a recessionary environment, people are wont to complain more than usual.
In the mortgage market boom times, treating customers fairly (TCF) was undeniably important – advisers had to be sure they were selling the most suitable product to their clients. Lenders had to be sure they weren’t giving mortgages to borrowers who would never be able to afford them, regardless of loan-to-value (LTV). But now we’ve hit the downturn, TCF is coming into its own. When the going is tough, it’s even more important to make sure a job is well done. The Financial Services Authority demands it, and the recent legislation brought in to protect homeowners are testament to the government’s commitment that lenders should treat their customers fairly, leaving repossession only as a last resort.
It’s now accepted practice to do an in-depth fact find on borrowers looking for a mortgage. But as recently as three years ago, when house prices seemed to be on an ever upwards path, Gordon Brown told us the days of boom and bust were past and the notion of recession was nothing more than an uncomfortable memory, pretty much anyone could walk into their financial adviser’s office with a 20 per cent deposit and walk out again with a mortgage.
In a rising market the risk that a loan will go bad is offset by the cushion rising house prices afford. It seems like madness now, with a 60-70 per cent LTV mortgage requiring a perfect credit score, but in the economy of the early noughties, a 75 per cent LTV mortgage was deemed low risk. Even without a large deposit you could still get a mortgage with very little proof of income. Prime lenders offered fast track mortgages with automated underwriting and specialist lenders offered self-certification products which didn’t need the usual income checks. Whatever the right and wrong of this scenario, the upshot is there are a large number of homeowners with hefty mortgages now unable to keep up with their mortgage payments. In order to treat these customers fairly, it’s crucial to understand their current financial state - especially when loans go into arrears.
Credit management
Easier said than done? The practicalities of managing arrears and keeping in touch with customers can be daunting. The FSA’s introduction of Treating Customers Fairly principles should have altered collections strategies across the board. But the reality is that arrears levels have been negligible for the past 15 years and in-house collections teams have been able to cope well with the volumes. There hasn’t been a pressing need to review collections strategies until now. Credit management has developed significantly in recent years but many lenders are yet to haul themselves around to embrace more modern collections methods. The deterioration in the economy, rapidly rising unemployment and credit lines still paralysed has meant arrears are mushrooming – collections departments are going to have to grow correspondingly. Rather than relying solely on lettering and calling to follow up with customers in arrears, a more TCF compliant, forward-thinking approach is in order.
Invariably, customers are not in the same financial position now as they were even just 18 months ago. For example, a borrower taking out an interest only mortgage with an LTV of 75 per cent two years ago on a fast-track basis with limited personal information is possibly in a negative equity situation now, even if he’s managing to keep up with the mortgage payments so far. Since the onset of the credit crunch he’s been piling more and more on credit and store cards. He might have had children since the mortgage application went through, meaning his disposable income has drastically reduced. If he loses his job next week, the lender responsible for this mortgage account knows very little about this borrower’s actual financial situation.
Pre-action protocol
Mortgage pre-action protocol requires that every effort is made by the lender to keep a borrower in their home before filing a repossession action – but there is a bit of a grey area over the definition of “every effort” at the moment. Many collections departments will send letter after letter calling in the arrears, and if the account doesn’t cure, eventually they will repossess - all without going to the borrower’s house early on to find out whether the borrower could afford to pay even part of their debt.
It’s impossible to assess a borrower’s arrears 100 per cent accurately by looking at the initial mortgage application or credit score as this information is now outdated. It’s for this reason that Clarity in conjunction with lenders makes it a priority to meet customers face to face, early on in the arrears process. Helping borrowers to sort out their financial situation sooner rather than later can significantly reduce the number of cases lenders have to deal with in the future – it’s much easier to get someone back on the straight and narrow if they’re one month behind with their payments than if they’re two or more.
Early fact find
There’s also a commercial reason to review collections processes. Efficiency in credit collections has in the past been lower on the priority list for many lenders than driving sales. But times have changed, and when historically, lenders have waited 60 days or longer before knocking on their debtors’ doors, it would pay to get in there much more quickly. A fact find at any stage in the arrears process is better than not at all, but we’re of the opinion that it’s madness to wait.
Building a rapport with borrowers is beneficial for two reasons. The borrower in debt develops a personal relationship with the collector and is consequently more likely to honour their payment plan. And there is a noticeable return from borrowers who have been visited by a debt counsellor. There is also growing evidence that if borrowers are encouraged to self-serve when repaying debt, they will “afford” a higher payment each month than if lenders demand a set amount by letter. Embracing new collections methods will help embed TCF compliance into operations, but it will also deliver a tangible return.
Communications
Considering the business world’s obsession with blackberries, email, social networking websites, etc, it’s perhaps surprising that the area of collections is still predominantly a paper-based industry. The vast majority of lenders simply letter and call borrowers who struggle with their payments. This is not the age of letters or even telephones. How many people nowadays don’t even have a home telephone number?
There are collections agencies who embrace the idea that traditional methods must be used alongside new technology. Clarity has set up interactive text messaging systems and emailing as a core way for borrowers to contact us. It’s had a massive impact on the way our collections operate - 65 per cent of calls in our call centre are now inbound, which means counsellors are talking to borrowers who are willing and able to discuss their arrears situation when the phone call takes place. The alternative, and unwarranted situation, is that lenders are wasting expensive resource having collectors battling to get through to people who don’t have the time or aren’t in the position to discuss their mortgage repayments at the precise moment collectors call them.
Mortgage support
The announcement that the Homeowners Mortgage Support Scheme is now live and that there will be an extension of the improved Income Support for Mortgage Interest in Alistair Darling’s 2009 budget is further cause for motivation. Lenders have a legal reason to improve their collections processes to ensure that customers are treated fairly and receive all the proper guidance necessary under these schemes. Trained professionals are a must in these times. Outsourcing field counselling to companies with experience not only covers off the need to ensure customers receive excellent standards of service – it also cuts training costs, rising human resource costs and overheads. Similarly, working with collections partners which provide borrowers with a range of payment methods including pay by text agreement, online using a customer facing website or in person in the post office, could make the difference to a collection department’s bottom line.
With growing pressure from the government on lenders to keep people in their homes at all costs, all lenders should be thinking seriously about their collections methods. Pre-action protocol requires an auditable trail proving that lenders have done everything within their power to avoid taking possession of a property – it’s no longer an easy option to wait three months before sending someone in person to discover why the borrower has not responded to payment summons. TCF is beginning to look less principles-based, and increasingly set in regulatory stone. Apart from satisfying the FSA that lenders are behaving responsibly towards borrowers, upping the face time with borrowers and providing easy-access means of payment actually improves the returns seen from collections departments. Now is the time to act on arrears – be ahead of the game.
Mike Perry is group sales & marketing director of Clarity Credit Management Solutions Limited
Date: 2nd, June, 2009
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