Is Your Financial Institution Prepared for the Surge of Delinquencies Caused by the COVID-19?

Summary  

The COVID-19 pandemic has changed virtually everything about the way we live our lives. With many states being under a shelter in place order for almost two months, unemployment has skyrocketed. This blog examines the potential financial ramifications and how that will cause an increase in delinquencies. This blog covers:  

• The state of unemployment and projects the possible peak.  

• The current state of consumer debt and what lenders need to keep an eye out for.  
• How to prepare by implementing proper collections processes.  

The last several months have been unpredictable and many states are approaching the two-month mark of their official shelter in place orders. This has caused the April unemployment rate to be the worst that the United States has seen since the Great Depression. In April, more than 20 million jobs were lost due to the Covid-19 shut down which equates to a 14.7% unemployment rate. And it’s not over yet.  According to Goldman Sachs, the U.S. unemployment will likely peak at 25%. That is tens-of millions of Americans who will be out of work and have a dramatic loss of income. The scariest part of this rise in unemployment is the fact that consumers are financially unprepared. 

In a recent May 2020 Modern Wealth survey by Charles Schwab, 59% of the participants reported that they live paycheck-to-paycheck, 44% usually carry a credit card balance or struggle to keep up with bills/payments and only 38% have built up an emergency fund. These responses paired with the high prediction of unemployment means an inevitable rise in loan delinquencies across all loan types.  

One loan type getting hit especially hard is auto loans. According to a new report from S&P Global Ratings, approximately 236,000 auto-loan borrowers received extensions between 30 to 120-day payment delays on their notes. This has impacted prime and non-prime loans and some lenders are being more lenient than others. Interestingly, the Wall Street Journal reported that a growing number of consumers are choosing to stop making payments on some of their auto loans that they can’t afford and instead walk into the dealership to get new cars with auto loans that they can. This practice is known as “kicking the trade” and is on the rise across the country. How this will impact the banks and credit unions is unknown. Since banks and credit unions made up 60% of outstanding auto loan debt in 2019 (per Experian data), there will be some major business decisions and process changes that will need to take place over the next few months.  

 

At the end of 2019 consumers owed more than $1 trillion in credit card debt, it is no surprise the shutdown from Covid-19 will force this number up even higher (Experian.com). Although the Federal Deposit Insurance Corporation (FDIC) has recommended that financial institutions work with consumers to help them during financial hardship, how smaller financial institutions will be able to support the recommended actions is unknown. Lowered monthly payments, relief from late fees, temporarily lower interest rates and more have been suggested, but not every financial institution is properly funded to support these actions.  

When a consumer takes on debt, they take on the risk and responsibility of repayment even during unfortunate circumstances. There are programs that will delay payment and potentially assist for a period, but the responsibility is still on the borrower to repay the loan. During times of crisis, like the current COVID-19 pandemic, this creates an inevitable surge in delinquencies. Is your financial institution ready for this sudden increase?   

In today’s digital world and due to new guidelines on safety and social distancing, the proper technology is key. Having a top of the line collections platform will help you provide your members and customers with excellent service and at the same time ensure that your staff is running an efficient collections process. Here are a few things that are must haves in any collections software you choose as you prepare for a higher than normal number of delinquencies:  

 

1. Flexibility 

Every financial institution is different and allowing the configuration of queues helps create a workflow tailored to each organization and each individual. Customization is a must have feature as it allows you flexibility in a time where additional staff may have to step in to assist with a portion of daily collections tasks. Additionally, configurable reporting within a system will help paint an accurate picture of the amount of delinquencies, measure the collections taken in daily and help improve the process further.   

 

2.Dashboards  

Dashboards are an extremely helpful tool as they help your staff prioritize the day and what phone calls need to be made first. Additionally, dashboards vary depending on who the user is, so it is helpful in managing the collections process as well as managing those who are doing the collections tasks to ensure maximum efficiency. 

3. Core Activity Visibility  

Many actions happen within one financial institution every single day and sometimes they may not be easily accessible to all. A robust collections system will provide a visibility into your core system to ensure that the most up to date data is being used when contacting a borrower and it will easily feed data back into the core system. Having up to date information also ensures a borrower is not being over contacted.  

If your bank and credit union is dealing with a surge of delinquencies and would like to see how our collection software can support you during these unprecedented times, please view our recent webinar.