Financial institutions and borrowers, alike, have breathed a collective sigh of relief over the last half decade as the U.S. economy has improved from the dark days of the Great Recession. Delinquencies are not what they once were thanks to an improved economy, job growth, and increased credit availability; however, America, and in turn, lenders, are not completely immune from delinquency issues.
Although the median household income has improved with economic expansion over the last six years, it is still down 4.5% from what it was shortly after the Great Recession began in January 2008, according to Advisor Perspectives. The fact is many families are still struggling, and 34% say that, financially, they are worse off than they were before the recession. And because your borrowers may still be struggling with meeting their financial obligations, your collections team may continue to stay busy until the economy fully recovers. They will likely spend a lot of their time working with a couple of "borrower types":
The Forgetful Borrower: this borrower has the money to make his/her loan payments, but they always seem to forget to make them—until your collector gives them their monthly friendly reminder, of course! Or, they struggle with making their payments on time due to your financial institution's lack of convenient payment options.
The Dissatisfied Borrower: this borrower believes they have a legitimate reason not to make their payments. They will often make partial payments in order to avoid collection calls.
The Unwilling Borrower: this borrower never intended to pay, and probably won't make their payment even if they have the money and convenient means to make it.
The Financially Burdened Borrower: this borrower wants to pay, but is genuinely going through a tough time financially.
Today, I want to focus on the Financially Burdened Borrower, the signs to look for, and what you can do to help. Before you pick up the phone to speak to a borrower, you should do your homework. Having a complete picture of the borrower’s payment history will help you assess risk, and give you an idea of what's going on and how to approach the situation.
Start by going through the notes associated with your borrower's account. Hopefully, your collections software can help paint an accurate story of your borrower and his/her payment history. You can also take your research one step further and pull the borrower's credit report. When analyzing your borrower's notes and credit report, look for these six things that may indicate that they are in a financial predicament:
An increase in NSF activity
A significant change in credit score—particularly if it is decreasing
An increase in the number of unsecured credit accounts being opened
An increase in delinquent accounts—especially accounts such as mortgages and auto loans
Changes in repayment habits—for example, making only minimum payments when they previously paid more
This high-risk activity—especially from a borrower that does not typically have delinquency issues—is a pretty good indication that they may be in trouble. And, if they are financially burdened, you want to do everything you can, as quickly as possible, to work with them to find a viable solution that is mutually beneficial because, after all, if they continue down the path of delinquency, you both lose. The reason that it is so critical to get ahead of these types of issues is because accounts that roll to more than two payments past due are 50% more likely to be charged off than delinquent accounts that stay within the zero to 59-day-delinquent-range, according to Karin Brown-Purtell from Lending Solutions Consulting Inc.
So, what can you do to help if all signs point to trouble for your borrower?
Step One: Build Rapport
Listen—truly listen—to your borrower’s situation to build the trust and rapport that is so essential to any successful relationship. When you talk to your borrower, utilize effective interviewing techniques—ask questions to help validate an accurate reflection of their current situation. Ask open-ended questions and stay away from questions that can be answered with ‘yes’ or ‘no.’ The key is to keep your borrower talking and give yourself an opportunity to listen carefully and observe clues that will help you determine the root cause of delinquency.
Related reading: The Top 8 Characteristics of Successful Collection Agents
Step Two: Negotiate
The best negotiators listen more than they talk, are respectful, and focus on a common ground. You may ultimately want to be paid in full, but use your best negotiation techniques to get some form of payment—even if it’s just a partial—because some payment is better than no payment, and your flexibility will go a long way with building that all-too-important rapport with your borrower. While you're negotiating with your borrower, be sure to communicate the benefits of paying this debt over paying other financial obligations. What’s in it for them? Be prepared to communicate this benefit. In addition, be prepared to overcome inevitable objections. Most collectors can anticipate common objections, so be prepared and have your responses ready to go.
Step Three: Find a Mutually Beneficial Solution
Communicate to your borrower that your goal is to find a mutually beneficial solution—you want to help them bring their account to a current status to avoid additional fees, charge-offs, or repossession. Look at each collection call as an opportunity to collaborate with your borrower to find a solution, and in turn, you will build trust and strengthen the relationship the borrower has with your financial institution.
When encountering a troubled borrower, strive to work with them to create a win-win solution for both you and them.