WILL SMALL DOLLAR, UNSECURED DEBT
BE OUR UNDOING?
By Jamie Arnold
Will small dollar, unsecured debt be our undoing?
Most Americans have multiple credit cards, a personal loan and some other debt. In fact, unsecured debt in the U.S. has grown at alarming rates and has reached historic highs far beyond levels seen in the last Recession.
That’s fine when the economy is stable and delinquencies are low, but what happens when the economy takes a turn for the worse? How will lenders respond to an influx of hardship relief requests when applying mortgage-style loss mitigation efforts is too costly and not scalable?
Riding the wave. Americans have enjoyed riding the credit wave fueled by a booming economy and record low unemployment rates over the past couple of years. This has translated into a consumer financing spree.
Lenders have made it easy to access credit by automating underwriting and using alternative data in order to offer credit more broadly, especially to Americans with a limited credit file.
On average most Americans have 4 credit cards and
the average carrying balance of $6,194.
One difference between the last U.S. Recession and now is that the average FICO score of Americans with credit cards is 713. With higher quality credit, lenders have benefited by low delinquency rates and have observed record lows.
But what happens when the economy makes a turn for the worse? How will lenders respond to the struggling borrower who has lost his job and waiting on unemployment benefits? Or the person with reduced income who can only afford a mortgage payment and groceries to feed his family? Sadly, this has become a reality faster than anyone anticipated.
As of today, the answer is call centers. The Motley Fool provided a list of 14 of the top banks and their process for seeking hardship relief. Every one of them directs borrowers to call.
In a world where social distancing has become the norm, staffing call centers is quite challenging. How do you set everyone up on the same calling platform fast? How will they access personal information from the servicing system? We wonder how long it will take before borrowers are backed up in long queues further delaying hardship support. And that’s not even the hardest part. Providing relief options that solve the problem, right-sized for the actual hardship is the problem.
Mortgage-style hardship relief programs are effective despite
being paper-based and manual.
That effort may make sense for large balances with a home securing the loan. However, applying this approach to troubled, small dollar,
unsecured debt is a money loser.
This debt is likely to get written down before a hardship relief program is offered. This could mean massive losses given the current state of the economy.
We don’t believe that outdated workout solutions will work this time around. Americans expect 24/7 service on digital platforms for nearly everything. They do not want to speak to a person asking the canned dialog of questions, and they prefer a digital solution to paper-based checklists and stacks of paper to prove that they are experiencing a financial hardship.
Imagine a world where borrowers could click a link to allow
their financial and credit data to be accessed real-time.
Then they are presented with practical repayment or workout solutions and the ability to select one and sign up online in a few minutes. A mortgage-style hardship effort boiled down to a few minutes. For small dollar, unsecured debt, this is not only a game-changer, but will likely allow investors to avoid massive write downs.
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