June 19, 2020
Amid unprecedented job loss and economic decline during a two-month period, COVID-19 has led to numerous economic stimulus and support efforts by country governments and central banks to support corporations and individuals. In retail banking, loan forbearance for retail mortgage, credit cards, and other loans has been the primary area of support in many countries, including Australia, Canada, Germany, Italy, Malaysia, Spain, Thailand, the UK, and the United States.
This Celent Blog examines lending lessons learned from the previous recession, evaluates the current health and economic crisis from a retail lending perspective, summarizes Celent’s ABCD vendor evaluation methodology used in its global loan collections vendor report, and makes recommends for loan collections technology transformation.
What We (Should Have) Learned from the Subprime Mortgage Crisis
We learned from the U.S. subprime mortgage crisis in 2008 and subsequent recession that many financial institutions had treated the collections function, its operations, and technology as a digital automation afterthought and a business unit best kept out of sight and out of mind. During growth periods such as the mid-2000s, the prevailing business view was:
“why invest in a new collections system? Delinquencies are low, I’m making money, and I need to invest my time and technology spend elsewhere”. In addition, I won’t be able to management’s attention to it, let alone obtain budget to automate collections”.
We learned that not automating collections is a prescription for failure, because when a recession hits, it’s too late at an operational level to transform the loan collections function because we were in crisis mode (think of it as a business continuity and disaster recovery situation). In addition to modifying loans and processing foreclosures, crisis mode continued for many years as we found that poorly documented loans, weak regulatory compliance, and asset-backed securities (ABS) noncompliance exposures led to lawsuits that lasted for years and caused many financial institutions to fail.