3 Ways to Protect Your Bank and Borrowers from Delinquency Risk
Bankers and borrowers have a common enemy, and that enemy is risk. That’s why in today’s post I’m going to teach you three easy ways to reduce risk. By reducing risk, your bank and your borrowers will be better protected and happier than ever.
In this post we'll cover
simple yet effective ways to communicate to keep the relationship strong;
how to use your core’s tools and resources to their fullest potential; and
other third-party products that provide further protection.
Let’s dive right in.
Community banks pride themselves on the relationships they build in the communities where they are located, but it can—and most often does—make discussions about defaults, delinquencies, past dues, charge-offs, and repossessions uncomfortable and stressful.
The harsh reality for bankers, whether big bank or community, is most of them will make a loan that goes bad sometime during their banking career. It’s a very fine line that banks walk to help provide for the financial needs of their local communities and protect the sustainability of the bank.
Even with all the usual measures in place to help mitigate some of the risk that comes with lending, there are some situations that are completely out of the bank’s control. In many cases, borrowers can find themselves in situations they never expected. According to an article published by Marketwatch.com, depending on the survey, anywhere from 50% to 74% of Americans who make under $50,000 per year live paycheck to paycheck. Not only is that number astonishing, but three out of ten adults have no emergency funds saved, according to Bankrate’s latest Financial Security Index. With all this uncertainty and the need to continue to provide funding, what can banks do to try to shelter both the financial institution and the borrower from becoming a victim of unfortunate financial circumstances?
1. Make communication a priority when the lending relationship is started.
Consider mailing or emailing new loan or welcome letters to the borrower. Include some of the terms of the loan, when the first payment is due, the collateral that may be securing the loan, and any other important and helpful information about the other products your bank offers. These letters can serve as a way to mitigate fraud, help strengthen the personal relationship with the borrowers, and serve as a tool for cross selling other products your bank offers.
Make a personal phone call about three weeks after the loan has been funded or about ten days before the due date. Ask questions like these:
Are they enjoying their new car?
How is the remodel on their home going?
Did they receive their coupons or first statement in the mail?
Then let them know about any online or mobile banking products they could take advantage of when making their payment.
2. Use the tools and resources your core offers to service loan accounts.
Research the collection tools that may be available to your bank through your core. Just because a loan is not delinquent does not mean that collection system functions cannot be used. For example, set a follow-up reminder to watch for the first payment. Assign a collector or a servicer to watch this first delinquency queue; catching an issue early may mean you divert a crisis in the future.
If you are still ordering and mailing out coupon books, I strongly recommend you think about sending out a monthly statement. If a borrower gets into a financial bind, sometimes the reminders they continue to receive each month in their mailbox motivate them to pay those obligations first. This would, of course, be in addition to the past-due notices they would be receiving.
Consider offering a little rate adjustment if they sign up for automatic payments. If you are worried about them taking advantage of this, make the adjustment contingent upon the continued use of automatic payments. If they decide to take advantage of the offer, don’t give too much leeway to stop and start the service. Include in the note a stipulation that prevents them from signing up and canceling multiple times during the lifetime of the loan and still receiving the rate adjustment.
3. Offer third-party products that provide protection for the bank and borrower during an unexpected financial hardship.
Life and disability coverage for the life of the loan is good for the bank and the borrower and may be a good option for borrowers that are in that 50% to 74% that live paycheck to paycheck. An accident can cause inability to work, and loss of income can quickly turn a good borrower into a struggling borrower. Having this type of coverage helps limit the anxiety of losing the ability to accomplish everyday responsibilities.
You could also offer an extended warranty for cars that may not be eligible for dealer warranty. Car repairs can easily turn into a financial burden that could seriously inhibit the borrowers’ ability to maintain a constant income stream.
Gap Insurance coverage is another product that benefits both the borrower and the bank. Insurance coverage doesn’t always cover 100% of loss in every situation. This product will give the bank and the borrower peace of mind in the event that insurance does not completely take care of the remaining balance of the loan.
And there you have it: three ways you can reduce risk for your bank while maintaining their strong local borrowing relationships. By looking out for the best interests of both the bank and the borrower, community bankers can create an environment of security and success on both sides. Whether a borrower has caused their own financial hardship or been blindsided by a tragic life event, having a strong relationship with them, being able to detect issues early, and having solutions in place to offer assistance during their greatest time of need is a win-win.
It’s highly unlikely that a bank can eliminate the risk of ever making a bad loan, but the question is, can your community bank afford not to try?