Disaster # 5 - Wrong Debt Relief to the Wrong Debtor

Part 5 of a series: Disastrous Debt Interactions

A new Equifax map shows that COVID-19 financial stress varies by location. Geo is just one factor in the optimal targeting of a debt relief offer.

“Good. Fast. Cheap.  You can only pick two.” It’s an old adage apropos to the current massive stimulus/debt relief apparatus.  It’s doing good. It was fast in the making. But it’s certainly not cheap, in part because help is sometimes going to the wrong people. For instance: the one million dead people who received IRS stimulus checks.

The private lending industry may not be into stimulating the dead, but they face the same conundrum of trying to help lots of people, lickety split, and in their haste are making some mistakes. I will address two key issues here:

1.   Bias toward the financially literate and well-off .

Instead of targeting borrowers at greatest risk, most debt relief right now is being made available for the asking — and to ask for something, you have to know about it…read about it…understand it…be comfortable with it.

Per a study by the St. Louis Fed, financial literacy is highest among the affluent. So that executive family with no job loss and a $500,000 mortgage is more likely to know about the CARES Act forbearance vs. a working class family struggling with their $150,000 due to part-time work hours being cut.

This is especially true in light of confusion about whether deferred payments are due in a balloon payment at the end of a forbearance. Some of the largest mortgage lenders were frightening borrowers about these balloon payments, even though the CARES Act directs that repayment should be tacked on to the end a mortgage.

When it comes to credit card payment assistance programs, Consumer Reports has complained that they’re too hard to find and use. In a letter to industry leaders, CR asks issuers to assure relief policies “are appropriately publicized and upheld by customer support personnel” and even suggests that cardholders be automatically enrolled in a program once an account goes 30 days delinquent.

2.     Short-term forbearances that kick the can down the road. 

In our two decades in collections marketing, we’ve learned delinquency is both a problem of finance and habit. Our aim is to get borrowers into the habit of making timely payments they can afford – not skipping payments, which is what happens in a typical forbearance. 

“Wow, this not making payments thing sure is liberating,” many will surmise.  Who wouldn’t prefer to have more dollars in their wallet for “…that great buy that suddenly hits your eye” – as we once wrote in an ad for Citi – instead of paying it to the finance company? 

The even bigger problem is what happens when the forbearances end: inevitably the debtor ends up farther in debt. This is manageable with CARES act mortgage relief — paying off a house in 30 years, six months, instead of just 30 years, is not life altering. 

But on a credit card, 6 months of missed payments could put someone thousands deeper in the hole, especially if interest continues to accrue during the forbearance.

And, since credit card payments are not fixed – they go up and down with your balance – a borrower could be hit with resumed payments even higher than the ones that were put on hold.

Keep in mind that over-indebtedness is not simply a COVID-19 problem.  2020 began with a record $1+ trillion total credit card debt. Millions of Americans were near their limits even before the pandemic landed at our airports and cruise line piers.

Right Offer, to the Right Borrower, at the Right Time

At Positive Collections Strategies (PCS), we identify and engage borrowers at the greatest risk for credit loss, and serve up the right offer, at the most opportune moment, to generate the best return on investment. Let’s call that a Collections ROI or C-ROI for short.

If “maximizing ROI”and “Right Offer. Right Borrower. Right Time.” sound similar to the principles of modern personalized marketing, you’re 100% right. Collections is marketing. 

Here’s a brief glossary of the programs in the PCS portfolio:

• Pre-delinquency: Often the signs are obvious when a borrower is approaching the edge, even if the account is current. A pre-delinquency program identifies these customers, and engages them to seek help before the problem occurs.

• Forbearance: While we’ve mentioned its downside, a temporary postponing of payments is appropriate when it’s clear the income reduction is temporary, and there will be no balloon payments at the end.

• Threshold offer: The moment a borrower misses a payment deadline, the threshold program sends a text message, email or robocall, offering a waiver of the late fee, and avoiding any report to the credit bureau, if an immediate payment is made. 

• Payment arrangement: If a previously punctual payer has missed two or more payments, chances are there’s an income issue. A payment arrangement is a series of smaller payments – usually scheduled in advance for automatic debits over the coming few months – with the goal of bringing the account current.

• Balance liquidation: This means converting a credit card balance into a short-term personal loan at a lower interest rate. This can be done either within the original bank, or via a balance transfer to a new lender.

• Settlement: Even though settlements can be abused by 3rd party settlement “mills,” a settlement made directly between creditor and debtor can be a win win for both sides..

There’s no “one size fits all” in collections marketing. And, despite the old song, anytime is not the right time to make a debt relief offer. Targeting, timing and offer are crucial to maximizing Collections ROI..