The lending landscape can be highly volatile, with a variety of risks having the potential to cause significant financial losses and reputational damage. One type of risk that can have a high impact on lenders is credit risk, which results from borrowers defaulting on loans.
There are a myriad of factors, not controlled by the borrower, that can increase credit risk and adversely affect a borrower’s ability to repay loans. Some identifiable factors include market instability, fluctuating interest rates across industries, inflation, and changing economic conditions. Changes in a borrower’s income or employment status may also be factors that can affect credit risk throughout the life of a loan.
In today’s fluctuating market, the absence of agile and responsive portfolio management practices that properly help combat risk can exacerbate the impact of other credit risk factors. Portfolio reviews provide a means of assisting lenders in being proactive in their portfolio management, allowing them to appropriately respond to fluctuations in the market along with changes in consumer finances.
The current adversities of today’s market
This year, consumer debt reached a record high of $16.9 trillion, making the increasing reliance on credit cards and personal loans no surprise. This historic surge in balances comes in the wake of the Federal Reserve’s (Fed’s) attempt to combat rising inflation through a rate-hiking campaign. Consequently, delinquency rates for loans across the board have increased, including mortgage loans.
The housing market is still tumultuous, coupling soaring mortgage rates with inflated home prices. Although there has been an increase in delinquency rates, mortgage delinquencies and foreclosures continue to remain relatively low. This can mainly be attributed to a strong job market and the formerly record-low interest rates that many mortgages are currently locked into. By the end of the second quarter, mortgage delinquency rates dipped to around 3.37%.
However, this doesn’t mean lenders should let their guard slip. Since the cost of borrowing has increased due to the Fed’s interest rate increase, lenders must diligently monitor any changes that might affect a borrower’s financial profile. The return of student loan payments may also pose a significant challenge for borrowers. In the U.S., student loan repayments have restarted and could negatively impact the credit scores of borrowers who are unprepared for the expense and could run the risk of an uptick in delinquency rates. The CFPB warns that the risk of delinquency on all types of loans may increase as student loan payments are required to resume
Lenders must actively support their borrowers’ financial success, starting with a comprehensive view of a borrower’s financial profile. Lenders must constantly be on the lookout for delays in payments, serious delinquencies, and any other borrower behavior changes.
How portfolio review can benefit lenders and consumers
As the lending landscape continues to shift, lenders must take the necessary steps to mitigate risk and help consumers. Leveraging income and employment data can assist in identifying problematic accounts before they have a chance to default. An adaptable portfolio review process can help make quick determinations tailored for individual borrowers based on segmentation and treatment strategies.
Establishing portfolio review procedures with cross-functional teams to oversee the process allows lenders to harness the full benefit of portfolio reviews. This means building teams consisting of members across risk management, credit analysis, and business line units, which fosters diverse perspectives and comprehensive analysis.
Lenders should also consider developing data interpretation tactics and training teams to effectively interpret key data, helping them understand how credit risk is influenced by market trends, interest rates, and borrower information. Lastly, income and employment insights should be utilized to inform lenders about a borrower’s propensity to repay debt. This data can assist lenders in developing account management strategies, credit reissuing, and account treatment strategies.
Although portfolio reviews are highly beneficial for lenders, they are also a valuable tool that can be used to aid consumers. Portfolio reviews greatly benefit consumers by enabling lenders to assist proactively and segment consumer accounts. Consumers can also gain lifetime value through a lender’s account treatment strategies, which include Credit Line Increase programs.
During this heightened risk period, lenders must prioritize managing and mitigating risk to sustain growth amongst their borrowers. Implementing portfolio reviews equips lenders with an effective strategy to minimize and manage risks.
Joel Rickman is the Senior Vice President and General Manager of Verification Services, the largest division of Equifax Workforce Solutions.