Demand foroutsourced collections services should grow during 2022.Pandemic-related stimulus and other borrower support has or will be ending, which will likely cause a rise in delinquency and increase credit unions need for additional collection support.
Lower delinquency over the past few years has been a result of government stimulus, student loan and mortgage forbearance, restrictions on renter evictions, lenders empathy working with borrowers to provide loan modification options, and tightening of credit underwriting standards. This environment is expected to change in 2022.
Overall, your members will likely see lower savings levels and weaker balance sheets, particularly historically marginal borrowers. Forecasted consumer loan demand and originations are predicted to reach pre-pandemic levels and lenders are expected to begin relaxing their credit standards.
Delinquencies
Virtually all experts believe delinquency rates will increase from their current historic lows for all forms of borrowing. With a very strong job market, delinquencies will not likely deteriorate to levels of great concern. Nonetheless, now is the time to make sure risk management practices and tools are in place to mitigate the potential downside impacts your credit unions bottom line.
Used Automobiles
One particular area of concern for credit unions in 2022 will be their used auto loan portfolios. During the pandemic, supply chain disruptions led to very low inventories of new cars and thus pushed used car demand and prices to all-time highs. As these supply chain issues resolve, used car prices will return to more normal levels. This will result in a lot of used car loans with very high loan-to-value ratios and borrowers potentially getting upside down on their loan payments.
Early intervention with delinquent borrowers will be key to preventing them from simply giving up and walking away from their vehicles, much like what we saw during the subprime housing crisis. As the credit markets normalize, lenders might experience a higher number of delinquent auto loans. Once the used car market softens, the severity of losses might increase.
Credit unions should keep this in mind when forecasting their provisions for loan and lease losses in 2022.
Workforce Constraints
With labor markets already tight and likely to tighten even more in 2022, credit unions should audit all their labor-intensive processes and consider outsourcing and automation solutions.
Automation
As employee costs rise, demand for automation will increase. Omni-channel solutions that include interactive voice response (IVR), texting, and email to promote self-service options will likely experience an upsurge. Demand is expected to increase for newer capabilities like data aggregation that enable financial institutions to customize their collections strategies and tactics to utilize tools generating best results for each borrower.
In short, credit unions will need to use their people resources (whether internal or outsourced) in a more targeted and strategic manner to keep costs down.
Near Shoring/Remote Work
Flexible work arrangements and vendor utilization (onshore and near-shore) will become increasingly important cost-control options as labor costs and workforce shortages continue to plague the industry.
Regulatory Changes
The Consumer Financial Protection Bureau’s new Regulation F impacts third-party debt collection agencies. It also impacts creditors, first- and third-party agencies collecting on California consumers through the State of California’s Rosenthal FDCPA. In general, the regulation places limits on call and contact frequency. However, the regulation does favor modern digital communication by not limiting the number or frequency of text or email communications.
Summary
Expect to see the following changes to the lending environment in 2022:
- Expiring governmental stimulus
- Anticipated increase in loan originations
- Loosening credit underwriting standards
- Rising delinquencies
- Used car values normalizing
- Tightening labor markets
- Expanded regulatory pressure
Action Items For Credit Unions In 2022
In this new environment, credit unions will need to focus on modernizing their collection operations. Consider implementing communication via IVR, texting, and email to promote self-service options, and if needed, provide borrowers the option to speakwith a live representative. Further modernization could include data aggregation and determining the cost benefit of outsourcing collection activities to augment current operations and to ensure your institution has scalability.
SWBC’s Financial Institution Group has your total solution for consolidating services such as outsourced collections from multiple vendors with one, strategic partner. By combining risk management, payments, and income generation products and services with SWBC’s Total Solution, you can solve many of the challenges your institution will face in the changing environment.Click here to learn more.
Blake Hastings is SVP of Corporate Development at SWBC.
