PERSON OF THE WEEK: Millions of borrowers in the U.S. have received COVID-19 related payment extensions, deferrals or forbearances. Back offices are overwhelmed by the manual processes to support the high volume of interim relief offers. As these options expire, lenders will need to approach hardship and affordability assessments with greater precision. The complexity of appropriate relief options will increase.
MortgageOrb recently interviewed Carissa Robb, president and chief operating officer at fintech and automated loss mitigation provider, Constant, to get her thoughts on managing financial hardships under the current landscape, credit blindspots and compliance risks surrounding consumer protection and loss mitigation playbooks.
Q: Constant entered the market as a fintech lender and then began offering it automated loss mitigation platform to financial institutions and technology companies that serve them. Tell us about your directional change in the context of the current landscape?
Robb: Hindsight is 20/20 in this case. Our decision to build an automated loss mitigation platform for our own book in 2019 was largely to prepare for market compression we thought might surface in the third and fourth quarters of 2020.
We had a robust fintech lending business. When COVID-19 emerged, we exited origination to address the urgent need for intelligent automation to address both short-term and long-term financial hardship. We created the Constant+ platform for our own book, so we could buy deeper into the credit box, but it was very evident that others in the market needed our help.
There’s always been a line of demarcation between origination teams and the back office, supporting them or collecting payments on loans that went sideways. Those relationships have many parallels and should be more cyclical than linear. By strengthening and automating a restructure policy, for example, and leveraging open bank data, one can actually inform the origination policy with attributes otherwise untested. It reduces the credit blind spot.
Q: The unprecedented levels of support via fiscal stimulus packages and relief options, coupled with regulatory initiatives and moratoriums to suspend collection activity are making it difficult to understand when the recovery period may start. What is your opinion on how long the economic downturn will last?
Robb: Any answer would be a total guess. What we do know is that companies have started to move from temporary layoffs to permanent cuts, a signal that the economic damage from the pandemic is likely to be long-lasting. There are a lot of people thinking this is short term and V-shaped but there are too many unknowns with the health crisis, vulnerability of businesses to remain open, strain on households and employers to support full and partial remote learning, and viability of businesses where gatherings are still restricted.
The severity and duration of the macro hardship impacting the markets is one thing, and the longevity and recurrence of micro hardships impacting households is another. We need to be prepared for ebbs and flows of solvency and distress. Failing to do so is irresponsible and somewhat resemblant of our failure to prepare for the last crisis.
Short-term relief options like extensions and forbearances can kick the can on deferred losses for so long before lenders are required to reconcile the true credit risk of non-payment.
We consistently refer to the forbearance plans related to the pandemic, but we’ve had a series of other natural disasters and crises this year. We should be preparing for managing financial hardship with greater precision as a matter of strategy, rather than trying to make it through this specific health crisis. We now have the technology and experience to do better by consumers, proactively, but the industry consistently requires a reaction before making forward progress.
One can be optimistic about the recovery period and still be prepared for responsible loss mitigation strategies and self-service.
Q: Despite market distortions and credit blind spots caused by extended forbearance and other drivers, lenders continue to originate. What are your thoughts on the short- to medium-term impact of origination during this time period? What can lenders do to reduce risk?
Robb: Acknowledge the blind spot and volatility. We are not operating under normal conditions – so relying on prior models and policies is really just a strategy of wait and see.
The sheer number of borrowers under some form of relief program, either through temporary forgiveness programs of debt obligations or stimulus programs to supplement income, should cause lenders to pause and consider the impacts around the transparency of credit worthiness and long term sustainability. The information reported in traditional models and scores might not be as strong of a predictive indicator.
There are two ways to prepare for managing that sort of volatility: 1) explore non-traditional data points to supplement credit blinds spots, and 2) implement strategies and automated solutions to restructure distressed debt on the back-end if ability to repay is challenged. We’ve done that in the Constant+ platform. Hoping it works out is not a strategy.
Q: A lack of automated workflow in most servicing systems has forced investors to track forbearance in Excel or ad-hoc programs. What are the compliance risks? How can automation make a difference?
Robb: Regulators already have boots on the ground, examining relief responses and disclosures about what options may have been available. We’ve seen lost tracking files, consumers being put into forbearance plans they never asked for, and others never processed despite being approved for the same.
These missteps are causing credit deterioration, wasted time and frustration. Misinformation about what a forbearance is and early on, what options one would be left with at its expiration, caused further damage.
Consumer harm is a lesson the industry learned in the last recession, and it is hard imagine any regulatory agency having the patience to watch it unravel this round due to manual errors. Banks will be challenged with additional consumer protection considerations, including operational errors and disparate treatment.
The industry outgrew Excel tracking and access databases years ago, but many back-office shops are struggling to keep their heads above water and put their best foot forward with interim solutions that, unfortunately, become the solution for far longer than intended.
Q: Most of the regulatory guidance for relief options focus on mortgages, with consumer and auto loans only seeing short term extension offers. Why is updating or creating loss mitigation strategies for all types of loans so important?
Robb: The popularity of debt restructuring in mortgage is a result of the last crisis. The industry didn’t really modify mortgages before the Great Recession, but interagency guidance called for action to remediate missteps and prevent an even larger collapse of the housing market. Covenants in securities that were intended to prevent modifications as a mask to cover inappropriate underwriting were thought to have previously blocked remediation of independent defaults due to subsequent hardships.
The same noise is surfacing today, with auto asset-backed securities. The industry will likely learn another lesson in distinguishing reps and warranties to protect investors against bad originations, and sustainable restructuring to stave losses and preserve payment behavior for financial hardships.
The consumer industry needs to catch up to what the mortgage players learned over the last decade – at an incredible cost. The FFIEC has already issued supporting statements encouraging continued collaboration through the downturn. It wouldn’t be surprising to see an increase in modification activity to preserve credit losses; and as a result of regulatory action to protect consumers.