Chances are good that anyone of a certain age will remember the phrase “Aim High in Steering” from their driver’s education class in high school. That’s because most high school driving instructors in the 1950’s and 60’s were trained by the Smith System Driver Improvement Institute, which coined the term to help teach students “Defensive Driving.”
“Aim High in Steering” reminded students to look where they’re going, not where they’re at, in order to anticipate and avoid trouble further down the road they were travelling.
So what does that have to do with banking? Plenty, if you want to avoid crashing into higher loan losses. We’re all banking at the speed of light these days – and this means we need to look far ahead for signs of trouble in a customer’s account and take pre-emptive steps to help them avoid it.
For example, consider home equity lines of credit (HELOC) resets. Mortgages written in the go-go days before the housing bubble burst in 2007 often had home equity lines of credit attached to them that featured ten years of interest-only payments before full amortization would kick in. When this “end of draw” period occurs, monthly payment increases of $200 to $500 – or more – are not uncommon. As shown in the graph below, the resulting shock to an already stretched family budget frequently leads to missed payments and higher default rates.
The Office of the Comptroller of the Currency (OCC) and other regulatory agencies were concerned enough about this risk that they provided formal guidance to lenders in July 2014 urging them to get out in front of the potential problem by engaging borrowers in a discussion of options well before their HELOC payment reset.
For financial services organizations, those that were “banking defensively” had already anticipated the trouble ahead. They had programs in place for proactive, multi-channel outreach to HELOC borrowers as early as two years before the end of their draw period. This gave these banks plenty of time to establish a dialog with consumers and discuss alternatives to default before the pressure of missed payments and its consequences made such conversations difficult.
But what about more subtle signs of trouble? If the 10-year mark on a HELOC was like flashing road hazard sign, are there ways to spot less obvious, but no less dangerous, indications of borrower distress that might be further down the road?
At the Consumer Bankers Association (CBA) LIVE 2015 conference in March, Michael Uline, a senior partner at Insight Financial Marketing, gave a presentation on “Pre-Delinquent Consumers: How to Find and Help Consumers Close to the Edge.” IFM’s work in this area found that indicators such as increased usage of credit lines, dwindling balances in demand deposit accounts and use of pay-day lenders can point to consumers who are one negative life event away from falling into delinquency and possibly damaging their credit for the future, even before a single payment has been missed.
Armed with this information, banks could conceivably reach out to these customers proactively to offer assistance. Michael pointed out that this is a very delicate topic for most consumers. But, that shouldn’t scare banks away. In fact, our own research shows that more than half (53 percent) of consumers say proactive messages could have helped them avoid an issue in the past. Customers are looking for companies who will be partners in their financial futures – not just traffic cops when something goes wrong. Proactive “defensive” banking requires careful messaging but the upsides for both banks and consumers are many. Help customers avoid potentially preventable and costly crashes – and help your business stay ahead of the curve.
That’s why it pays to bank defensively.