5 Considerations for Managing Credit Through a Crisis

We are living through unprecedented times and financial institutions are a critical piece to bringing stability to their customers’ lives. That being said, financial institutions still need to take prudent measures to ensure that they are managing risk. Upstart is quickly managing through many of the same challenges as we work with our bank partners, and I wanted to share 5 considerations I am thinking about for how to navigate this environment in the short term that will pay off, both for the company and for the borrowers we serve, in the long run.

1. Take care of your customers.

First, and most importantly, we all need to make sure we are doing a good job taking care of our customers who are impacted by this crisis. While each program may require a different approach there are several common threads for how to work with customers. This probably goes without saying, but it’s also the most important thing. All of these things aren’t just the right thing to do, but they help build trust with your customers. A few specifics we have been focusing on:

• Be proactive in notifying customers of what options are available for hardships or forbearance. Whether that means notices in your online servicing experiences, emails to impacted customers, social media posts, or just a general message on your site — make sure your customers know how to reach you.
• Make your alternatives easy to access. Easy, digital ways to access relief programs can ease the process for customers, ease the burden on your call centers, and help ensure you can respond to your customers quickly.

2. Find leading indicators and watch them closely.

Under normal circumstances, most lenders manage their portfolio through metrics like delinquent loans or charge-offs. However, in a fast-paced environment, these metrics are far too slow to be effective (especially if there is a grace period before loans become delinquent). In the current environment, you may need more dynamic metrics like the number of hardship requests or number of loans with a payment past due. It may also be useful to combine multiple metrics and look at metrics like a percentage of a portfolio that is past due or in hardship. To help make the most sense of this data, it can help to compare it to data from a year earlier to help adjust for seasons and day-of-month variations. Upstart has been constantly iterating on finding the best metrics to understand how this crisis is impacting outstanding loans.

3. Spend some time looking for trends.

As you find and track your leading indicators, look for any trends within the data that could be actionable. Are your hardship requests coming from delinquent loans or on-time loans? Are hardships or delinquencies clustered in certain regions, occupations, or other ways that might give you more targeted ways to respond? Once you develop a consistent set of metrics to watch regularly, it’s important to spend time digging a layer deeper to see what sort of more targeted responses might be available to you. This process is one of the most challenging — because we often don’t know exactly what we’re looking for — but it is also where we have found the most insight if we can find the right questions.

4. Adapt origination processes intelligently.

As customers can’t come into branches, we need to find ways to make the borrowing process easier. Are there ways for potential borrowers to have conference calls with branch associates? Can they easily submit their paperwork digitally? As we do make this process easier, it is important to also think about ways you can use the origination process to help manage risk outside of just the underwriting policy. Is there extra documentation you might want from the applicant in the current environment? Can you target those requirements to a subset of applicants who are at higher risk? We have found that credit score isn’t a great indicator of increased risk right now — so finding other ways to manage risk can be crucial.

5. Consider additional controls around risk-based pricing — beyond the credit score.

Many lenders are looking to reduce their risk during a macro shock like this — but some mechanisms to do this can be more effective than others. While raising minimum credit scores is the most obvious method to try to reduce risk it has two key challenges: (a) it is a backward-looking metric that is not reflective of future risk and (b) it applies broadly across applicants and is not targeted at those whose risk has increased the most. During an event like this, some people are more impacted than others and risk-based pricing models may allow you to target increased risk assessment on the most impacted applicants while having smaller impacts on others. In addition, changes to application processing can also help mitigate credit risk. Finding more targeted ways to manage risk can help banks meet their mission to help their communities by continuing to make lending available to those in need.

It is during these times that we all have an opportunity to build trust with their customers, continue to service their needs, and plan for the future by building resilient business processes that can assist consumers while prudently managing risk. And although we are all being stretched and challenged, we believe that we will all come out stronger and the quick thinking and execution of today will better prepare us for the future.

We’re learning a lot with each new day managing through this crisis. I’m always happy to set up a time to share experiences or notes with others in our space so we can learn from each others’ experiences. If you’d be interested in talking through any of this, please feel free to send me a message!

Originally published at https://jeffkeltner.com on April 27, 2020.