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Deloitte Zeros In on Servicing Strategies for First-Time Defaulters

The economic environment of the last several years has added to the ranks of first-time defaulters.

According to a survey conducted earlier this year by ""Deloitte LLP"":http://www.deloitte.com, 11 percent of bank customers fall into this category, meaning they have experienced their first default or serious delinquency because of the recent financial crisis and recession â€" and that number may grow should the economic recovery continue to lag.

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Deloitte contends that servicing and default management strategies should be tailored to match these customers' needs, which will allow lenders to capture what will likely be a profitable segment over time, with good risk and reward characteristics.

""As the banking industry generally continues to be challenged on a number of fronts, the search for profitability continues in earnest,"" said Deron Weston, principal at Deloitte Consulting. ""By addressing the servicing and default management needs of first-time defaulters, lenders may have a meaningful opportunity to retain and expand their customer base in a challenging market.""

The results of ""Deloitte's first-time defaulter survey"":http://dsnews.comarticles/first-time-defaulters-an-underappreciated-customer-segment-2011-02-21 led the financial advisory firm to more extensive analysis, in which it pegged first-time defaulters as the ""underappreciated customer segment.""

The company has released ""a follow-up study"":http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/FSI/US_FSI_Servicing%20and%20default%20management%20final_101411.pdf exploring how financial institutions can serve these customers' needs while potentially making them a profitable segment in the long run.

Deloitte says the first six to eight months of a first-time defaulter entering the credit cycle is a critical time to assess environmental changes and behavioral characteristics to identify which borrowers are more likely to result in future losses to the lender.

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High-touch strategies, such as outbound calls and one-on-one servicing as well as strong data will allow lenders to detect potential warning signs, according to Deloitte.

The company says banks might consider isolating first-time defaulters from the general population and establishing servicing strategies that foster frequent communication as well as close monitoring of the borrowers’ accounts. The study also suggests establishing a dedicated servicing unit for these accounts to keep the lines of communication open and support direct interaction to help manage the risk of default.

Sustained favorable payment trends demonstrate a first-time defaulter’s willingness and ability to pay as agreed. Deloitte research revealed that 84 percent of first-time defaulters expecting an improvement in their credit score had scores of 700 or less.

At about eight months into the credit cycle, Deloitte says reducing the frequency of high-touch interaction may be appropriate. At this point the company suggests there may be a shift towards self-service tools and applications, including dialers and voice response units (VRUs).

By the 12th to 15th month, servicing strategies may stress retention and cross-sell opportunities as first-time defaulters become reestablished customers, according to Deloitte. At this point, the company says banks should have enough information about first-time defaulters to offer products that align with this segment’s needs and economic conditions.

The company’s study notes that because first-time defaulters have relatively high customer service expectations due to their pre-default experience as prime borrowers, it’s important that banks focus on delivering targeted and timely service to this group.

In today’s environment, the growing customer segment known as first-time defaulters could prove to be a profitable opportunity, according to Deloitte.

Although some of these customers may represent long-term credit risks, others are likely to regain their creditworthiness as they overcome temporary financial problems such as reduced income and unemployment. Deloitte says servicing strategies tailored to the borrower’s position in the credit reform lifecycle will allow lenders to capitalize on the first-time defaulter opportunity.

The timing of various stages in the return to creditworthiness represent Deloitte’s estimates. The firm’s full study and analysis is available ""here online"":http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/FSI/US_FSI_Servicing%20and%20default%20management%20final_101411.pdf.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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