Looking over the horizon of payment holidays and forbearance

Katie Pender

Katie Pender | Head of Client Solutions

Katie is responsible for applying her experience and Target’s technical, operational and digital capabilities to drive disruption and innovation in the mortgage market, focusing primarily on enhancing customer experience. She has a wealth of mortgage market and outsourcing experience, often focusing on establishing new entrants in the mortgage market.

Financial Challenges in 2020

One significant challenge the financial industry is facing, in 2020 and beyond, is the increase in public debt due to the Covid-19 outbreak. Here, we take a look at how businesses can adjust to the short and mid-term demand increase for servicing and forbearance in collections and arrears.

Covid-19: Government Measures to Support the Public

When the Coronavirus pandemic first hit, and the UK went into lockdown, the Government and the FCA were quick to announce a series of measures to help citizens through a period of income loss. This included the introduction of mortgage payment holidays and breaks on payments for other loans (such as car finance and personal loans), for a period of three months.

What Is a Payment Holiday?

Though lenders will be familiar with mortgage payment holidays, the concept of deferring mortgage payments to temporarily avoid the financial burden has now been thrust into the spotlight with the Government’s nationwide mortgage holiday scheme.

What Effect will the Payment Holidays Extension Have?

With the FCA in discussions on extending payment holidays for up to 18 months, it’s clear that the impact of the coronavirus pandemic on the economy will last for some time yet, but the exact impact of this decision is uncertain.

One thing we do know is that lenders have had to adapt to this latest challenge, administering high demand for payment holidays while supporting customers with forbearance, especially in collections and arrears.

There is a further challenge just over the horizon that lenders should be addressing right now: once the payment holiday period is over, whether that be in a month, a year, or longer, the additional customer demand volume caused by such holidays will continue to create a huge spike of activity, especially when it comes to collections and arrears.

Arrears and collections capacity planning

While the temporary measure of payment holidays has been very much welcomed by the seven million plus customers who have so far applied, the holiday period won’t last forever, and payments will need to be made.

For some customers, this won’t be an issue, as their income returns to pre-Covid levels. But for others, there will be a longer-term requirement for help with making payments. Some help may well continue to come from the government of course, but there will undoubtedly be an additional burden falling on lenders as they try to handle this increase in demand for customer services.

How can Lenders Manage Increased Debt Servicing Requirements?

Business Process Outsourcing

There’s a clear need for short-term resource to help lenders to be able to deliver fair and effective loan administration and payment collections. Outsourcing these services is one way of supporting customers and responding quickly to changes. This set up is ideal for a short-term critical business need, with the added flexibility of developing the response as the environment and the challenges evolve into arrears management.

Taking on help in a crisis needn’t involve a long-term commitment, and a lengthy contract. The beauty of outsourcing collection and arrears servicing allows lenders to evolve the service from a “plug and play” response in the short term, and one that can develop into a value-add long term relationship that will evolve over time.

Technology-Led Solutions

From low-level integration of systems and processes providing tactical support, with a speedy set up and deployment driven by technology, there is a perfect opportunity to be able to adapt into longer-term arrears and collections management. This strategic partnership supports not only the requirement for additional resource, but also enables expert handling of vulnerable customers, and good customer outcomes.

How are Customer Needs Changing due to Covid-19?

After mortgage payment holiday periods have expired, lenders will need to prepare for a range of different customer needs and behaviours depending on their financial situation following the pandemic. A “one size fits all” approach won’t be possible, as individual customer journeys and the level of support required will vary.

We expect to see different types of customers, each with their own complex needs:

  1. Uncertain: Including employees in fear of redundancy, as well as the self-employed and business owners. These people will be facing uncertainty on what income they expect over the next 6-12 months as they seek to recover their business from a period of no work or limited trading. These customers will have needs beyond payment holidays, to reduce payment commitments until their income re-stabilises.
  2. Curtailed: These customers may have been furloughed or received lower levels of income for a short period (3-4 months) and requested payment holidays during this period. They are expected to sustain full payments following the payment holiday including uplifts in future payments as a result. They may want to, and be able to, make over-payments to re-balance their increased monthly instalment over time. Some customers may want to increase the term of their mortgage rather than have higher payments over the same term. There may also be customers who had no financial detriment from the crisis, but who may have taken advantage of payment holidays to reserve funds for their future. They may not understand the spread of capital and interest as a result of taking the payment holiday, which could result in customer dissatisfaction over time.
  3. Troubled: These customers are likely to have experienced an unexpected redundancy, perhaps after a period of furlough. They may have found new employment, but at a lower income level. They have suffered a significant impact financially and will be at risk of not being able to meet payments in the short-term as well as longer-term.
  4. The Fortuitous customer. These people have been unaffected financially during the crisis, and may actually have some surplus income available to make over-payments, since their spending may have reduced.

It’s important that lenders are aware of customers’ individual circumstances and have approaches in place to be able to fairly handle customer accounts, with the relevant forbearance. There will undoubtedly (and unfortunately) be a significant demand from customers for support with arrears management.

Lenders should review capacity and capability, carefully assessing what services they can safely handle in house, and what could (and should) be outsourced. This short-term capacity planning is critical to keep on top of demand.

Longer term mortgage payment plans

After the peak in demand has passed, to help to alleviate future peaks, and enable good long-term customer outcomes, there is the option to introduce payment plans. Such payment plans are designed to spread the cost of payment defaults, at a manageable level. This not only helps alleviate pressure on the customer, but also helps to regain some income for the lender and avoid litigation and repossession. Payment plans take a collaborative approach between the customer and the lender, to fully and robustly assess affordability, whilst also ensuring payment contributions can be made.

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About Target

We have over 40 years of experience in managing emerging trends in financial services. We work with over 50 banks and building societies, helping to ensure good customer outcomes, and we have extensive capability in supporting vulnerable customers who may find it harder to pay. We work with lenders to successfully and safely manage arrears and collections for mortgages and unsecured loans, providing payment plans in line with affordability and compliance.