How a global economy makes its mortgage payments on time

Using behavioral insights to improve customer communication and decrease loss rates.


The following is an excerpt from our article Every bank needs a nudge....


It is no secret, the post-pandemic world is likely to have its share of financial troubles. The Consumer Financial Protection Bureau (CFPB) has been vocal about lenders, and in particular mortgage companies, being ready to help their customers. On April 1, 2021, they issued a bulletin that made those expectations very clear.

"CFPB Compliance Bulletin Warns Mortgage Servicers: Unprepared is Unacceptable"

But sometimes, borrowers are not always easy to reach. Generally speaking, pro-active customer contact can lead to a higher resolution rate and a lower loss rate. So, what can a mortgage lender do to improve its contact rates? The United States has something to learn from its neighbours across the pond.....


The Behavioural Insights Team (BIT), also known unofficially as the "Nudge Unit", is a U.K.-based social purpose organization that generates and applies behavioral insights, to inform policy and improve public services. (1)

In the build-up to and aftermath of the 2008 financial crisis, Northern Ireland was hit particularly hard by a housing boom and bust. Many homeowners still face negative equity, delinquency, and ultimately the risk of foreclosure. One of the key behavioral challenges is encouraging homeowners at risk to engage proactively with their lenders so that effective solutions can be found. BIT was commissioned by the Department for Communities Northern Ireland to develop and test a range of behavioral interventions to increase loss mitigation-related customer contact and engagement. A report was created in June 2018 that outlines the results and is summarized in the next section.


Please note, BIT is using Randomized Control Trials (RCTs). In this case, the control group is important to confirm the baseline customer contact business environment, before the new customer contact intervention. That is, RCTs are necessary to determine causality. Meaning, to determine whether the new risk management tactics caused improvement as compared to the existing risk tactics. Please keep in mind, these results need to be validated in your unique environment. While likely a good starting point, these results are not a substitute for performing your own RCT testing.


Given the potential post-pandemic challenges to mortgage servicers globally, this is a particularly interesting study. Customers with payment challenges are often difficult to contact. Plus, many people no longer have a traditional landline-based home phone. As such, if a customer does not wish contact, it is easier today for them to avoid calls from their lenders.

Communicating with collections customers is generally challenging and a critical step to encouraging a customer payment or developing a loss mitigation strategy. The tests utilized several different communication approaches to drive customer response. These approaches included:

  • Letters, email, and text reminders;

  • Behaviorally informed calls to action including personalization, loss aversion, and reciprocity; and

  • Handwritten notes to increase salience.

The response was measured by contact rate for both inbound calling or collections agent outbound calling. The first and third test results demonstrate a significant customer contact improvement over the baseline control results. While a higher contact rate does not automatically lead to a 1 to 1 decrease in loss rates, it will very likely make directional improvements. The results will inform ongoing collections effectiveness by 1) increasing collections customer contact and 2) effectively resolve the customer delinquency.


Notes

(1) Utilizing behavioral economics and behavioral psychology theory, BIT helps companies, government, and related organizations improve various socially important goals. The Behavioural Insights Team is headed by psychologist David Halpern. BIT is affiliated with the United Kingdom government. It was originally chartered as a cabinet-level office. Today, it is a UK-based social purpose limited company. BIT has performed over 500 RCTs and runs over 750 projects. The following Mortgage Servicing example is one of BIT's projects.

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