Payment holidays – the risks for lenders

With the announcement that the payment holiday scheme is being extended for a further 3 months, with 1.8 million borrowers already having taken that option, it is now clear that number will increase significantly.

We estimate that up to 30% of borrowers will take at least a 3 month payment break, as some that did not apply first time round will do so now, as the effects of the crisis hit household incomes further. It is also looking likely that there will be around 1 million credit card payment holidays and 500,000 personal loan payment holidays. 

Lenders were always going to find the process of agreeing payment holidays challenging;

1. Normal forbearances processes do not factor in significant volumes of customer contacts and these number are going to grow with the extension of the scheme.
   
2. Many of the staff required to agree these arrangements are working from home with different background distractions and in thousands of different locations.
   
3. The ‘staffing requirement’ issue is further compounded by the low arrears environment of recent years.  Collections departments have just not needed lots of customer contact staff who are trained in debt counselling.
   
4. Although the recent lower volumes of lending has enabled underwriting staff to be switched into collections roles, the training task has been, or will be, significant.      

While the popular media often presents payment holidays as an appropriate solution for current circumstances, some in the financial press and certainly those working in lenders, together with regulators, acknowledge that a payment holiday may not be the right choice for everyone.  That has been recognised by some customer focused lenders who have provided a range of options to help customers through the Covid-19 crisis.  

However, we are already hearing widespread concerns from our funder clients that some of the lenders they support are agreeing payment holidays ‘carte blanche’, without carrying out checks to ensure that the payment holiday is the appropriate outcome for the borrower.  They are compounding the issue by not agreeing their strategies with the funder in advance or are failing to report appropriate volume statistics to them.

Inappropriate ‘agreed’ payment holidays will cause problems for years to come.  So it is critical that lenders, having not had to deal with this issue in such volumes for years, ensure that their processes and policies are fit for purpose right now.

Give us a call to see how we can help.