Arrears and debt collection: Preparing for trouble

As arrears increase and underwriting tightens motor lenders
face an uncertain 2008, Brian Rogerson finds

Automotive finance arrears are predicted to rise sharply over
the next 12 months as higher borrowing costs and the fallout from
the credit crisis force more companies and individuals into
difficulties.

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The Credit Services Association (CSA), which represents some 95 per
cent of the UK debt collection industry, forecasts that the figure
for the consumer credit total passed for collection will rise to
around £22.7bn by the end of 2007 (see chart 1). Worryingly, it
predicts that this figure is likely to increase to between £23.9bn
and £24.3bn by the end of 2008 – although it warns “the real
figures may be higher still”.

Najib Nathoo, president of the CSA says: “The size of the debt
collection industry has effectively tripled in four years.
Underlying debt has increased significantly and lenders
increasingly want to move any bad debt off their books.

“Consumers are tightening their belts against the background of a
credit squeeze and access to credit is becoming increasingly
difficult as lenders tighten their lending scorecards,” he
adds.
The rise in the London Interbank Offered Rate (LIBOR), and the fact
that most UK lenders have still not announced losses that may be
linked to the US sub-prime exposure, is also likely to exacerbate
the position.

The facts of repayment stress
In a sector notorious for its lack of transparency on the subject
of default, UK automotive lenders remain as reluctant as ever to
discuss the position of their arrears. Even the Finance &
Leasing Association was coy to give Motor Finance an indication of
default statistics reported by members – although admitting it was
“slightly increased over the year”.

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Privately, automotive lenders tell of “disturbing trends” and
“difficult times” and admit that underwriting criteria are being
tightened.

“There is ample evidence that lenders are tightening their
underwriting policies.” Neil Munroe, External Affairs director of
Equifax tells Motor Finance. “This is especially so around the
near-prime margin where many more potential borrowers are being
declined – or having to pay more for their loans.”

Munroe stresses that lenders are already anticipating having to
report increased bad debt levels on their interim reports – and are
not seeking to increase this unnecessarily.

Nathoo explains that the new financial rules under Basel II are
responsible for some of the growth in collection work. The rules,
due next year, have encouraged banks to move bad loans off their
books faster than previously because they will be required to hold
more capital against risky assets that may default.

Munroe adds: “The odd missed payment on a credit search – which was
previously waved through – is now having a far greater impact on
underwriters’ decisions. Lenders are looking closely for signs of
repayment stress. They are mining deeper and need more persuading
to accept anything other than cast-iron proposals.”

Munroe believes that when fixed-rate mortgages convert to variable
rates early in 2008 there will be a “fight for wallet” amongst
borrowers. “Motor loan repayments will still be a high priority,”
he says, “but will increasingly have to compete with mortgages for
priority.”

Collection strategies to change

Munroe predicts that lenders will face not only a significant rise
in arrears for the first time since the 1990s economic downturn,
but also a change in debtors’ attitudes: “A social change has taken
place, with a shift in people’s behaviour and attitudes towards
arrears. The rise in people prepared to go for an Individual
Voluntary Arrangement (IVA) or bankruptcy is, as in the US, a
symptom of this change.”

Gill Payne is head of Collections, Finance Litigation and
Recoveries at Shoosmiths. She says: “Arrears levels are rising. The
larger finance companies are sensibly starting to get to grips with
the problem.”

She adds: “Most lenders’ collection departments are dialler driven
which is good for high volumes and low arrears. With the current
rise in over three-month arrears, however, different skill sets are
required.”

Payne confirms that more lenders are outsourcing their debt
collection either directly or by selling debt. Shoosmiths is
experiencing greater demand for its collections expertise and
advice in the prime, near-prime and non-prime sectors. Commenting
on new approaches to collection work, she says: “Instant
repossession is not the first call it used to be and lenders are
actively trying to keep the customer in the vehicle. Rehabilitation
of the defaulter is the principal aim and more emphasis on finding
a solution at the back-end of the process, hopefully leading to
less repossession both of peoples’ vehicles – and homes.”

Lenders spurn IVAs – but bankruptcies up
Consumer Credit Counselling Service (CCCS) has revealed in its
quarterly publication Trouble Totals that IVAs and bankruptcies
fell by 0.8 per cent to 10,698, whilst bankruptcies rose by 8 per
cent to 16,258 in Q2 2007 (see chart 2), compared to the same
quarter the previous year.

Malcolm Hurlston, chairman of CCCS says: “The fall in IVAs
reflects the increasing dissatisfaction of creditors with the
for-profit IVA sector. As a result, we have seen bankruptcies
increase.
“Calls to the CCCS helpline are up – which suggests that people are
coming to us earlier when the financial counselling can resolve
their problems.”
Hurlston predicts that the biggest problem today for consumer
borrowers is no longer the credit card, but rather from secured
burrowing and the rising cost of mortgage debt. He emphasises: “The
Council of Mortgage Lenders has announced that there has been a 30
per cent year-on-year rise in repossessions in the first half of
2007. There is more bad news to come.”

New CSA boss to press government for
change
This October Najib Nathoo, a founding partner of 1st Credit, was
elected president of the CSA as it enters a new period of challenge
and change. His appointment comes at a time of major progress
within the debt collection industry, not least towards greater
representation with government. It also coincides with the launch
of the first ever debt manifesto calling for changes in the law
that currently focuses too much on the rights of consumers and not
enough on their duties to fulfil their financial obligations.

The CSA is also challenging the government to tackle the issue of
“information sharing”. The biggest problem impacting upon the
recovery of debt, Nathoo believes, is the lack of rightful access
to information about debtors who have wilfully absconded or
disappeared so as to evade their debt obligations.

“Specifically,” he says, “we believe there should be a legal
requirement for individuals to register an address with their
creditors, and inform creditors if they move. This would,
practically overnight, protect the innocent from the incidences of
‘mistraces’ that have been allowed to overshadow the real issue of
certain debtors committing deliberate fraud or evasion.”