What collections are: from a missed payment to recovery

What collections are

A loan is repaid on a schedule. When a payment due on that schedule is not made in full, the loan is in arrears, and the lender's collections work begins. Its aim is not only to recover money: it is to bring as many borrowers as possible back to regular payments, to agree a realistic arrangement with those who cannot pay as planned, and to limit the loss on those who will not repay, while treating every borrower fairly.

Collections sits at the end of the credit process but feeds back into its start. What is learned about who falls behind, and why, informs the score, the limits and the price offered to new borrowers; the credit scoring course describes how behavioural and collection scores use that information.

The stages: from reminder to recovery

Lenders usually organise collections in stages that follow the time since the first missed payment. The stages below are a common pattern; the boundaries between them are each lender's choice.

• Before the due date: reminders, and a payment method that makes paying on time easy.
• Early collections: the first weeks after a missed payment, when the aim is to bring the borrower back to regular payments with a reminder or a call.
• Late collections: longer arrears, where the lender looks at the borrower's situation, offers a payment plan or changed terms, or prepares further steps.
• Recovery: after the loan is treated as in default, collection through an agency, legal action, the sale of collateral or the sale of the debt.
• Write-off: removing from the books the part that is not expected to be recovered.

Days past due: the common clock

The stages are measured in days past due: the number of days since the earliest payment that is still unpaid fell due.

Days past due = date of assessment − due date of the oldest unpaid payment

A worked example, with illustrative dates: a monthly payment of 300 was due on 5 March and has not been paid. On 4 April the loan is 30 days past due. If the payment due on 5 April is also missed, the loan is 61 days past due on 5 May, because the clock still runs from 5 March, the oldest unpaid payment.

The Basel Committee's 2017 guidance on the prudential treatment of problem assets treats an exposure as past due when any amount due under the contract has not been paid in full on its due date, counted from the first day of a missed payment. It classes as non-performing, among others, material exposures that are more than 90 days past due, and exposures for which full repayment is unlikely without the bank relying on collateral, even before 90 days. The guidance notes broad convergence among supervisors towards a 90-day threshold, while the wording, the treatment of partial payments and materiality thresholds still differ between jurisdictions.

When a borrower is in difficulty: forbearance

Not every borrower who falls behind is unwilling to pay; a borrower may have lost income or faced an unexpected cost. The same Basel guidance defines forbearance as a concession that a lender grants to a borrower experiencing financial difficulty in meeting its commitments, which the lender would not otherwise consider. The concessions it lists include extending the loan term, reducing the interest rate and granting a period without payments, known as a grace period. It adds that financial difficulty can be identified even before any payment is missed.

Some markets make this a duty. In the United Kingdom, the Financial Conduct Authority's consumer credit rules require a firm to treat customers in or approaching arrears or in default with forbearance and due consideration, and give as examples suspending, reducing, waiving or cancelling further interest or charges, deferring payment of arrears, and agreeing a repayment arrangement that allows a reasonable period to repay. Lesson 5 explains how such arrangements are designed and counted.

How lenders may contact borrowers: rules differ by market

Most markets set limits on how debts are collected, but they differ in whom the rules cover and how precise they are. In the United States, the Fair Debt Collection Practices Act applies to debt collectors, defined to include those who regularly collect debts owed to another, and excludes a creditor's own officers and employees collecting in the creditor's name. It bars contact at an unusual or inconvenient time or place, unless the consumer has agreed or a court has permitted it, and, absent knowledge to the contrary, treats as convenient the hours after 8 in the morning and before 9 in the evening, local time for the consumer. Regulation F, issued by the Consumer Financial Protection Bureau, presumes that a collector complies with the limit on repeated calls if it does not call a particular person about a particular debt more than seven times within seven consecutive days, nor within seven days after a telephone conversation with that person about the debt.

The contrast matters: the UK rule quoted above applies to lenders as well as to debt collectors and focuses on how customers in difficulty are treated, while the US statute focuses on the conduct of third-party collectors. A lender working in several markets needs to check, market by market, who is covered and what is required; the comparison of lending rules sets out what applies in each market, and lesson 7 returns to the principles of fair conduct.

Questions to settle before building collections

• How days past due are counted, including how partial payments are applied.
• Where each stage begins and ends, and what happens at each.
• How a borrower in difficulty is identified, and which arrangements can be offered.
• Which contact rules apply in each market, and whether they cover the lender's own staff, agents or both.
• How collection results feed back into the score, the limits and the price.