Last month I chatted with the head of collections at Lending Club, Cathy Pickhover, about their collections practices. It was quite an illuminating discussion. We covered a number of different topics related to collections and we started off talking about what happens when a borrower misses a payment.
Q. Describe the process when a borrower misses a payment.
A. Because nearly all borrowers are doing ACH payments every month we know almost immediately if a payment fails. We then contact the borrower by phone and/or email to find out what is wrong – attempting to shape borrower behavior in the first contact attempt is critical. If that contact fails, we will generally continue trying for the next 30 to 60 days depending on a combination of the escalation behaviors such as no contact, refusal to pay, etc. If there has been no payment, we will outsource the loan to a third-party collections agency that can use even more advanced technology and tools. Note that, depending upon the borrower response (or lack thereof), we may hand off the loan even sooner than 30 days.
Q. Tell us about your collection agencies. Who do you use and why?
A. After reviewing a variety of collection agencies earlier this year, we decided on FMA Alliance in Houston and FMS Inc. in Tulsa as our current providers. These two are continually evaluated head to head in a champion/challenger setup so that we can closely monitor performance and reward excellence. We want partners that can scale with our growth. Moreover, we want agencies with the latest technology, excellent security, catastrophe planning and also reasonable fees that would reward us for the increased volume.
Q. The question many investors want to know is how are you combatting fraud – such as those instances when a borrower takes out a $35,000 loan then never makes a payment.
A. We take these situations, called “straight rollers”, very seriously at Lending Club. The first thing we look at is the viability of a collections lawsuit and post-judgment remedies such as real estate liens, bank levies, and wage garnishments if allowed in the borrower’s state. If we believe we have a reasonable chance of recovery, we most likely will sue the borrower. We have dozens of judgments and stipulations to judgement out against borrowers right now and I may even be appearing at trial next month.
Q. What about those instances when a borrower just declares bankruptcy after recently obtaining a loan? There is nothing that annoys an investor more than that.
A. If a borrower has retained a bankruptcy attorney, we must immediately discontinue contact with them. We will typically charge-off the loan 60 days after notification of the filing. If we feel there is obvious fraud at work we may file a bankruptcy objection. (Note: this is very expensive and we need to be sure we have a solid case).
Q. What about debt sales? Do you sell your charged-off loans?
A. We have just recently put the systems in place to allow for charged-off asset sales. And for those loans that we cannot sell we continue to work the accounts internally or by using third-party agencies.
Q. What is the deal with payment plans? It seems like there are a lot of borrowers on payment plans and some are on one very briefly?
A. We have just over 300 borrowers on performing collections payment plans involving temporarily reduced payment amounts (details are available in the downloadable historical file). For reference you can compare that to the over 55,000 currently active loans.
Q. These are fixed term loans so how long will you allow someone to be on a payment plan?
A. We don’t grant term extensions or restructuring for borrowers who are late. We expect a borrower to begin recapturing any deferred amount within six months.
Q. How many people in the collections department at Lending Club?
A. While we can’t share exact numbers I can say this – we have doubled the number of people in the collections team in the last six months and the total resources we are utilizing (ie including agencies) are scaling with loan volume.
Q. Are collection efforts done in a uniform manner or is more effort put into the larger dollar amounts?
A. Our collection procedure is uniform across all loans. The only time the size of the loan may matter is when we are deciding whether or not to take legal action – here a larger loan may make it more worthwhile to pursue in court.