Reduce Loan Portfolio Risk in Six Simple Steps
Portfolio management is paramount for government agencies, microlenders, banks, credit unions, and other direct and third-party lenders/account servicers. According to data from JPMorgan Chase, the loan default rate has ticked up to roughly 2.9% on a par-weighted basis from around 2% a year ago. After surpassing pre-pandemic levels in Q4 2023, the Fed announced that in Q1 2024 charge-off rates increased from 4.07% in Q4 to 4.65% in Q1**. Managing risk is increasingly important in reducing default rates and getting strong returns. All accounts carry the risk of default, leading to losses and regulatory risk. Repayment is a function of default mitigation by leveraging tools for in-depth analysis and informed decision-making. By building a strong foundation of portfolio management, you can drive profitable growth, borrower retention, and increased profitability.
These six steps will help lenders of all types reduce their portfolio risk and maximize performance:
Step 1: Sharpen Your Application Process
Your application process should be as specific as your needs and requirements. Crafting a user-friendly application process with clear instructions, intuitive forms, easy document uploads, and automated contract generation improves borrower happiness and process efficiency. Robust risk mitigation tools like automated risk assessments and identity verification can significantly enhance decision-making and prevent fraud before it occurs. Configurable identity verification allows for an added layer of security and peace of mind while minimizing friction. By automating decisions based on your pre-defined approval criteria, you can streamline the process and increase originations. Integrating cash-flow data to your risk assessment also improves outcomes by generating more precise insights.
Step 2: Leverage Smarter Underwriting
While FICO scores offer value for both lenders and borrowers, they don’t predict the current ability to service a loan and a borrower’s financial wherewithal. Their most obvious limitation is applicants with deceptively low credit scores like young adults or immigrants with thin credit files. The risk in excluding these applicants is that they might have become profitable customers. These missed opportunities mean you might reject a good customer or offer them unattractive terms due to their low score. To broaden access to credit, consider supplementing FICO scores with alternative data like spending habits or cash flow. This paints a more complete picture, helps you make more informed decisions, and significantly improves repayment rates.
Step 3: Detect Issues Early
Monitoring KPIs and producing reports on a comprehensive dashboard allows for a fulsome view of your portfolio. Having all relevant data in one place and key portfolio data automatically surfaced means you don’t have to chase information down from various sources. When you can analyze data comprehensively, you can spot trends earlier and intervene more proactively. Remain compliant and keep stakeholders informed with customized reports based on your reporting needs. Customized reports are key to meeting your specific requirements. Remain compliant and keep stakeholders informed with reports on delinquency rates, LTV ratios, and credit risk concentrations.
Step 4: Go to the Cloud
On-premise solutions are impractical and present information security challenges. They only allow users access from the office or their home through a dedicated VPN connection. Cloud-based systems provide anytime, anywhere access to everything users need while facilitating real-time collaboration with colleagues. This eliminates roadblocks and minimizes delays in the process. We use AWS to reduce the risk of data breaches because they invest heavily in robust security measures to protect sensitive data as well as offering superior processing power and data storage capabilities. This processing power allows for the analysis of vast amounts of financial data, credit history, and alternative data to make better decisions.
Step 5: Embrace Technology Automation
Utilize technology to streamline processes and automate tasks. By auto-generating custom reports, program participant reconciliations, and digital closing you can reduce the risk of small human errors that can lead to larger issues. A good portfolio management software automates communication within your organization and between you and your account holders. This frees up your team to focus on more complex cases and improve overall program efficiency.
Step 6: Human Touch Matters
Never underestimate the power of a strong account management team for your portfolio management software. Through collaboration, we develop bespoke software solutions and implement proactive intervention strategies for our clients. This human element, combined with the software's analytical muscle, allows for a more comprehensive platform and swifter action for the best program outcomes. Having excellent support and service ensures your uninterrupted management and scaling of your portfolio, minimizing risk throughout the process.
By following these six steps and prioritizing data-driven decision-making, you can turn portfolio management from a laborious necessity into a powerful engine for growth.
*Source: Yahoo Finance
**Source: Wallet Hub
