Helping to avoid sub-prime arrears

25 February 2014

Against the backdrop of a blossoming market and economy, Chris Thompson, CEO at Capita Mortgage Software Solutions, says sub-prime is still an important part of the market.

He examines ways to make it work, both for the lender and the customer, and looks at how these lessons can be applied to the rest of a market being shaken up by MMR and Help to Buy.

The reputation of sub-prime lending has taken a huge dent since the 2008 global market crashed. Seen as unpredictable, unreliable and risky, and largely blamed for the financial collapse, the lending industry has made huge strides since then and now attitudes are shifting.

Before the market crash in 2008, the average man on the street would have been largely unaware of what sub-prime even was, yet it became the by-word for irresponsible lending amongst the mainstream media.

While anybody in our industry knows that’s never precisely been the case, it was clear that important lessons needed to be learned about the way our sector handled sub-prime. It’s still a crucial area of the industry – people without good credit records still need to borrow, or they already have borrowings, and need to be dealt with in the correct way to ensure borrowing does not become bad debt.

It has certainly been an area that we at Vertex have taken seriously, particularly as economic conditions have gradually improved over the past 18-24 months, and as a provider of business process outsourcing (BPO) solutions from loan origination through to possession, it’s something we feel is a key part of our offering to meet client, customer and regulatory requirements.

It led to the decision to overhaul the way we approached our sub-prime customers and their clients, and it has been a challenging but rewarding journey. This industry is competitive and it is vital to strive for best practice at all times if the best possible outcomes for customers and clients are to be achieved.

What’s more, we feel the lessons learned from sub-prime can be applied to the whole market, especially with the stronger economy, the Help to Buy scheme and Mortgage Market Review (MMR) all having a huge impact on our sector.

Whether dealing with small sub-prime portfolios or much larger ones, we firmly believe that taking a more personal approach is the way forward. Now just 15 per cent of the sub-prime accounts we manage are in arrears, which for a sub-prime portfolio is, we feel, remarkable and we put it down to fundamental principles of good customer engagement, which, surprisingly, is frequently overlooked.

The personal touch

It is critical to treat people with sensitivity appropriate to their circumstances; these aren’t necessarily people who want to talk and be open about their money issues, so we focus on reaching realistic, sustainable payment arrangements supported by income and expenditure information. Affordability is a critical factor for customers and clients alike, and a common sense approach should be taken.

People’s manner on the phone can have a huge impact on the long-term customer relationship, and asking the right questions in the right way, will generate more productive and useful answers. Sometimes it is necessary to put people in touch with agencies that can provide direct assistance, such as the debt advice agency Step Change.

These standards ought to be constantly reviewed, too, perhaps by working to a robust call marking framework on which a call is scored. This avoids scripting and enables an adult, sensible and rational conversation to take place which delivers the right outcomes for both the customer and our clients.

Reaching these levels has, of course, been a relatively intensive process. We are committed to continual investment in staff training to ensure our service is up to date with industry best practice and regulatory requirements. Crucially, we invest in external training with industry specialists and allow time to embed the training to ensure it takes hold and is being implemented successfully.

It is also possible to apply this approach to help identify pre-arrears cases, looking at a number of early indicators to see if there is the likelihood of something going wrong further down the line – such as being put at risk of losing work, having to take maternity leave: basically any of life’s circumstances that can impact people’s ability to make repayments. To a lender, this improves predictability on any given case, can help with forecasts and avoid the need for costly chasing of payments.

Impact on the wider industry

It’s impossible at this stage not to consider the wider market. MMR is changing the way many lenders will operate, with particular focus on customer relationships, while Help to Buy is already bringing new customers through lenders’ doors in their thousands – and this will continue. It is a good time, therefore, to consider customer relationships and to ensure that everything possible is being done to ensure customers have a smooth journey.

One of the aims of MMR is to limit high-risk borrowing – or at least to ensure it is carried out in the right way – and therefore, in the future, we could see less of a burden on arrears management resources. For now, though, and with so many new people in the market for borrowing, it is still important to address this.

The way we have analysed our service has led to improvements across all departments, whether we’re dealing with people in danger of being in arrears, or with people who have complex property portfolios. The approach also works with prime accounts, not just sub-prime.

Skills and training

This requirement for greater training and staff development is clearly going to be a major challenge faced by lenders as MMR takes effect. MMR has created an element of confusion in some areas of the industry, and there is a lack of readiness among others. The fact is that MMR is coming and very few organisations will be unaffected. The loss of non-advised sales channels means there is huge pressure on every lender to ensure its customer facing-staff hold the relevant mortgage qualifications.

This has created new requirements for skills and training so that the lender or servicer can manage the advice process effectively and in a fully compliant way. We believe that this is a major burden on the industry and that it will drive an increased demand for outsourced services. For those lenders who are yet to put training programmes in place, outsourcing business support will most likely become crucial. Ready-made, complementary services offer an alternative to attempting to retrain staff in a short space of time.

As the non-advised sales channel is replaced by an execution-only process, every lender will need to ensure its customer-facing employees hold the relevant mortgage qualifications, again, making training an important requirement for 2014.

What’s more, lenders now operate in a market where the customer voice is louder than ever. The popularity of social media has placed a renewed emphasis on the customer experience and if a brand is to succeed, it needs to uphold its online reputation. Combined with the arrival of a tranche of brand-new first-time buyers, along with lenders keen to offer them products, and it’s clear that this will be a difficult – but productive – year for the industry.

Under MMR, as customers have the choice between execution-only or advised sales channels, those who choose to seek advice will be looking for a time-efficient service. This is particularly true of those who have a lot of industry knowledge, and who are confident about which products they want, but who are unwilling to go execution-only because of the legal rights they would therefore waive. In these cases systems that can guide both the adviser and the customer through the loan origination process will become key to help advisers gather sufficient information in a timely and well-structured manner.

Consumers will benefit from transparent and well informed mortgage advice and those lenders that have plans in place to offer this will reap the benefits throughout the year. The above challenges point towards 2014 being the year of the outsourced service provider as more lenders rely on technology solutions and business process support to effectively deal with the changing regulatory landscape.

The customer is key

It’s not just the personal touch that can give an advantage and we expect a lot of lenders to be analysing their back-office systems this year. Loan origination and administration systems will play a key role in improving the customer journey. Such platforms can be highly automated to drive efficiencies and regulatory adherence across all types of business including prime, near-prime, sub-prime, buy-to-let and lifetime mortgages.

In order to meet quality assurance (QA) checks and be accountable to the Financial Conduct Authority, it is important that each customer case is traceable throughout the advice process and clear record keeping is therefore paramount.

Also, an important aspect of any loan origination system is the ability to generate suitability reports reflecting the customer’s individual mortgage needs. Systems exist that allow this report to be highly personalised to ensure the best advice is being given. Efficiencies can also be made at the quality review stage of the process as reports are flagged for third party approval based on each adviser’s competency record.

A well-executed and followed-through suitability report will also, we hope, help to reduce the likelihood of people getting into arrears. While it can never help to control unexpected events, it can reduce the likelihood of arrears as a result of customer circumstance. This is because circumstances can be more fully understood and clearly documented and checked during the advised sales process.


There is no doubt that 2014 is a huge year for our industry. We won’t have come under this much public and regulatory scrutiny since 2009, and how we collectively adapt to the changes – and the influx of new customers – should pave the way for many more years of success and growth.

Treating people well and giving them an enjoyable, flawless experience as they borrow, or as they seek to repay debts, should be every lender’s number one focus this year.