Underwriting correction -> collection

Every lending company, if it is a startup or big player is working with underwriting -> rules how to approve or reject a loan application. Underwriting rules come out from presumptions, fraud detection, scoring models and manual verification.

Each of the steps result in amount of loans underwritten and theirs behavior once they are mature. To tackle the behavior or the underwritten loans by the maturity all of companies create internal collection teams and procedures that are later in the process outsourced to external collection companies.

External collection companies are easier to be managed, as they are paid only by % of loans collected -> but respecting local laws and regulations. They are also gathering information cross market and therefore understand the risk in broader perspective.

Figure 1: Conflict of interest

Every loan originating company has to, also, understand the conflict of interest with collection agency. Loan originator - Lending company is very much interested to :

1. collect as many loans as possible (within reasonable legal and costs borders)

2. understand why there are not more loans collectible

So where is the conflict of interests on both points, point 1 and point 2?

1. Collect as many as reasonably possible

Figure 2: A hypothetical collection company -> costs and revenue

As you can observe on a figure 2 -> collection company has an ability to collect more loans, but it is becoming economically unreasonable, as there are needed more steps to follow up with debtor or collection company is paid only selected cases of full repayment of the overdue amount, or it is necessary to adopt additional sources to skip-trace debtors....

2. understand why there are not more loans collectible

Getting in touch with collection agency on regular basis -> on advisory level and analytical level provides to underwriter an amazing opportunity to get a real market perspective to his initial presumptions and understand what could be done in next underwriting cycle or even on the already underwritten loans.