Banks and other financial institutions provide various lending products to consumers and businesses, including installment loans and revolving lines of credit like credit cards. The process of administering these lending products over their lifetime is known as “servicing.” This includes activities like sending monthly statements, collecting payments, handling customer inquiries, and managing delinquencies.
The servicing metrics tracked for a portfolio of loans can differ quite a bit from those tracked for credit cards. This is because the products have some inherent differences in how they work and how consumers tend to use them. Understanding these key distinctions is important for financial institutions to monitor the health of their servicing portfolios.
Key Loan Servicing Metrics and Definitions
Some typical loan servicing metrics include:
Delinquency Rates
The delinquency rate shows the percentage of loan balances where the borrower has missed one or more scheduled payments. Typically delinquency is broken down by days past due:
- 30 days past due
- 60 days past due
- 90+ days past due or “severe” delinquency
Tracking delinquency is critical to gauge the financial stress level of borrowers and the risk to the servicing portfolio. Higher delinquencies may prompt additional collection efforts.
Default and Charge-Off Rates
A default occurs when the borrower can no longer or refuses to pay the loan per the original terms. Defaults typically occur after 90+ days delinquent. The defaulted loan balance is “charged off” and usually sent to a collection agency. Tracking defaults monitors losses in the portfolio.
Prepayment or Early Payoff Rates
Borrowers may choose to pay off a loan early, which is tracked as the early payoff or prepayment rate. This helps monitor how actual repayment periods compare to scheduled repayment lengths. High early payment rates can impact interest income.
Modification Rates
When borrowers face financial hardship, loan servicers may modify the loan terms to make payments more affordable, e.g. extending the repayment period. Tracking types and rates of modifications aids portfolio risk management.
Loss Severity Rate
If a defaulted loan balance is successfully collected, there may still be losses compared to the principal balance owed. Loss severity measures the extent of those losses.
Key Credit Card Servicing Metrics and Definitions
Common credit card servicing metrics are focused on account usage and delinquencies:
Utilization Rates
The proportion of the total credit limit used by the borrower based on their balance carried each month. Higher utilize rates may indicate financial stress.
Credit Line Increases
How often and to what extent credit lines are increased to account holders. This monitors account usage and growth.
Delinquency Rates
Similar to loan delinquency tracking by 30/60/90+ day past due categories. However, credit cards don’t have fixed terms so delinquency relates to the cardholder’s minimum payment due. Severe derogatory delinquency (90+) prompts write-downs.
Charge-Off Rates
Similar to defaulted loans, severely delinquent credit card balances must be taken off the books as losses or “charged off”, minus expected recoveries. This recognizes uncollectable debts.
Recovery Rates
The proportion of charged-off credit card balances that issuers successfully collect shows the effectiveness of collection activities. Combining charge-offs and recovery rates helps determine net credit losses.
Activation Rates
For newly issued credit cards, the activation rate metrics monitor what percentage of cardholders activate and start utilizing their cards. Higher activations signal healthier account growth.
Portfolio Comparison
Now let’s compare how a sample servicing portfolio of installment loans would differ from a portfolio of bank-issued credit cards.
Portfolio Profile Comparison
| Metric | Installment Loans | Credit Cards |
|---|---|---|
| Original Balance | $100 million | $50 million |
| Number of Accounts | 10,000 | 25,000 |
| Average Balance Per Account | $10,000 | $2,000 |
| Portfolio Yield | 6% | 12% |
Key Observations:
- The loan portfolio has fewer accounts with much larger average balances
- Credit cards have smaller individual account balances but generate more portfolio yield
Delinquency Management
| Metric | Installment Loans | Credit Cards |
|---|---|---|
| 30+ Day Delinquency Rate | 2% | 3% |
| 60+ Day Delinquency Rate | 1.5% | 2% |
| 90+ Day Delinquency Rate | 1% | 1.8% |
| Annual Charge-Off Rate | 0.5% | 1.6% |
Key Observations:
- Credit cards tend to experience higher delinquencies due to more intermittent usage
- However, installment loan charge-offs are lower due to collateral recovering some losses after default
Account Management
| Metric | Installment Loans | Credit Cards |
|---|---|---|
| Annual Prepayment Rate | 22% | NA |
| 6-month Modification Rate | 2% | NA |
| 6-month Credit Line Increase Rate | NA | 65% |
| New Account Activation Rate | NA | 73% |
Key Observations:
- Loans see material early prepayments (payoffs) and modifications
- Credit cards focus more on line management and new account growth
So in summary, while both products monitor delinquency rates, installment loans require more long-term account management while credit cards emphasize utilization growth.
Impacts on Servicing Processes
The differences in servicing metrics and portfolio characteristics have implications for financial institutions’ servicing operations processes and systems:
Loan Servicing Processes
- Requires managing fixed repayment schedules spanning months/years
- More staffing for individualized account management and modifications
- Higher priority on post-default collateral recovery
Credit Card Servicing Processes
- Managing high transaction volumes across large account holder base
- Emphasis on strategy around credit line increases to spur usage
- Streamlined technological interfaces with users
- Robust analytics on utilization trends
Conclusion
- Loan and credit card portfolios differ significantly across concentrations, balances, and portfolio yield
- Delinquency tracking is critical for both but more long-term account management needed for installment loans
- Credit card servicing focuses more on utilization growth and activations
- These product differences translate to differentiated servicing processes operationally
Understanding these servicing metrics dynamics allows financial institutions to better monitor portfolio health and build appropriate servicing capabilities. The product nuances shape the servicing strategy.