COVID-19 delinquencies amongst consumers haven’t followed the original script many had written for it. In fact, it’s been relatively good news for creditors and consumers thus far. Will the good news continue? To understand that, think of 2020 as a play in three acts. The third act is coming.

Act 1: Significant delinquencies expected

The coronavirus went from an outbreak across the Pacific to a national U.S. emergency in a rapid two months. States across the country moved to shut down places where people congregate to reduce the virus’s spread. This of course was a disaster for many businesses. We saw initial unemployment claims skyrocket to levels we’d never seen:

Naturally, a logical conclusion to draw is that catastrophic unemployment would put households into a cash flow pinch. Indeed, during the 2009 Great Recession, high unemployment led to high delinquencies. Expectations were for a similar experience here in 2020:

In response to this unprecedented pandemic, both the Federal government and financial institutions sprang into action. A series of relief actions were undertaken:

• Increased unemployment benefits
• $1,200 + $500 per child stimulus checks
• Paycheck Protection Program
• Payment deferrals offered

These steps are different than what was done during the Great Recession. Would they change the dynamic this time?

Act 2: Consumers show remarkable resiliency

We now are several months into the pandemic, with unemployment rates ranging from 8.4% to 14.7%. Based on history, that should translate to significantly higher delinquencies.

But a funny thing happened on the way to collections:

As the Wall Street Journal reports and from what we’ve anecdotally heard from several large banks, consumers reacted to the crisis in three ways that have aided their financial health:

1. They applied the government relief dollars to paying down some of their debt
2. They took advantage of the payment deferral options
3. They cut back spending, a natural result of there not being places to spend money

TrueAccord, a servicer of seriously delinquent loans on behalf of lenders, ran a webinar on August 19, 2020 that looked at the previous weeks’ changes in borrower behavior. One data set was “click through rates”. TrueAccord does outreach to delinquent borrowers primarily via email. Click through rates are indicative of people’s willingness to address their delinquent debt (credit cards, personal loans).

See this time series comparison of clicks for 2019 (normal times) and 2020 (coronavirus times):

As you can see, consumers themselves were just as concerned as financial institutions and economists. They hunkered down in March and April, with much lower click rates versus 2019. But then May, they sharply rebounded. They clicked to make payments at a much higher rate than in 2019. Almost like making up for the early avoidance.

The government relief, the lenders’ payment holidays, and the lock-down of the economy appear to have done the job, preventing the worst delinquencies. This was a key difference from the Great Recession.

Act 3: Is the COVID-19 delinquencies dam breaking?

Looking forward, nearly all financial institutions are left to divine what will happen with consumers. Those marvelous measures to help consumers are running their course. Collections groups face the uncertainty of whether those measures will hold back COVID-19 delinquencies much longer:

In a September 2, 2020 article on The Financial Brand, Impending Credit Crisis: How Banks and Credit Unions Must Prepare, experts are looking at exactly this issue. Chris Scislowicz, Managing Director of Accenture’s financial services practice, and Head of North American credit practice, noted:

The challenges of the COVID-19 recession for lenders have not yet begun to bite in earnest, but banks and credit unions are going to start feeling it soon.

I was on the phone with a chief credit officer from a major superregional bank in mid-August and he said that they were just starting to see delinquencies tick up.

In an American Banker webinar, Outperform your loss provisions: Increase recoveries through loan restructuring, FICO Senior Principal Consultant Jeffrey Bernstein presented this view of what’s coming:

Mr. Bernstein nicely lays out what’s coming. In Congress, the Senate and House versions of another round of consumer aid vary significantly. Presumably in an election year, and for the basic needs of people experiencing financial trauma, they will come together. But what that looks like is very much an open question.

If consumers need more payment holidays, are banks ready to deliver? Expectation seems to be that the level of support will likely decline from April/May levels. Here’s how the expert from Accenture describes it:

Accenture believes that because this recession is not being placed at banks’ doorsteps this time around lenders have the opportunity to be heroes. Some of this has already been seen in early efforts to voluntarily offer credit relief, such as skip-a-pay programs. But this is a limited-time opportunity.

“It will last right up until the point where their shares start to suffer and their shareholders come after them,” says Scislowicz. “By that point they will have their own challenges.”

Whatever happens with Act 3 of this COVID-19 delinquencies play, creditors can improve the performance of their delinquent collections customers with BackOnTrack^TM. Find out how your firm will be ahead of the game through the use of a 10 minute behavioral science intervention.

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