What are the best practices for measuring and reporting loan performance metrics?

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Loss mitigation is the process of helping borrowers who are struggling to repay their loans avoid default, foreclosure, or other negative outcomes. It can benefit both the borrowers and the lenders or servicers by reducing losses, improving cash flow, and preserving customer relationships. However, to effectively manage loss mitigation programs, servicers need to measure and report loan performance metrics that reflect the status, risk, and results of their actions. In this article, we will discuss some of the best practices for measuring and reporting loan performance metrics in the context of loss mitigation.

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private…

1 Define clear objectives and indicators

In order to measure and report loan performance metrics, you must first define your objectives and indicators. Your objectives should be in line with your loss mitigation strategy, regulatory requirements, and stakeholder expectations. The indicators should be relevant, measurable, accurate, and timely. Common objectives and indicators for loss mitigation include reducing delinquency and default rates by measuring the percentage of loans that are current or past due, increasing workout options and retention rates by measuring the number of loans modified or refinanced, and minimizing loss severity and maximizing recovery by measuring the net present value (NPV) of each loss mitigation option, the amount of principal reduction or forbearance, the loss given default (LGD), and the recovery rate.

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private Investigator, Fugitive Recovery Agent
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? Tailor metrics to your niche. Beyond delinquency rates, consider metrics specific to your loan type. For small business loans, track on-time lease payments. ? Benchmark wisely. Don't just compare to industry averages. Look at lenders with similar risk profiles for a more nuanced view. ? Track trends, not just points in time. Monitor how metrics evolve over months to identify areas for improvement.

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2 Collect and verify data from reliable sources

To measure and report loan performance metrics, you need to collect and verify data from reliable sources. You should have a data management system that can capture, store, and process data from various sources, such as loan origination systems, servicing platforms, credit bureaus, property valuation tools, and borrower contact channels. You should also have a data quality framework that can ensure the accuracy, completeness, consistency, and validity of your data. You should perform regular audits, checks, and validations to identify and correct any errors, gaps, or discrepancies in your data.

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private Investigator, Fugitive Recovery Agent
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? Beyond the Basics: While a strong data system is crucial, incorporating borrower trends and repayment behavior specific to your loan type can provide deeper insights for better risk assessment and product development. ? Actionable Insights: Don't just collect data, analyze it! Look for correlations between borrower demographics, loan characteristics, and delinquency rates to identify early warning signs and optimize collection strategies.

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3 Analyze and interpret data with appropriate methods and tools

To measure and report loan performance metrics, you need to analyze and interpret data with appropriate methods and tools. A data analysis system should be used to generate insights and recommendations from your data, while a data visualization system should be used to present the data in clear, concise, and compelling charts, graphs, dashboards, and reports. You can use segmentation to group loans or borrowers based on common characteristics, such as loan type or credit score. Additionally, trend analysis can examine changes in loan performance metrics over time, benchmarking can compare your metrics with industry standards or best practices, and scenario analysis can estimate the impact of different assumptions or events on your loan performance metrics.

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private Investigator, Fugitive Recovery Agent
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- Early intervention is key: Identify potential delinquencies early through borrower behavior analysis. This allows for proactive outreach and can improve recovery rates. - Tailored communication: Segmenting borrowers by loan type and risk profile allows for targeted communication strategies, increasing borrower engagement. - Data visualization is king: Use clear and dynamic dashboards to communicate loan performance to all stakeholders, fostering better decision-making.

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David D. McElroy

Managing Director @ First Fusion Capital, Private Banking Consulting for Project Funding With Structured Finance
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Talk directly with a cross section of customers. Look for patterns of perceptions in both performing and non performing outcomes. Data is useful but it misses the customer feedback balance for a deeper understanding of what’s going on with human beings represented by the date.

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4 Communicate and report data with relevant and actionable information

Measuring and reporting loan performance metrics requires an effective data communication and reporting system that can deliver data to the right audience, at the right time, and in the right format. Additionally, a data storytelling system is necessary to convey data with context, meaning, and purpose. To communicate and report data with relevant and actionable information, you should consider key performance indicators (KPIs) to highlight important loan performance metrics. You should also identify performance gaps and opportunities, share best practices and lessons learned, as well as provide recommendations and action plans that can help you or your stakeholders take action based on your data.

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private Investigator, Fugitive Recovery Agent
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- Focus on borrower behavior: While delinquency rates are crucial, consider segmenting them by borrower characteristics. This can reveal pockets of repayment stress and inform targeted outreach programs. - Make it actionable: Translate insights into clear recommendations. Recommend portfolio adjustments, product tweaks, or collection strategies based on data trends.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private Investigator, Fugitive Recovery Agent
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- Leverage data visualization: Charts and graphs can make complex loan performance data easier to understand for all audiences, not just data analysts. - Benchmark your performance: Include industry benchmarks alongside your internal data to understand where you stand competitively. - Track progress over time: Monitor KPIs over time to identify trends and measure the effectiveness of implemented changes.

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What are the best practices for measuring and reporting loan performance metrics?

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1 Define clear objectives and indicators

2 Collect and verify data from reliable sources

3 Analyze and interpret data with appropriate methods and tools

4 Communicate and report data with relevant and actionable information

5 Here’s what else to consider

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