Industry2 min read
Settlements and one-time settlement, done properly
A settlement is a decision to take less money now instead of more money later, or none at all. Made well it is the best outcome available. Made casually it is a discount given to borrowers who would have paid.
Late in a book, full recovery stops being the realistic outcome for a portion of accounts. A settlement, whether a one-time payment or a structured reduction, recognises that and closes the account for a sum both sides can live with. The instrument is sound. The way it is usually operated is where the losses come from.
The two failure modes
- Settling too readily. Offering a reduction to a borrower who was going to pay in full is a pure loss, and word of an easy settlement policy travels through a borrower base faster than any lender expects.
- Settling too late. Holding out for full recovery on an account with no capacity converts a recoverable seventy per cent into an uncollected hundred.
What should drive the decision
Not the borrower persistence, and not the caller month-end position. The decision should rest on an estimate of what this account is actually likely to yield if worked normally, the time that would take, and the cost of doing it. A settlement is worth accepting when the offer exceeds the risk-adjusted present value of continuing. Written that way it is arithmetic, and arithmetic can be delegated to a rule rather than to a negotiation.
Authority has to be structured
- Bands by bucket and by account characteristics, so most cases resolve without escalation.
- A named approver above the band, with the approval recorded against the account rather than in an inbox.
- A floor below which nothing is accepted without senior sign-off.
- An audit trail showing who approved what, and on what basis, because this is the area a review will look at first.
The paperwork is the product
A settlement that is not documented properly is a future dispute. The borrower needs an unambiguous letter stating the amount, the deadline, and precisely what happens on payment: which account closes, what the outstanding becomes, and what will be reported to the credit bureau. That last point causes more post-settlement complaints than everything else combined, because borrowers frequently expect a settled account to be reported as closed and it is not.
Broken settlements
A settlement agreed and not paid should return the account to its previous state cleanly, with the original amount restored and the offer withdrawn on a defined rule rather than at a caller discretion. Operations that leave broken settlements in an ambiguous state end up negotiating twice against a lower anchor, which teaches exactly the wrong lesson.
Measure the policy, not the case
Track settlement rate by bucket, average haircut, the share of settlements that were paid in full and on time, and, most usefully, recovery on the accounts you declined to settle. If those declined accounts eventually yielded less than the offer you refused, the policy is too tight, and no individual case review would ever have told you.