How does the arrears cycle reset steps on arrears letters work

How does the arrears cycle reset steps on arrears letters work


There needs to be a clear definition and boundary for an arrears “cycle”. So in other words at what point does the finance company wish to end and restart the sending of a specific arrears letter and charging of associated arrears fees.

To give an example:

We have the following arrears letters

5 days

14 days

21 days

30 days

60 days

90 days

120 days

Lets say an account goes into arrears and moves all the way through to 45 days in arrears. The following options could happen

1)      The borrower pays the full arrears amount and moves back to zero days. This is the easy scenario and as if the borrower misses their next payment and goes back to 5 days in arrears hey get another 5 day letter.


2)      The borrower pays some of the arrears and moves from 45 days to 15 days in arrears. The questions here is do we resend the 14 day letter and charge the fee again?


3)      The borrower organises a promise to pay (ptp) to make 3 payments on different days. The first ptp the borrower pays and moves to 22 days. The borrower then misses the second ptp and moves to 31 days. Do we reprint the 30 days letter and charge a fee again?

 

There needs to be a clear definition of when the finance company wants to “restart” the sending of arrears letters and charging of fees for each specific letter, i.e. when does the existing arrears cycle end and new one start. At what point has the borrower paid enough of their arrears that the finance company regards the risk of the days the customer is in arrears to be over. 


Example if a borrower is 90 days in arrears and has received the intent to default letter, as what point does the finance company regard the risk of the borrower defaulting to be over. Is it when the borrower gets back to 21 days, or back to 14 days?

Once this is defined by the finance company it will be clear as to when letters will be resent and fees charged again.

in the above example  of the 90 day intent to default letter, if the finance company decides that the risk is only over once the borrower moves back to 14 days in arrears. If the borrower is 90 days in arrears and makes a payment (or more than one) and does not move below 14 days the platform will not send any other arrears documents or charge any other fees until the borrower moves either to below 14 days in arrears, ( as the finance company still deem the borrower to be a risk and the existing 90 days letter the borrower has already received still stands), or if the borrower moves to the 120 days which is the next letter above the 90 days.

Once the borrower has paid enough that the finance company regard the risk to be over it will be seen as a new arrears cycle. So if the borrower makes a payment and goes to 12 days in arrears, the platform will then send the borrower the 5 days in arrears letter and charge the borrower the 5 day letter fee. So in affect the 90 day letter is being replaced with a  5 day letter.

Not only does this control the risk for the finance company by correctly controlling the section of arrears that any customer is in (so if they have received the intent to default etc they remain in that section until the risk is correctly over), but it also correctly penalises the borrowers that do not pay all their arrears and those that pay off the full amount of arrears are not penalised.

 

Documents are only reprinted and fees generated once a borrower pays and moves back the number of cycle rest steps i.e. into a new arrears cycle. The finance agreement is moved into a new arrears cycles when

a.       The arrears are repaid back to zero and the money paid has cleared.

b.       The arrears moves back the defined number of steps (as per a)

c.       A ptp arrangement is broken


So if the arrears cycle is 2 for example then borrowers will start a new arrears cycle and receive letters and fees only once they have paid and moved back more than 2 “steps”. Example a borrower is 30 days in arrears and only once the borrower moves below 14 days are they regarded as being out of the 30 day risk. A borrower is 21 days in arrears only once the borrower moves below 5 days in arrears are they regarded as being out of the 21 day risk.


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