Brian Reshefsky – CEO
The “Small-Dollar Lending Rule” is going to hurt: our preliminary analysis of EDGE client data suggests there could be as much as 14% losses for lenders’ portfolios, depending on the product. Additionally, our research shows that lenders can reduce those losses to 5-10% by leveraging bank data analytics (more below).
Issued by the Consumer Financial Protection Bureau (CFPB), this rule will become effective in 2025 and, among other requirements, will prohibit lenders from making a new attempt to withdraw funds from an account after two consecutive attempts have failed unless the borrower specifically authorizes another attempt. The likely result will be fewer opportunities to collect on debts, leading to fewer returns, increased defaults, and ultimately increased rates for borrowers.
The bad news: conventional risk data from bureaus and similar sources can’t help. And while lenders might have pay stubs giving insight into payroll dates, that’s usually data from before funding the loan and potentially out of date. Historical paystubs also don’t account for other factors that affect account balances, such as other financial obligations coming due and general personal finances of a borrower.
The good news: cashflow insights offer a more accurate, real-time, and reliable method to assess a borrower’s ability to repay and can help lenders optimize every collection attempt to more accurately predict available balances in the future. With cashflow data, lenders can see all sources of income (salary, freelance payments, government benefits, cash deposits, etc.) alongside expenses and transfers (rent, utilities, debt payments, and more). This comprehensive view enables accurate calculation of a borrower’s disposable income and capacity to meet debt obligations.
That’s where EDGE’s Loan Servicing solutions come in. Risk alerts let you take proactive action when collection attempts are likely to fail
On-demand updates give real-time views into borrowers’ ability to repay Collection timing optimization based on predicted future balances and optimal collection dates to improve the chance of successful ACHs
New challenges come with changes in any industry– with the advent of the Small-Dollar Rule, lenders have an opportunity to see immediate value from cashflow analytics which are still nascent in consumer lending today. The prospect of cutting losses from failed collections by such a large amount will surely accelerate lender adoption of cashflow analytics for loan servicing. As these risk techniques gain traction, we expect lenders to embrace them at every stage of the consumer credit lifecycle; from pre-funding screening to underwriting to post-funding demands for servicing an account..