In this first installment of our new Thoughline series, we’ll be taking a look at the broad economic implications of the coronavirus. How will lending be affected? How will firms model credit risk in our new normal? For the first dispatch from the series, LiveVox’s Boris Grinshpun met with former SoFi Chief Risk Officer Kevin Moss to discuss some sustainable ways that financial firms can move forward.
In this discussion, Boris and Kevin hone in on the long term treatments that firms will need in place to restore previous levels of economic health.These include providing deferment and forbearance options to customers, but also encompass more tactical internal changes that need to be implemented in order to better evaluate credit risk and loss mitigation.
Boris Grinshpun (00:04):
Good morning or good afternoon, everybody. Thank you very much for joining us here at LiveVox for our Thoughline series, talking about everything happening in financial services today. We’re lucky enough to be joined by Kevin Moss, an industry leader, really, a chief risk officer guru, and a man of many talents. And so, this podcast, of course, is sponsored by LiveVox, the leading platform in contact center solutions. So with that, let’s dive right in. Kevin, thank you very much for joining us today on this podcast.
Kevin Moss (00:44):
Thanks for having me, Boris, appreciate the opportunity.
Boris Grinshpun (00:48):
Yeah, absolutely. Kevin, you and I have a long history and we go way back, but maybe a lot of folks aren’t familiar with your background. Would you be able to share that a little bit with the folks here with us today?
Kevin Moss (01:01):
Sure, Boris. I’ve been working in the financial service space for 36 years, 31 as a banker, my last 17 at Wells Fargo, both as a Senior Risk Leader. The last job I had there was the Chief Risk Officer for consumer lending group. I also ran the home equity business during the last financial crisis. And then more recently over the last five years I’ve been working in the FinTech space, both as an advisor board member. And for three of those five years, I was the Chief Risk Officer for SoFi.
Boris Grinshpun (01:39):
Great, great. I mean, it’s interesting that you talk about your experience in some of the things that you’ve seen. Ultimately, you’ve seen the ups and downs of the credit economy take shape, and we’re, well, maybe in the beginning stages of one of those cycles, but how’s the cycle going to be maybe similar, maybe different than the ones that we’ve encountered in the past?
Kevin Moss (02:03):
So I think that’s a great place to start. And the way I characterize it is normally recessions have been over a period of quarters. You can start to see it in the credit world and your delinquency. You can start to see it in the way people use their products. And so what’s different about this one is that this was precipitated by a health crisis. And so really a deep, deep drop in the economy has occurred in really just a couple of months, right now with the latest unemployment claims, most economists officially, we were at 14.7 in April of unemployment rate. We’re probably around 20%, to maybe a little over 20% right now. And so the speed by which that unemployment has occurred, 36 million people filing claims really in the last couple of months has led to the highest level of unemployment since the Great Depression.
Kevin Moss (03:17):
I think the other question that’s really on people’s minds is while it happens so quickly, which caught us all by surprise, how quickly will we recover? And right now I think the country’s in the phase where most of the states are starting to open up, most very cautiously, I’d say. And obviously we have the risk of further infection when this happens. And so most economists, I think, are expecting to have a longer tail recovery than I think people had initially hoped for. And so my personal view is that the next 18 to 24 months, we’re going to be recovering to get back to really where we were before this crisis was precipitated.
Boris Grinshpun (04:13):
Yeah. Well, it’s interesting. And, we’re based on what you’re telling me there and the timeline that you’re really painting, it sounds like from at least a consumer credit perspective, we could be just in the beginning of this. And so as organizational leaders think a little bit about that and being at the beginning of this crisis today, what should they be doing to prepare better for it as this thing sort of winds and goes forward, if you will?
Kevin Moss (04:43):
Yeah, I think that’s a great question. And I think the way most organizations have started to deal with this is that we’ve seen deferment and forbearance used across really all the products. And so, what that does is it buys each organization a little bit of time to really further evaluate and build the infrastructure, the staffing, the training, the treatments that they really need to address longer term hardships. If you kind of reflect on the point I made earlier about a much longer recovery, I think than people initially hoped for, what it really highlights is the need for longer term treatments, and frankly, deferments and forbearance while in the mortgage space, Fannie and Freddie and FHA, UVA, have allowed treatments up to 12 months, it’s in six months, and then you can request it again.
Kevin Moss (05:57):
Most of the other products are really deferring for maybe two or three months and and outside of the real estate space, there aren’t as well developed tools from the last crisis, which was precipitated by the drop in real estate prices. the real estate businesses built loan modifications. They have a waterfall that allows them to extend term and lower rates and forgive, or forbear balances that creates an affordability for the customer in the case where income is less than they were earning. And while we talk about unemployment, there’s also people who have had their hours cut. When you think about a household, particularly around real estate, it might be in many cases where two people are working and maybe one of them has lost their job, or maybe both of them have had their hours cut. And so you really have to design the treatment for the particular circumstance.
Kevin Moss (07:10):
I also worry a little bit about given how so many people are getting sick, and this flu-type bug takes many weeks, or in some cases months, to get over, so that too can create a hardship for people who may still have their jobs, but they may not be in the position to work for quite a long time. So, what people need to be thinking about at the company levels is first off establishing what some people have referred to as a control tower. It’s really a place where information and people who come together, you need your marketing teams focused on strong communications to customers. You need your risk and compliance, legal collections and operations people working together to figure out what kinds of treatments you can build to address the various scenarios of what the off ramping needs to be for those customers.
Kevin Moss (08:22):
And then, while you may work within product or similar product constructs, like unsecured home equity and mortgage probably work together, et cetera, all that needs to come together to make sure that you have a consistent customer treatment. What’s important is to think about it from the customer back. And many retail banks have multiple relationships with customers. So it’s important that as you think about how a product might treat somebody that they’re not getting or one treatment that makes them feel valuable and recognized in one product and not recognized in another. So it’s really important that they come together and think about the customer relationship in total. So, the biggest thing that I think we lack right now is the resources, we don’t have all the treatments and we don’t have all the technology and people. So really, in the second quarter and probably into the third quarter, people have to be working on the plans and the priorities to address these longer term challenges that we have, and probably moving resources, for example, underwriting, we’ll talk about what you should be doing in new accounts. We’re talking really about your existing customers.
Kevin Moss (09:54):
In a lot of cases, people will be tightening up the credit box. People will not be looking for credit as much as they normally might. And credit inquiries overall are down quite a bit since this pandemic began. So you should be moving resources from underwriting into loss mitigation, because basically lost mitigation is really just a re-underwriting of the customer on the back end part of the business. You should be moving some of your best leaders into the areas where you need them the most, because right now, it’s a very challenging experience for people who are working at banks. Number one, many of them are working at home. Many of them have family or friends who have been impacted, and their families may be impacted. So leadership and strong communication and employee assistance and support are the things that companies need to provide to their teams. There’s a phrase that I used to always hear that stuck with me for many years is “if you take care of your team members, then they’ll take care of the customers.” So it’s really important for companies to make their teams feel valuable and cared about right now.
Boris Grinshpun (11:21):
Yeah, absolutely. I couldn’t agree more. And I think what struck me is the example that you gave around, if you will, treatment paths that have existed for quite a bit of time in the mortgage space or in the mortgage or the secure secured industry, if you will. What’s interesting, as I think a little bit about is about the variety of financial institutions that have sort of really were born, if you will, over the course of the last few years specifically, whether it’s FinTech companies or folks are going directly to consumer, whether it’s in the secured or the personal lending space versus banks and credit unions. So I’d love to get your take, Kevin. It seems like they would all weather the storm or this storm a little bit differently. What’s your take on who is well-positioned or who is better-positioned, maybe is a better word for this.
Kevin Moss (12:20):
So, the FinTech world grew up in a post-last recession, low interest rate environment. And the one keen advantage that banks have over FinTechs is a thing called deposits. And so deposits, it’s interesting when markets get volatile and the economy turns down, people put more money in banks because they know it’s insured. They’re not sure what’s going to happen in the stock market. So, banks are flushed with deposits. FinTechs typically rely on three sources of funding. They may rely on capital markets through securitization. They might rely on investors or insurance companies. And they typically would have wholesale lines, bank warehouse lines that that help fund for things that they might have to hold before they sell through those other channels. And so right now, credit spreads have widened a lot for many products and securitization markets are not available.
Kevin Moss (13:39):
The investors have become quite skittish and not really sure what the loss curves really should look like. And as portfolios deteriorate and they haven’t yet because forbearances and deferments have basically held down delinquency pretty well. But people will worry about the triggers being hit in their bank of warehouse facilities, which could force amortization and people have to rely on cash or equity on hand. And most of the FinTechs don’t have tremendous cash reserves. So, this is a real advantage right now for banking environments. And some of the FinTech companies have stopped originating dramatically, cut originations, and to reflect on the things you should be doing right now, like all institutions need to tighten their credit box. Models are much less reliable than they were. They were built on historical data in a very different environment and the relationships between different characteristics than they are in the model may change in this go forward environment.
Kevin Moss (15:05):
So, people are raising cutoffs, but they don’t really know what the score to odds relationship really is. And smart people are overlaying good judgment and using Credit Bureau attributes. Obviously if you’re seeing people shop for credit, if you’re seeing a build up in balances, if you’re seeing people turn from transactors to revolvers, and aggregate excess payments going down, payment rates going down, there’s a handful of very key sort of common sense things that you can do that you can overlay on top of tighter credit to make sure that you’re using good credit judgment. The other thing is that as you see people with forbearances and deferments on the Bureau, it’s probably a good practice to increase your income and employment verification. Push it out, like if you have a pipeline business, try to push it out as late in the process as you can so you avoid the opportunity for people to lose their jobs.
Kevin Moss (16:16):
But there’s a number of tools out there between deposit aggregation, the work number, true works, number of different places people are using to try to step up their focus on that. And really in dealing with the existing customers, it’s really about the toolbox and the resources and all digital here. I think that the face to face interaction has a health risk associated with it now. So I think being able to reach out and communicate on an Omni channel basis, whether it be over the phone, through chat, through SMS, through email, and basically be able to understand as customers move between those channels exactly where they are and where they’re at. That’s critical to really understanding and I think scaling the response that you’re going to need to have in this type of environment.
Boris Grinshpun (17:24):
Yeah. Yeah. And I know you and I talked about that it’s a bit of a shift, and one of the things we specifically discussed was this notion of how well some of the FinTechs performed, not from maybe a credit perspective, but more for some of the capabilities that they have built themselves and being attractive, like being able to attract the consumer with these sort of channels that they adopted perhaps a little bit quicker than the traditional banks. But I also want to turn the conversation a little bit, Kevin, because we’re talking about the full credit life cycle, and we’ve talked a little bit about forbearance and recovery. What’s interesting is that to your point, how much we’ve relied on models to predict future behavior, and as folks now transition to this notion of needing credit or new folks needing credit now in this particular time where they maybe are, they’ve had their hours reduced, the question will be, how do financial institutions handle this if they haven’t had a model or a good predictor for this behavior before, in other words, how will we underwrite risk today?
Kevin Moss (18:37):
Yeah. I mean, every institution by now has made significant tightenings in credit. If you’re in the secured credit area, you’re lending less as a percentage of the collateral value, whether it’s in auto or real estate. On the auto side, people are concerned about all the used cars between the rental companies, the fact that new car productions have calmed down, expecting a significant drop in used car values. So that’s something important to think about because when people get into large negative equity positions, like we saw in the last real estate crisis, you have these strategic defaulters, you have things that you have to worry about that no credit policy will protect you against. But so, really, in my view, what you’ve got to do is will the FICO score rank order? It will likely rank order, but it may not be in a linear shift in the way it goes up.
Kevin Moss (19:51):
Some of the research I’ve seen, at least in the unsecured space, is that the low risk people with the highest scores on a relative basis might actually be a lot worse than the people who are high risk. So, it might actually, they still may be on an actual basis way less risky, but on a relative basis, you might see their loss risk triple. And maybe the people who are on the non-prime area maybe will be one and a half or two times as bad. And so it’s really hard to know what you’ve got to do is create the right management information and tracking. And then what you’ve got to do is see how your model development data emerged month by month, maybe at a 30 day bad rate, for example, and see what you’re seeing by score as your newer vintages are emerging. And then you use that to have a very dynamic process to feed back into maybe cut off adjustments or credit overlays that you need to add in on top of it.
Kevin Moss (21:07):
So in this environment, you’ve got to create the process, and that’s why a control tower kind of at the company that feeds up through the product levels is so important. You’re going to have to iterate and make changes on a much more frequent basis than you would normally have to do in a more stable economic environment. As you learn things, as you studied the data, as you segment the populations, as you get feedback from customers, that’s going to be important to be able to feed back to the people in those teams who are able to then take it into strategy development, and actions that you need to take. So that’s easier, in my opinion, on the front end. On the backend side of the business, it’s going to require technology. If you haven’t digitized and you’re going to be using overnight mail to send documents back and forth, if you’re going to be using phone for most of the conversations, the biggest concern I would have would be the volume of customers that need to be served.
Kevin Moss (22:22):
If you have a big staffing, training, coaching challenge, the digital channels give you the ability to be more efficient, shrink the cycle times, and they allow you to scale up more easily with a little less resource. And so I would encourage people, particularly in the mortgage and real estate space, to at least be able to build some capabilities to pass secure documents back and forth, to be able to use like a DocuSign, to sign a modification agreement or a deed in lieu agreement, or whatever the treatment has to be to help that customer in a respectful and responsible way. So if without those, I think the volume of people, we’ve seen around somewhere between seven and 8% of the mortgage business has some type of forbearance right now. So it’s a sizeable population. And as those roll off those, maybe a number of them will be satisfied with their hardship and they’ll be able to roll back into their contract and you put it at the end, or it becomes a balloon. It’s not a onetime catch up situations. That might be just fine. But for those that are still in a hardship situation, you’re going to have to think about the next treatment in the toolbox that really works.
Boris Grinshpun (23:59):
Yeah. It’s interesting that you say that. I mean, I clearly picking up sort of that statement from that control tower that you’ve made around really tying in operations and marketing and risk all in the same room and making sure that they speak with each other. Also, love your comment regarding the utilization of digital channels. I mean, the question that we always have for a lot of folks is, and a question that I’ll pose to you as well. You know, digital channels aren’t necessarily new new, I mean, they’re somewhat new, but what do you think has really specifically has not made people, especially in the financial services industry, run to those channels as quickly as maybe others or other industries have?
Kevin Moss (24:48):
Well, I think if you think about FinTech, so these FinTechs started with a blank sheet of paper. They weren’t hampered by legacy systems. They weren’t hampered by physical distribution and multiple channels that they had to plug into. They had their own sales platforms, whether it be a phone bank or a branch system, or a tele center or whatever it happens to be. And so, it’s a little easier for some of the companies that have grown up over the last 10 years or so to be able to build out the digital channel, because that is the channel. And yeah, they have phone banks, they have customer service, they do direct mail, they sell through the mail, but principally, digital channel, digital statements, digital apps or web are the ways that people interact. And so when it’s your only, it’s your most important channel, people focus on optimizing and making it as easy as possible to self serve through that channel.
Kevin Moss (26:09):
So, I think the banks have a tougher problem to solve because they’re trying to plug into the digital channels and not necessarily scrap all the old legacy systems. And it’s a harder problem. It’s not an impossible problem to solve, but I think it’s a harder problem to control the customer experience, make it Omni channel when you’re hampered by the technology that’s in place that basically serves as either your accounting system or your servicing system in this case. So, I think that’s why what I’d like to see is just some basic capabilities that allow the experience to be better, to allow for the cycle time to be shorter, and really allow the financial institutions to scale a little bit better, because that reduces the challenge that they have around training, staffing, moving resources around, hiring resource in an environment where people are working at home or largely at home, it’s going to be a very challenging environment to try to train new people when they’re not really working next to their supervisors. So I think it’s an unprecedented challenge right now, which is why the industry, I think, has gone to the deferment forbearance route because of all the challenges that we have right now.
Boris Grinshpun (27:50):
Yeah. But it’s interesting also that you mentioned that comment, right, as you look at traditional financial institutions, you also look at FinTech companies that were sort of born in the digital channel space, if you will. And given our prior conversation regarding capitalization, who’s better capitalized quote, unquote, to weather a particular storm, I mean, is there an opportunity for consolidation in this particular space? Would there be a benefit? How would people or consumers view this?
Kevin Moss (28:23):
Well, I think what FinTechs have done, if you go back 20 years ago, you had, for example, mono-line card issuers, and they were fierce competitors, but we went through a phase where, well, the model line entities are not strong enough. We can’t survive as a single product. And they were all acquired by banks, right? Then I think what’s happened now with the digital channel is there’s two, number one, being able to engage over the digital channel and being able to use the ability to aggregate your relationships like at a mint or using a company like Finicity or Plaid. What you can do is we’re really back in a place where a company like a lending club or a prosper can really be specialized in a product. Yeah, they have different terms, they have some different channels and partnerships, et cetera, but essentially selling personal loans.
Kevin Moss (29:43):
And I think there could be a place where someone who has such a great product, such a great experience could become an integral part of a financial relationship. And it could be at a number of different financial institutions, because there’s a way now to pull your whole financial life together. So consumers who are smart shoppers may end up this going for the best products that meet their needs instead of just going to their bank for everything. So I think that’s the wave of the future. I really do. I think that technology has enabled the ability to take disparate financial institutions, pull them together in a way that from the customer back, and I also feel that specialization offers the opportunity to have broad share in a particular vertical right now. So, we may be back into a world where people can specialize in one or two verticals and still be successful because they can just become part of a broader financial relationship.
Boris Grinshpun (31:07):
Yeah. Well, it’s interesting, right? Because I think we’ve gone full circle, but I think what’s interesting about the statement you also make is the fact that we used to live in this world where we were really vying for the consumer’s wallet share, right? Because if we had X amount of products, we knew what the consumer was about. We knew exactly all about them in their life cycle. And we were able to make, I’ll call it additional models, where we were better able to model credit risk, just because we had a much more holistic picture. Not that that picture doesn’t exist, obviously, we have credit reports, but it’s sort of like the consumer taking back charge a little bit of where they purchase and where they buy products. And it’s the reversal of what the bank was trying to do before.
Kevin Moss (31:56):
Right. I mean, right now the consumer, in the UK is clear because it’s mandated, consumer owns their financial data. And I think that is kind of the direction that we’re going. And when you think about, historically who your bank is, you think about where your checking account is. And now through these deposit aggregation capabilities, you can basically get up to 24 months of history at the transaction level, by just logging your username and password, and probably doing some type of two factor authentication, but it’s so easy that some of these FinTech companies can now get to the same data that a larger multi-product bank does, and they can use that data to help them optimize the product or products that they’re delivering to the marketplace.
Kevin Moss (33:04):
So, my view is that what banks need to do is they’re going to need to get to the cloud eventually. They’re going to need to rebuild some of the technology infrastructure. And some people are already done this, or are in the act of doing it. And they’re going to need to go digital beside just mobile. Mobile is an end point in my view, but having everything along the way be digitized is also an important component of it. And so I think banks, a lot of them have got to realize, and I think as we get through more innings of this crisis, I think it will become apparently clear to everybody, abundantly clear, that digital is the way to go. And for those that are in risk, this is a time where you’re going to have more budget, you’re going to have more mind share those in operations, the people who are really the front line dealing with customers. So this is the time for you all to ask for what you really need to serve the customer that you have the right way.
Boris Grinshpun (34:33):
Yeah, no, that’s absolutely…. During times like this, when there is, again, so much change, if the time is, it is today specifically for that. So yeah, Kevin, this has been an awesome dialogue. It was great having you come on and chat with us. We really appreciate a lot of your insight. I always like to open it up also to the folks that are with us here on this webinar. What’s next for Kevin? Where’s Kevin’s attention focus on next, if you will?
Kevin Moss (35:07):
Well, I’ve been really busy. Where I’m at in my career stage is I’m not working full time for any one person, on a senior advisor with all the Wymans, so I get to work with some of their customers on the banking insurance side. I love working at Oliver Wyman, the people are great. And then I’ve got about seven startups and other companies that I’m working with as an advisor, just helping them about a lot of the things that we talked about today. And so I love it because, first off, I’m working with some brilliant young talent. I’m working with three different fraud platforms, [Senalink 00:00:14:39], Secure, Neuro ID. I’m working with a personal loan lender. I was working with another card and deposit integrated account through an app. There’s just really some really smart, brilliant people.
Kevin Moss (36:20):
And really at this stage, what I want to do is I want to share the learnings that I’ve had over the years. I want to see how smart people solve problems today that I may have solved in a different way. And really this is all fun to me. It keeps your brain going. It keeps you engaged and relevant in the industry. And I think right now, in some ways it’s part of me giving back. I’ve had people along the way that gave me great opportunities that believed in me that helped me have a successful career. So in some ways, whether it be teaching or sharing, I believe that we should all be paying our success forward right now. There’s a lot of people that are in need, and this is one way that I think I can do that, if I can help more people who were in distress, just like we did when we were in home equity, I think that’s what our responsibility is as human beings and as people who have had our share of success in our life.
Boris Grinshpun (37:44):
Yeah. That’s great. That’s great. Well, I want to extend mine a very big thank you for coming on the webinar today. Thank you to everybody at LiveVox and Kevin, hopefully we actually get to have a coffee or a beverage sometime soon in person.
Kevin Moss (38:01):
As long as we are six feet apart, I look forward to it.
Boris Grinshpun (38:04):
Absolutely, Kevin. Thanks very much, talk soon.
Kevin Moss (38:08):
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