After a brief lull in early 2025, lender risk teams are once again facing rising signs of consumer distress. Behind the headline figures, the structure of borrower behavior is shifting, forcing lenders to reevaluate how they approach loss mitigation in this cycle.
With many consumers relying more heavily on unsecured credit, lenders should rethink the durability of their existing mitigation playbooks.
Why Traditional Playbooks May Fall Short
Historically, loss mitigation strategies have relied on segmentation models built around credit score tiers, repayment history, and macroeconomic triggers. But this model is under pressure.
- Prime-tier vulnerability is increasing. Prime and near-prime segments are starting to show more volatility, particularly in unsecured personal loan and credit card delinquency trends.
- Borrowers are reshuffling their priorities. Many are preserving mortgage and auto payments while falling behind on revolving or installment credit—masking financial distress.
- Average loan balances are growing. Larger origination volumes, particularly in personal loans, are amplifying the risk when defaults occur.
As borrower resilience wanes, lenders are facing a more fragmented and less predictable delinquency landscape.
Shift from Static to Adaptive Mitigation Models
Loss mitigation needs to become more dynamic, starting with:
- Tier-fluid strategies. Don’t assume super prime means secure. Loss mitigation teams should watch for shifts in utilization rates, increasing reliance on minimum payments, and growing personal loan balances—even in higher score brackets.
- Cross-product intelligence. Monitor how stress in one product type (e.g., credit cards) may signal upcoming delinquency in another (e.g., personal loans). Data silos limit responsiveness.
- Time-sensitive triggers. Many borrowers who default in this cycle may not show traditional warning signs. Reactivity should be measured in days, not months.
The Role of Digital Engagement and Borrower Experience
Consumer-facing interventions are no longer just about compliance—they are central to loss prevention.
- Offer optionality, early. Proactive outreach that includes short-term forbearance, payment flexibility, or restructuring can prevent roll rates from accelerating.
- Use behavior, not just scores. Digital interactions—missed app logins, changes in payment method, or decreased contact rates—can be predictors of upcoming risk.
- Test contact cadences. SMS, email, and digital self-serve portals are becoming more effective than traditional dialer-based strategies, especially in the early stages of delinquency.
Increased delinquencies do not necessarily lead to increased charge-offs, especially if contact is made and resolution paths are clear.
Structural Alignment: Ops, Risk, and Compliance
Loss mitigation isn’t a department. It’s a cross-functional capability.
To reduce loss severity while maintaining compliance, lenders should:
- Align risk and ops on near-real-time decisioning frameworks.
- Equip compliance teams with upstream visibility into borrower communications.
- Integrate collections infrastructure with case management and customer support tools.
Modern mitigation requires moving from reactive recovery to preemptive engagement.
Preparing for the Long Tail
Even if macroeconomic conditions improve, the aftershocks of current consumer strain may stretch into late 2025 and beyond. Longer delinquencies mean higher legal and operational costs, and the potential for downstream reputational risk.
Key actions to consider:
- Build segment-specific recovery plans that factor in not just repayment potential, but contactability and willingness to engage.
- Revisit settlement strategies for mid-stage delinquency cohorts—especially those entering 90+ DPD with previously strong repayment histories.
- Establish early resolution scorecards that track the ROI of different mitigation approaches across regions, products, and demographics.
The goal is not just to manage losses, but to mitigate them before they happen.
