Do Forbearance Plans Help Mitigate Credit Card Losses?

22 Pages Posted: 8 Jul 2005 Last revised: 17 Jan 2008

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Lawrence Mielnicki

De Lage Landen Financial Services

Abstract

In this paper, we examine how reinstated (i.e., re-aged) credit card accounts are likely to default again. Our sample data reveal that about 22% of the re-aged accounts default again, mostly in the first 24 months after reinstatement. We also find that a FICO score (public information) is a better predictor of a second default, while a payment behavioral score (private information) is a better predictor of a first default. Furthermore, the average FICO score of the 78% of the re-aged borrowers who did not default again rises about 20 points, an improvement in their relative risk profile overall. These findings suggest that the re-aging program provides a second chance for liquidity-constrained borrowers who would have otherwise defaulted on their debt.

Keywords: Credit card default, forbearance, loss mitigation, hazard models

JEL Classification: G21, C41

Suggested Citation

Agarwal, Sumit and Chomsisengphet, Souphala and Mielnicki, Lawrence, Do Forbearance Plans Help Mitigate Credit Card Losses?. Available at SSRN: https://ssrn.com/abstract=754825 or http://dx.doi.org/10.2139/ssrn.754825

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Lawrence Mielnicki

De Lage Landen Financial Services ( email )

1111 Old Eagle School Road
Wayne, PA 19087
United States

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