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FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management

A lender's collections team applies different strategies to delinquent accounts. Which approach best reflects risk-based collections management?

Risk-based collections use collection scores and roll-rate analysis to set contact intensity and treatment according to cure likelihood and balance size. This allocates limited resources efficiently, unlike identical treatment for everyone, waiting until accounts are very late, or writing off at the first missed payment.

  1. AContact all delinquent customers identically and at the same time regardless of score
  2. BUse roll-rate and collection scores to prioritize contact intensity and treatment by expected cure likelihood and balanceCorrect
  3. CWait until accounts are 180 days past due before any contact
  4. DWrite off every account at the first missed payment

Explanation

Risk-based collections use scores and roll-rate information to tailor treatment, focusing resources where the cure probability and exposure justify it. Uniform treatment wastes resources, and waiting too long lowers recoveries. Immediate write-off ignores likely cures.

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