As a one-off, a defaulted loan at a bank is not ideal, but it is usually a tolerable loss. When many defaults are taken together, non-performing loans en masse can result in the proverbial death by a thousand cuts. In tenuous economic times, such as right now during this unprecedented pandemic, defaults increase and banks are left with tough decisions to make.
Does a bank forgive the debt (which is costly and results in regulatory concerns)? Does the bank file lawsuits against each of its borrowers (which will be expensive and time-consuming)? Or, does the bank sell that debt at a loss to a third party (resulting in write-downs, regulatory compliance issues and other legal costs)?
One small defaulted loan won’t “break the bank,” but when the defaults start piling up, banks are faced with difficult and costly decisions.
Now, however, there is an additional option that may actually preserve more of the value of the debt, quickly resolve the default, and cost much less: ODR, or online dispute resolution.
The key is finding a debt recovery strategy that makes sense, especially if you don’t hope to recover the full amount a borrower owes you is difficult, and online arbitration makes that process easier.
Understanding Online Arbitration
Whereas litigation involves going to court and litigating the non-performing debt, maybe years later before a jury, online arbitration is an alternative that allows both parties to expeditiously present their sides of the argument to an arbitrator.
The arbitrator, an impartial expert, after examining both sides and any supporting documentation uploaded to the arbitrator, is able to quickly decide what the defendant is required to pay and that arbitrator is able to issue an award quickly and efficiently. Additionally, most ODR companies only charge an up-front flat fee, which is immensely less expensive than traditional litigation which requires continuing, legal fees, court costs, and time, which is usually months, if not years, to resolve a case.
The ODR process is less formal (and less time-consuming) than going to court, and the arbitration is typically legally binding and enforceable in court. Once the award has been issued, a bank can go to court to have it confirmed as a court judgment if the award (and a looming judgment) is not enough impetus for a defendant to settle. If necessary, once an award is confirmed, the court can issue a garnishment order to automatically withdraw payment from the defendant’s paycheck or bank account amongst other tools available to it.
Mediation vs. Arbitration
So why consider arbitration rather than mediation, since both are alternatives to going to court? Let’s look at the differences.
Mediation, just like arbitration, allows both the plaintiff and defendant to present their sides of the case, and an impartial mediator facilitates negotiations between the parties. Both sides must agree on the negotiation.
The key difference between mediation and arbitration is that mediation is not binding on the parties and the mediator will not issue a final and binding award. The mediator’s role is merely to facilitate a compromise between the two parties.
In the case of defaulted loans, it’s often fairly cut and dry: the borrower wasn’t able (or willing) to pay his or her debt. The lender wants to recover the funds it lent to the borrower. In an arbitration, the arbitrator can look at the documentation and the communications between the parties and make a determination that is logical and consistent with the law. An arbitrator can look at extenuating circumstances and make determinations in the award that are fair and equitable to the parties and consistent with the contracts between them.
Many financial institutions find that online arbitration offers faster, more streamlined solutions to debt collection.
While arbitration certainly can happen in-person, both technology and the COVID-19 pandemic have fueled the arrival of online arbitration options for the financial industry. Rather than having to take time out from your busy schedule to meet with the arbitrator in-person, you can open a case, upload supporting documents, and wait for the process to move forward.
While there are fees associated with arbitration, they are much lower than legal fees associated with litigation. And with a high success rate at recovering debt, at least partially, arbitration helps lenders even out their bottom line.