Case Study: Richard Beck Consumer Credit Corp.

Founded in 1959 by Richard Beck, the Richard Beck Consumer Credit Corporation (RBCC) has enjoyed over four decades of profitable growth in the Southern New England region, loaning money to individuals in Western Massachusetts, Connecticut and Rhode Island.

Now operated by the third generation of the Beck family, the firm in recent years has experienced increased losses from bad debts (loans that the company writes off as uncollectible), as well as increased costs associated with collections (loans on which the customer has fallen into default, but which the company still feels can be collected).

The current management team, led by Julia, Daniel, and Andrew Beck (the president, CFO, and COO, respectively) has engaged your consulting team to analyze data from 1,000 recent loans and make recommendations.

There are several questions of importance to the management team, as you infer from a recent teleconference:

Juli Beck: “We are really getting creamed on some of the loans we are making. It seems like we aren’t doing as good a job as we used to in identifying whom to lend money to. We are paying a lot to the Boxwell & Haller Credit Rating service (B&H), but I don’t know if their ratings are worth a damn.”

Andy Beck: “I think we ought to can those B&H guys. They have this scale from A to E, but I don’t think there’s any difference between A and E. All it does is slow down the approval process.”

Dan Beck: “It’s not just that. A lot of times a good customer falls behind on their payments, but they will still get caught up if we approach them the right way. We’ve tried a number of different ‘scripts’, or ‘appeals’ our customer service reps use when talking to the customers on the phone. It would be really helpful if you could tell us whether the different scripts make any difference. Right now we are using three of them: one is designed to appeal to a person’s sense of responsibility and what sort of example they are setting for their family; another one stresses the negative effect that a loan default will have on their credit rating, and the third one focuses on the threat of legal action. I wish I knew which one works the best.”

Andy Beck: “That’s another waste of money. Once we decide somebody is in default, we ought to just send the lawyers after them.”

Juli Beck: “I don’t think so. A lot of people will pay us back if we’re patient and work with them, and it’s a lot cheaper than going to court.”

Andy Beck: “My point is, why can’t we stop making bad loans in the first place? Why can’t we do a better job of figuring out ahead of time who will pay us back and who won’t?”

Your Assignment

Data from 1,000 recent loans are contained in the Excel file rbcc.xls. In that file, the Beck analysts have collected the variables defined in Exhibit 1.

Your job is to use those data to try and answer the questions posed by the Becks:

  • What proportion of RBCC’s customers go into default?
  • What criteria should RBCC use when deciding which customers are good credit risks? If you were to recommend a set of variables for RBCC to use, which variables would you use?
  • Once a loan is in default, what “script” should they use to try and collect the overdue debt?

Variable / Definition
Subject / A number from 1 to 1000, identifying the customers (for confidentiality reasons, you aren’t allowed to see the customers’ actual names).
Marital Status / The customer’s marital status; Single, Married, Divorced, or Widowed.
B&H Credit Rating / The credit rating from Boxwell & Haller; A, B, C, D, or E (A is the best; E is the worst).
Children / The number of children the customer has listed as dependents for tax purposes.
Age / The age of the customer in years.
Income / The customer’s most recently reported gross annual income.
Debt / The amount of debt owed by the customer, including the loan from RBCC.
Gender / Male or Female.
July Status / The status of the account as of last July (either “Up to Date” or “Default”).
Script / In the case of accounts that were in default as of last July, this indicates which “script” the collection department used when they called the customer. “A” indicates the “Responsibility” appeal, “B” indicates the “Credit Rating” appeal, and “C” indicates the “Legal” appeal.
January Status / In the case of accounts that were in default as of last July, this indicates whether the account was “Recovered” or still in “Default” as of the following January.

Exhibit 1

B01.13051Prof. Juran