By Bill Merrick
“Go to Lyle.” That’s what Sherry Sheridan advises friends to do during tough financial times, and it’s
how the Janesville, Wis., resident survived her own financial crisis.
Suffering from arthritis and unable to work, the 63-year-old single mother of teenage twin boys gets by on a monthly disability check of $1,127. Sheridan used to earn extra money babysitting. But that ended with the implosion of the housing industry and the pullout of Janesville’s largest employer, forcing her to make some terrible choices.
“It was either keep the house or eat,” she recalls. “During the winter, I’d sit in the house wearing a coat and gloves so I could keep the heat down. It was a struggle, but I kept making my house payments.”
Needing a lower mortgage payment, Sheridan found a loan broker on the Internet offering a “government” mortgage modification program—if she ponied up $5,000.
Pen in hand, ready to close the loan, Sheridan had second thoughts and contacted Lyle Wermund, loss mitigation manager for $313 million asset Blackhawk Community Credit Union in Janesville.
He warned her away from this “charlatan” and ultimately modified Sheridan’s mortgage, saving her $200 per month.
Now she doesn’t fear losing her home or trying to sell it in a bleak housing market. “I’m so glad I went to see Lyle,” Sheridan says. “I haven’t made a financial move without him since.”
Sheridan’s dilemma is all too common in Janesville, a South Central Wisconsin city of 60,000 where the unemployment rate approaches 13% following the closure of a General Motors (GM) assembly plant that was a city mainstay since 1919.
As Blackhawk Community can attest, members’ struggles can cause hardships for credit unions, particularly those serving distressed industries such as manufacturing, construction, and transportation.
The construction industry lost an average of 72,000 jobs per month during the previous 12 months, reports the U.S. Bureau of Labor Statistics. And since December 2007, more than two million manufacturing jobs have disappeared, with an average loss of 41,000 jobs per month during the last six months of 2009, Yahoo Finance reports.
All told, 15 million Americans were unemployed as of March 2010, including 6.5 million “long-term unemployed”—those who’ve been jobless for 27 weeks or more. The number of long-term unemployed increased 414,000 since February.
As daunting as these statistics are, credit unions that serve distressed industries and communities are improving members’—and their own—financial stability by diversifying their membership base, intensifying loan monitoring and collections, modifying loans, and helping members make wise financial decisions.
The dreaded news
Blackhawk Credit Union was formed in 1965 to serve employees of GM’s Fisher Body Division and UAW Local 95 workers. The first inkling the company might close its Janesville assembly plant came in mid-2008 when the auto maker cut 700 jobs there. Rising gas prices and the poor economy killed demand for the pickup trucks and sport utility vehicles the plant had produced since 1990.
In December 2008, GM delivered the dreaded news—it would close the Janesville plant and eliminate 2,600 jobs. Over time, the ripple effect would eradicate another 7,000 to 8,000 jobs at GM suppliers and local businesses.
By the second quarter of 2009, Blackhawk had 80 properties in foreclosure. And by year’s end, the credit union’s loan delinquency rate had doubled to nearly 4%, reports CEO Bob Carmichael.
“It’s devastating,” he says. “GM has been a huge part of Janesville for decades. But we’re gearing up for the future. It will take a few years, but this will be a vibrant community again. And Blackhawk will be part of it.”
In mid-2008, foreseeing the possibility of the GM plant closing, Blackhawk Community implemented a three-pronged strategy to help members and minimize loan losses. The credit union:
1. Created a loss-mitigation department. What started as an effort to improve loan quality assurance has
grown into a three-person department that handles all foreclosures, litigation accounts, and mortgage short sales.
2. Moved collections in-house. The credit union hired three collection specialists who were familiar with the area and its residents. “You need local people for this,” Carmichael says, “not a company that’s 100 miles away.”
Blackhawk also takes a proactive approach to collections, contacting members right away when signs of financial distress appear instead of waiting until loans are 60 or more days in default. Early warning signs include bounced checks, overdraft charges, and the termination of payroll deposits, Wermund explains.
“When people lose their jobs and face an uncertain future, they’re often reluctant to talk to creditors,” Carmichael says. “If you wait too long to contact members, it’s hard to get them to disclose what’s happening in their financial lives, let alone come in for help. You need to contact these members right away.”
The credit union sends past-due notices when loan payments are 16 days late, and follows up with phone calls. After 45 days, the borrower receives a letter detailing possible solutions—along with Wermund’s name and phone number.
3. Expanded financial education. Blackhawk Community partners with BalancePro to offer members budgeting assistance and credit counseling. Members must complete this counseling to receive a loan modification.
The best financial education tools are engaging, interactive, and relevant, says Janet Garkey, manager of adult education
for the Credit Union National Association (CUNA). “Make financial education relevant, using examples that are relevant
to members. And make it just in time—when members need it and are most receptive to it.”
She says Accel, a CUNA strategic alliance provider, offers this type of financial education and counseling, helping credit unions instill fiscal responsibility among members while minimizing loan losses.
Most members intend to meet their obligations, Wermund adds. But they sometimes have unrealistic expectations. Budget counseling can remove these.
“If you can show a member on paper that he has $1,000 going out each month but only $500 coming in, he knows he’ll fall short,” he says. “We discuss these types of things when we try to modify loan terms.”
The ‘make-sense’ approach
When Wermund determines whether to modify a mortgage, he asks one key question: Does the loan make sense?
Finding this answer requires examining the value of the collateral and loss potential, the member’s credit history and ability to repay, the member’s long-term employment prospects, and whether additional time will make the situation better or worse.
“The goal is to restructure the loan so it’s successful regardless of what happens, barring job loss or them walking away from the house,” says Wermund. “If we can buy time, hopefully the situation will heal—property values will come back, people will get jobs, and we’ll start to recover.
“But you have to make a loan with your head, not your heart,” he continues. “People will tell you their stories and your heart bleeds for them. But sometimes the best thing to do is tell them, ‘You can’t afford this home, and it’s probably best to move on to another part of your life. Can we help you make that transition?’
Blackhawk Community models some of its modified mortgages after the Treasury Department’s home modification program, which sets the new mortgage payment at 31% of the borrower’s income. If the member makes on-time payments at the new amount for three months, the modification becomes permanent.
“That tests the mettle of these members to see if they’re serious,” Wermund explains.
The credit union also offers a “Care” program, which makes the member’s mortgage payment for up to 120 days “to help members get over the hump and get back on their feet,” Carmichael says.
To participate in Care, members must show they’re taking steps to improve their situation by, for example, participating in financial counseling or learning new job skills.
“We’ll look at members’ circumstances and make the modification with a time limit,” Wermund explains. “That doesn’t mean we won’t extend the modification, but at least we’ll revisit it a year or two later.”
The credit union’s overall loan delinquency rate, including mortgages, is 3.2%, which is nearly double the 1.8% rate for all U.S. credit unions (Figure I).
But Carmichael credits his three-pronged strategy for a lower than average charge-off ratio (40 basis points [bp] in 2009 vs. 55 bp for its peer group) and other positive measures:
• The number of properties held in foreclosure has fallen to 48;
• The credit union has had only three short sales during the past year;
• Only six of the credit union’s 70 modified mortgages have been 30 or more days delinquent;
• Only one of the credit union’s modified mortgages has had a new foreclosure filed in the past 18 months.
Even members who don’t receive mortgage modifications are grateful for the credit union’s efforts to help.
Wermund recalls a member who spent some time in jail but was positive he’d return to his job afterward. “If that happened, we wanted to do a modification, give him a fresh start, and let him keep his house.”
The credit union helped stall the foreclosure until the member completed his sentence. Unfortunately, this person’s job had disappeared due to economic factors. He couldn’t collect unemployment or find a job, so the house went to a sheriff’s sale.
“Even though he lost his house, he sent us a thank-you card,” Wermund says, because the credit union tried to help when no one else would.
Empower branch staff
In Corpus Christi, financially strapped consumers are as much a part of the landscape as the South Texas city’s beaches, says Wayne Vann, CEO of $960 million asset Navy Army Federal Credit Union. Lacking high-tech employers and heavy manufacturing, the city’s median annual wage is only about $30,000 per household.
Plus, the average credit score for Navy Army Federal members “is somewhere south of 600,” Vann says. “It’s hard to tell when Corpus Christi isn’t in a recession. That said, we have a lot of good, solid people here. They just don’t, traditionally, take care of their retail credit and they don’t have a lot of disposable income. So bills often get set aside when members hit a bump in the road.”
Despite this, the credit union has quadrupled in size since obtaining a community charter in 2003. In 2009 its delinquency rate was 0.7% and its net income was 224 bp. Despite tough economic times, “There are still a lot of people borrowing and depositing money,” Vann says.
Navy Army Federal succeeds by:
• Building relationships with members. The credit union’s top three factors for loan decisions
are relationship, stability, and ability. “Give members an opportunity and tell them, ‘if you treat us well, we’ll
always be here for you,’â??” Vann advises. “We reward behavior we like and upcharge behavior we don’t
• Giving branch staff loan authority. The credit union has lending guidelines and uses some automated decisioning, but it allows staff to make loan decisions because they know members best. Many of its loan officers used to be tellers. “Once you give front-line staff some autonomy, they’ll own the community,” Vann says.
• Widening credit “buckets.” Recognizing that many consumers’ credit scores have fallen—often because large credit card companies reduced their credit lines—Navy Army Federal expanded its A and B credit tiers. The A+ “bucket” now starts with a 700 credit score. Most lenders require a 740 score for an A+ rating.
“We don’t have many members with 740 scores,” Vann says. But the credit union does have a 90% loan-to-share ratio. Half of its borrowers have C or D credit scores. “That’s where we make our money.”
• Focusing on auto loans and being conservative with mortgages and unsecured loans. Members have shown they’ll make their car payments, Vann says.
• Being assertive with collections. “I have a high-powered collection crew,” he says. “If there’s a problem out there, we get it answered quickly.”
In sum: Know your audience, train staff, and don’t be overly risk-averse, Vann advises. “In today’s world, you need to realize people will encounter some hard times. You also need to realize credit scores tell you very little about people.”
Take Sherry Sheridan. Despite her financial challenges, she kept up her mortgage payments. And Blackhawk Community came to
her aid, easing her payment burden.
This summer, severance benefits for Janesville’s former GM workers start to expire. Blackhawk Community is gearing up for potentially higher delinquencies—and more members who may have to “go to Lyle.”
• Members’ struggles can cause hardships for CUs, particularly those serving distressed
• Loss mitigation, proactive collections, and financial education help both members and CUs.
• Board focus: Build enough flexibility into your loan policies to let loan officers make appropriate exceptions.
During the late 1980s and early 1990s, Service Credit Union, Portsmouth, N.H., shuttered 10 branches in seven years due to
the Base Realignment and Closure (BRAC) program that closed numerous military installations. This affected up to 30,000 of
the credit union’s members overseas and 13,000 stateside.
“We planned for the worst,” recalls Gordon Simmons, CEO of the $1.6 billion asset credit union. “We were concerned that we’d lose half our members; possibly more with additional base closings. Our very existence was in doubt.”
Service Credit Union survived the military downsizing and it thrives today. To weather the storm, Simmons says, the credit union:
• Expanded to military bases in Germany that had no branches. It has opened 10 new branch locations
in Germany since BRAC ended.
• Converted to a New Hampshire state charter, allowing expansion to nine of the state’s 10 counties.
• Expanded its field of membership (FOM) to include all branches of the U.S. military worldwide, adding 10 million potential members.
• Merged in five smaller credit unions, four in New Hampshire and one in Massachusetts.
• Enhanced its two call centers and implemented 24-hour service with live operators.
• Implemented an “employee empowerment” policy that lets staff make member-service decisions—even out-of-policy requests—to meet members’ needs.
“The expanded FOM mixed with improved technology and a member-service mentality has proven to be extremely successful,” Simmons says. “Looking back, we wouldn’t change a thing we did to stimulate growth. And we’re still growing.”
• BalancePro, San Francisco: 888-456-2227 or balancepro.org.
• CUNA: 2010-2011 Credit Union Environmental Scan: buy.cuna.org, enter 29436 in the product finder.
• CUNA strategic alliance provider: Accel, Farmington Hills, Mich.: 800-356-9655, ext. 5794, or accelservices.org.