Collections: Use What You Learn
CUs find creative ways to help struggling members.
The Great Recession officially ended in June 2009, but the economic fallout continues to affect credit union members.
Members’ struggles to maintain financial stability continue to test credit union collection departments, according to “Collections in a Post-Recession Environment,” a white paper from the CUNA Lending Council.
Credit unions report seeing more loans held by formerly affluent households—those without a history of loan delinquency—enter collection. As these members exhausted their assets, many fell behind on payments.
When this happens, it’s vital to collect as much information as possible early in the intervention. “Collections in a Post-Recession Environment” advises credit unions to find out:
- How has the member’s income changed? Has it moved from two earners to one earner, or from one earner who was “overemployed” with bountiful overtime to one earner who’s “underemployed” with reduced hours or at a reduced wage?
- What’s the household using to pay living expenses? What types of savings or investments are available? Do they qualify for unemployment or other benefits?
- What’s the possibility of the member finding employment that matches their experience or training, and how long may it take?
- Is the member receptive to counseling that would help them reduce spending and pay down debt?
- Does the member understand how the inability to make their payments will affect his or her long-term financial prospects?
Develop the right repayment plan
Credit unions can use the information they glean to develop the right repayment plan.
Ent Federal Credit Union, for example, revised its approach to loan modifications in 2008 when increasing delinquencies and chargeoffs sent collections into “crisis mode,” says Bill Vogeney, senior vice president/chief lending officer for the Colorado Springs, Colo., institution and vice chair of the CUNA Lending Council.
Ent Federal’s leadership decided it didn’t want to “postpone the inevitable” by, for example, turning a five-year loan into a seven-year loan because doing would simply lead to larger losses later on.
Instead, the $3 billion asset credit union used auto loans to test the value of lowering the troubled borrower’s interest rate to 0% for up to six months. That allowed Ent Federal to lower payments while maintaining roughly the same amortization schedule.
Ent Federal initially allocated $5 million to fund these temporary modifications—and learned it was generating a payback of roughly 300% to 400% in the form of reduced chargeoffs.
That led to the program’s extension to home equity loans, with a reduced rate sometimes offered for as long as one year. The credit union estimates its $5 million in funding improved more than $10 million in loan balances.
Other successful tactics:
• Combining loans, extending terms, and turning unsecured debt into collateralized loans when possible.
• Implementing a loan “re-age” program. This can help members who have a temporary loss in income but can later return to full payments.
• Using cash flow analysisthat documents the member’s hardship, income, and expenses now and in the future. This will help determine whether a temporary loan modification would allow the member to make loan payments in the future.
• Working with a financial counseling provider, such as GreenPath Debt Solutions [http://www.cunastrategicservices.com/Greenpath_Debt_Solutions_45.html]. This can help members develop a realistic budget that includes payments in line with the member’s needs.
• Using principal-only paymentsto help members reduce credit card balances. This also can give members an incentive to continue paying off unsecured debt, reducing the potential loss to the credit union if the loan is eventually charged off.
• Moving catch-up payments to the end of the loan rather than asking members to increase their current payments;
• Allowing members to skip paymentsfor a month or two to address temporary needs.
"Collections in a Post-Recession Environment” and other white papers are available at no cost to CUNA Lending Council members; $50 for nonmembers.