By Ron Oleston, CCE
Are you spending more hours on activities in the collection department than you used to?
Are the examiners asking for more and more procedures regarding new collection activities?
Are additional reserves adding a financial burden to your already-strapped bottom line?
Well, collections is not what it used to be. In the good old days, when members missed a payment, you had a set timeline that you followed. Today, members have become much savvier about manipulating the system. Members are very much aware that financial institutions are willing to be more lenient on missed payments and even open to a settlement of the outstanding balance. Financial institutions are settling for 30-50 percent of the balance on delinquent accounts. In many cases, the consumers have the funds to make the payments but are taking advantage of the economic situation to reduce the balances on their loans.
Having worked with many credit unions across the United States, I have seen them positioning themselves to help their members through tough financial times, with the theory that members will be able to make the new lowered payment and be more willing to pay a financial institution that has worked with them. Many credit unions have openly informed their members that if they have a hardship of any type, they will look at either granting an extension or a workout loan, thereby reducing members' payments for a predetermined time.
Credit unions have bent over backward to help members in these ways, only to face stiffer reserve requirements from regulators. On top of that, the delinquency numbers are not going down as expected. So are results worth all the effort?
Data highlights: 1Q 2009 vs. 1Q 2010:
- Total workout solutions increased from 0.71M to 1.36M (+92 percent).
- Modifications completed increased from 370,440 to 476,190 (+29 percent).
- Foreclosure starts decreased from 728,780 to 691,020 (-5 percent).
- 60 days+ delinquency increased from 2.85M to 3.99M (+40 percent).
- Completed foreclosure sales increased from 201,310 to 291,380 (+45 percent).
Here are some sobering statistics according to MortgageLoan.com on mortgage loans that were modified in the first quarter of 2008:
"Within three months of the modification, over 35 percent of the borrowers were over 30 days late, or had missed at least one payment.
"After six months of the modification, the default rate was nearly 53 percent.
"After eight months of the modification, the default rate was 58 percent."
Many financial institutions are finding themselves in a very difficult position. To meet the increased demand for extensions and workouts, they have had to increase their manpower to process all the inquiries.
I have been in the credit union industry for 25 years and it is time that we take a step back to fully evaluate not only our intentions, but the impact our loan modification processes are having on our credit unions and our members. Don't blindly follow other financial institutions down this very slippery path. If you are doing modifications, put in place a simple three-step pre-qualifying phase before you spend days of manpower gathering all the documents for final approval. Ask the member these questions:
- Is the financial hardship that you experienced over?
- Do you have the means to make a reduced payment?
- Are the credit union and the member better off for granting this modification?
Give the members who answer "yes" a "soft" approval; then move on to the heavy-lifting part of the modification process.
For those who don't pass this initial screening, tell it to them straight (or dig a bit deeper if you think it will help). These members may not like the answer, but they will appreciate the speedy response and your honest explanation of why a modification will be nothing better than a short-term fix with more financial heartache beyond the next turn. Counsel them, but do not automatically approve a modification if it will not benefit the member and your credit union.
Don't get me wrong. I am not professing that you should stop working with your members during these difficult times. Credit unions have and always will find creative ways to work more closely with members than banks do. But credit unions are also facing very difficult times and need to do some real soul searching before they commit to a philosophy that will harm the credit union in the long run. Consider the facts for your membership and make a sound business decision, so that you are putting your effort toward the members who will benefit the most.
Ron Oleston, CCE, is president of Ron & Co., where he "helps credit unions realize their vision one step at a time."
