FRANKENMUTH, Mich.-Frankenmuth CU is now in the first year of a program making car loans to members who file for Chapter 13 bankruptcy, and to date has 44 active loans for a total of $846,000 in balances with the average yield at 12.19%.
But to ensure the loans perform, the credit union has also made adjustments to its program this year.
The loans are risk-priced and are often made to members who need to get out from under an existing upside-down car loan at a rival institution and acquire reliable transportation. The loans are closed before the bankruptcy plan is finalized, and the loan becomes part of the plan. The bankruptcy plans state the credit union will be paid first, ahead of all other creditors (Credit Union Journal, March 19).
So far $231-million Frankenmuth CU has not had any charge-offs or losses, said CEO Vickie Schmitzer, but it has learned some lessons. Currently 15% of the loans are past due, and three of the past-due loans have had the bankruptcy dismissed and the CU is having difficulty collecting. "These loans were granted late in the bankruptcy plan."
The credit union has since revised its program to only include loans made early in the bankruptcy plan, no longer allows members to pay the loan directly and requires payment through the trustee, and no negative equity is allowed to be rolled into the loans.
"Now that we have tightened our program guidelines, we feel comfortable continuing it into 2013," said Schmitzer. "We will continue to closely monitor these loans for potential revisions but are pleased we can offer an alternative to traditional lending that's beneficial to both our credit union and to the member."
