ROCKVILLE, Md. - With loan delinquencies on the rise, many credit unions are considering ramping up their collections activities both in-house and outsourced.
For information on the latest collections strategies and trends, the Credit Union Journal caught up with Ken deMello, CFO of the $48-million FedFinancial Federal Credit Union and president of its wholly-owned CUSO-CU Collections.
CUJ: With regard to credit unions, are you seeing more outsourced collections activity or activity in general as we go into 2008? If so, why?
deMello: During the 4th quarter of 2007 we had the greatest increase in growth with regards to the number of clients and inquiries about our services. I believe that credit unions under $250 million should consider outsourcing for the improved collections and the cost benefit. Collections is more than a process it requires sales skills because people that are delinquent with a credit union are usually delinquent with other creditors and they must be convinced to pay the credit union first. Finding skilled and compassionate collectors is a very difficult task.
CUJ: What types of delinquent accounts are you seeing more of regarding collections activities: auto, unsecured credit, student loans, first mortgage loans or refis?
deMello: Although the majority of our client’s delinquency ratios have dropped this month (loans delinquent two months and over), we have seen an increase in auto loans, unsecured and home equity loans showing up on the delinquency list. I believe that this is the effect of our slowing economy. We worry about an increase in unsecured and secured debt as we move into 2008. For two years CU Collections has been providing seminars telling their members that delinquency ratios dropping was not indicative of better asset quality as everyone in the industry was touting. If you analyze the data from past years, you would see that the delinquency was being driven down by the increase in mortgage loans being put on the books by credit unions and these loans were not going delinquent due to rising home values during those years. Actually, delinquencies for unsecured accounts have been on the rise for some time. Now move forward to 2008, people can no longer use their homes as an additional form of income. Additionally, people are finding that their homes are not worth what they owe. They are panicking and trying to short sell their homes. Credit unions are finding that their home equity loans are in an unsecured position because of dropping home values and the fact that their members have first trusts with negative amortization.
CUJ: Do CUs collect accounts in a different manner than traditional larger financials like banks?
deMello: The basics of collecting is the same and I cannot speak on behalf of the banks but I feel that credit unions work hard to develop and maintain a rapport and relationship with the members. I believe that Credit unions want the member to know that they have always been there for them and we will try to help them through this difficult time. CU Collections follows through on this belief and feels that the majority of people want to make good on their loans and we would like to do what we can to help both the credit unions and their members. Credit unions as a whole are going to need to be creative in figuring out ways to help their members. They may need to make exceptions that would be more unusual during normal times. The mortgage brokers, mortgage companies and banks were overly greedy and creative when times were good and in doing so they put a lot of our member’s homes at risk. Now that times are bad they are going back to a conservative lending style. People are being denied because the home does not meet appraisal criteria. Unfortunately, the mortgage industry created the mess and now credit unions will need to work to pick up the pieces for their members.
CUJ: Is it harder to collect these days given the credit and mortgage crisis?
deMello: Collections are never easy but I believe that today’s crisis is just beginning. A consistent and reliable collection process is needed now more than ever. A credit union needs to be proactive in contacting the member. As we move forward into 2008, the situation will probably get worse before it starts to improve.
CUJ: How much money is out there for credit unions as a whole to collect?
deMello: December 2007 data from NCUA indicated the total amount of delinquent loans is $4.95 billion.
CUJ: How are collections activities affecting delinquency rates at CUs?
deMello: We will need to wait until the end of March to see the latest data. CU Collections has only seen a rise in delinquency with one client this month. I believe that this is abnormal for the industry and delinquencies and charge-offs are expected to increase through 2008.
CUJ: What sort of strategies will credit unions need to adopt if more accounts go into collections?
deMello: Having protocols in place and adhering to them is a very important part of the process. If contact is made early on with the delinquent member, chances are much greater that the member will be able to make arrangements to clear up the debt. Consistency also plays a huge role in collecting on delinquent loans. If the collector is consistent in the contact that is made to the member, they will have a greater chance of seeing a payment or some type of response from the member with hopes of resolving the debt. It is important for collectors to determine what action is appropriate with each member. In certain cases you can work with a member, but in other cases legal action must be taken immediately in order to mitigate potential losses. If credit unions realize how important competent collection professionals are to the process and do what it takes to find these people or outsource to companies with these people, it is almost certain that they will be able to weather the storm through 2008.
