Debt Cancellation Begins to Get Toehold Among CUs
Debt cancellation-a two-party contract in which a lender agrees to cancel, defer or suspend debt when one or more specified events occur, in return for a fee-is offered by just 26 credit unions in the United States. Yet that figure is up significantly from three CUs a year ago.
According to two speakers at CUNA Mutual's Discovery conference here, debt cancellation has numerous benefits for credit unions and their members.
Janet Randall, regional vice president, lending, for CUNA Mutual Group, and Susan Genovese, director of operations for Vista Financial Services LLC, a subsidiary of Orlando, Fla.-based Vista Federal Credit Union, co-presented an educational session on the topic. Randall gave a detailed background on how to set up a debt cancellation program, while Genovese told attendees about Vista's experience offering the product with CUNA Mutual as a partner.
There are several differences between debt cancellation and credit insurance. Randall said the most important distinction is that the former is regulated by NCUA and state credit union regulators, while the latter is regulated by state insurance departments.
"That is a huge difference," she said. "Credit insurance is an insurance company product that has state-specified limits on rates, forms and product features. Debt cancellation is a credit union product with no current limits on rates, forms or features. A debt cancellation program can be designed a number of different ways. Borrowers can cancel some, part or all of their debt, or suspend a pre-determined number of payments during a period of unemployment."
Steps To Be Taken
Because debt cancellation is a CU loan product, it can be tailored to the needs of a credit union's membership, Randall explained. She said it reduces charge-offs, delinquencies and collection costs, and helps increase loan officer and lending staff commitment. It has the potential for increased fee income, and the loan officer does not have to be licensed to sell insurance products.
The first, and most important, step in starting a debt cancellation program is to thoroughly plan early on, she said. "A credit union must understand its members' needs. Does it have SEGs that have a claims volatility risk? Credit unions must anticipate work stoppage events such as furloughs."
Other contingencies to plan for include litigation risk and tax implications. Randall acknowledged the potential for lawsuits, but added there are coverages to help offset the risk. Because it is not an insurance product, it might be considered a taxable event, she warned.
CUNA Mutual has prepared an "implementation timeline" for CUs that decide to partner with it on a debt cancellation program, including all the critical tasks to be completed in the 120 days leading up to launch.
Randall said some credit unions might need more than 120 days. Before going live, they must have in place data processing, agreement language, forms, member notifications, accounting and sales tracking. "Credit unions need to know their claim payment procedure-who is going to handle it, and how it will work. And, they need to inform their regulator."
One Credit Union's Experience
Vista FCU serves Walt Disney Co. employees, and has operations in California as well as Florida. Genovese said the credit union wanted a nationwide program that would enhance its protection offerings. She said Vista selected CUNA Mutual as its partner for several reasons, including expertise, support and the ability to customize features of the program.
"When it was time to design the debt cancellation product, it was important to us to canvas our staff," said Genovese. "We wanted to narrow down the type of life events we would offer the program for. As a single-sponsor credit union, there is not much diversification in our membership, so it was not a good idea for us to take on a lot of risk."
As part of the product design, Vista's management reviewed seven years of claims, she said. There were low loss levels, and the longest disability was 12 months.
When design was complete, Genovese said every area of the CU was involved in bringing the program to life. The lending department implemented it, compliance reviewed it, marketing prepared collateral pieces such as newsletters, collections had to be trained on a new claims procedure, information technology had to prepare new systems, and accounting had to design a new fee collection schedule.
Twelve months into the program, Genovese said it is going well.
"Staff reaction has been very positive, and members have started to come in and ask about the 'unemployment protection' they've heard about. We've had very low loss rates so far, and net income has increased-which is always a good thing."
Vista already has learned several lessons, she continued. First, the plan must be designed to be something members need and want. The staff continues to ask members for feedback. Second, the number of plans should be kept at a minimum so as to not be confusing to members or staff.
"Don't copy the credit insurance program," Genovese advised other CUs. "Designing a debt cancellation product is like being given a blank piece of paper. Take advantage of it and write your own program. Watch the cost of adding benefits, and embrace the change."
Vista recently added credit card protection to the program. Genovese said the CU will wait one more year before it makes other major changes or alterations.