FAIRFAX, Va. — As delinquencies and defaults continue to rise, credit unions are searching for ways to help both members and the bottom line by offering loan modifications, but there are a number of wrinkles CUs need to iron out first to be successful.
"Issue No. 1 is the practical issue of being able to identify a member before he goes seriously delinquent. Our biggest enemy is the member who has already given up on paying the loan and we don't know about it," said David Reed, a consultant and the founder of CU Doctor.
Reed emphasized the importance of closely monitoring not just delinquencies, but also credit scores and other member behaviors with their core systems.
"Credit unions have been a bit slow in embracing technologies that will give them a heads up. The more that they can pick that low hanging fruit through technological means the better," Reed said.
In addition to the technological avenue, every staff member from tellers to the board should also keep their antennae up and report any information they glean that a member is in trouble so that individual can be placed on or moved up the delinquency watch list. Credit unions, especially those states hardest hit by the housing collapse, can no longer rely on past history of member behavior noted Aaron Bresko, director of credit and portfolio management at Boeing Employees Credit Union and Vice Chairman of the CUNA Lending Council. In normal times a struggling member would stop making payments on credit lines, revolving credit products and auto loans before their home loans, but today more and more members are letting their mortgages go delinquent and keeping credit lines current.
"If they are $100,000 backwards in the house they aren't going to try hard to keep up with the payments but they'll keep the credit cards up to date because they need them for everything," Bresko explained. "If there is something that goes wrong you might save your car or some other item before your house and find some other place to live."
To combat bankruptcy lawyers, short sale brokers and scammers, it is critical to continue to publicize the fact that CUs are part of the solution. Members who are behind are very likely to not respond to collection attempts if they think the institution is just looking for money, Reed said.
"They are anticipating every call from the credit union is seeking payment," Reed explained. "How much? Everything that is past due, and they can't pay that right now so why should they answer the phone?"
Getting the word out in every newsletter and advertisement as well as blasting the message on the website's front page are easy ways to alleviate member fears. And though more members are starting to feel the economic pinch, the good news is that regulators are giving CUs the green light to be "aggressively creative" with workout solutions as the definition of "reasonable" modifications has expanded. Every ball is in play, Reed pointed out, from eliminating delinquent interest to cutting down mortgage principle.
"What the regulators need to see is some form of a plan," he said. "They can't give [modifications] out like candy, but the alternatives to a lot of these is total loss."
Regulators may be a be more liberal with creativity, but as interest rates continue to stay low CU execs need to be aware of the strain that refinance and first-home buying volume coupled with new legislation puts on employees. Keith Reynolds, VP-lending at Peoria, Ill.-based Citizens Equity First Credit Union and CUNA Lending council member, said the government policy landscape changing from day to day is something he had never seen in his 35 years in the industry.
"I don't ever recall this level of abstraction," he added. "The biggest strain it puts on staff is that you're trying to monitor all these different debates going on and the implementation of any of them has an impact on operations."
When a modification is finally made, depending on the terms and conditions surrounding the loan, it can mean real consequences for a member-though such consequences are certainly much better than a foreclosure or repossession.
"It is safe to say that a modified loan looks much better than a delinquent real estate loan. There is no way to go back and 'cure' past delinquencies on the credit report if there was no error in their original reporting," said Reed. "Removing or altering the payment history gives all other creditors a false sense of the loan.
Several credit unions have reported that they also either require, or strongly suggest, that members receiving loan modifications participate in a financial counseling program. But regardless whether modification impacts members' credit scores or if they get financial literacy assistance, CUs need to keep track of whom they have helped and factor that into future lending decisions.
"One final aspect to the equation is the fact that a credit union remains a financial cooperative. Even though it is in everyone's best interest to see the member remain in the home any loss to the credit union will need to be 'remembered,'" Reed added. "That is, a credit union may have a 'member who has caused us a loss policy'" that says if you make us lose money we will limit your services because you have, in effect, made all the other members pay it."
