HOUSTON — Smart Financial Credit Union reports it shrunk its delinquency ratio from three times above peer average to three times below by removing "rigid" collections policies and making them very flexible.
Among its tactics: avoiding a legal-looking collections letter to delinquent members in favor of something that looks more like a wedding invitation.
COO Dana Rawlings said that today's economy demands such an approach, and believes that many credit unions generally ignore their collections policies. "Credit unions are always changing lending policies to be leading edge," Rawlings contended. "But often we just establish our collections policies and sit them in the corner."
In this case, Rawlings reference is not to Smart Financial's policies for working delinquent accounts, such as frequency of calls. He's talking about policies that affect the credit union's ability to work with members through tough times.
"I don't get why the big banks and big credit unions are not willing to do everything humanly possible to prevent a foreclosure on a home or an auto repossession," said Rawlings. "They need to use every collections tool they have. There just seems to have been a trend we have gotten used to over time that we have our policies, they are rigid, and we simply focus on keeping delinquency numbers low. We cannot think like that today."
SFCU's results support Rawlings strategy. The $400-million credit union's delinquencies stand at 35 basis points this year. Assets have grown by $125 million in the last four years, and net worth has remained stable, near 9%.
"My belief has always been that we will work with our members to do whatever we can to help them," Rawlings explained. "Whether that means doing contract modifications, extensions, even giving 0% interest refinancing for a time period. That's what it's all about for us. If your policies say you'll grant one 30-day extension per year, that's not going to cut it in today's financial conditions. Look at it from the standpoint of maybe you can offer three extensions per year, or a 90-day with a couple 30-days."
How the credit union approaches members about a delinquency should be re-examined, as well, according to Rawlings. SFCU's collections letter resembles a "wedding invitation." It's smaller than the typical legal-sized envelope in which collections notices are typically mailed, it's cream colored, and the letter is thick stock. SFCU's name is not on the outside.
"People who are late on payments see a legal-sized letter with Smart Financial's name on it and they know it's a past-due notice, and may not open it. Inside our letter says 'My name is Sandy Robinson and I am collections VP at Smart Financial. I know how difficult this must be for you not being able to fulfill your obligations with your credit union. Please call me, and I personally assure you that we will do everything within our power to work out your situation.' It works remarkably well and is a great way to get people to understand that we are not here just to be collectors. We are here to help them solve their problems."
While SFCU's very flexible in its approach to working with members who are delinquent, it's approach to what it does with charge-offs is firm.
"It works well for us to sell charge-offs to a third party. We get a fair price for them and we generate monthly revenue," said Rawlings. "You can go through collections agencies. For some people that's OK. I don't like it and I have heard horror stories where members sue the credit union for harassment because of what the collections agency has said to them."
SFCU is willing to work with a third party regarding charge-offs, but not on early- stage collections, said Rawlings, who advised against outsourcing. "Why would I want a third-party vendor contacting my member, speaking on my behalf, and not having the same vested interest in the accounts that I do? Their goal could be just to make 150 calls a day. That's not my goal."
If a credit union must outsource, Rawlings suggested shipping out the later-stage delinquencies, since those are likely to provide the lowest return. "The front-end delinquencies are where you can make the difference. And it's where you can be the most flexible in coming up with solutions to members' problems."
