DALLAS - The question for credit unions in 2008 won’t be whether or not to ramp up collections activity but how soon to start collections and whether or not to do it in-house.
There is a marked increased in collections activities centered largely on mortgages and direct and indirect auto loans, according to collections managers. Surprisingly, credit card collections have yet to uptick.
“Strangely, because there was a push to get rid of credit card portfolios in recent years, many of them actually made a decision to go back into credit cards and we on the delinquency side haven’t seen a huge bump in credit card delinquencies,” said Chuck Busch, VP client development Gila Group.
Busch, whose Texas-based company Gila Group offers outsourced collections, payment processing and call center services to credit unions, says that the overall credit union delinquency ratio has jumped from 0.68 at the end of 4Q 2006 to 0.93 at the end of Q4 2007.
“I don’t even think we’ve seen the wash out in the charge off side,” Busch said. “They haven’t charged everything off yet so I think what is going to happen in 2008 is going to be critical and certainly the charge off component is going to be higher than it was in 2007.”
NCUA: Charge-Offs Up 830%
NCUA reported net loan charge-offs (annualized) increased $179.67 million or 8.30% by the end of Q3 2007. Total net charge-offs for the same period totaled $2.3 billion with real estate leading the way.
Busch added that delinquency ratios have a regional component to them. In states like Florida, Michigan and California, where fallout from the subprime mortgage mess is greater, collections activity is not surprisingly higher. But in states like Texas, where real estate appreciation was less dramatic, there is far less of an impact.
“Where we are in Texas, we’re starting to see some delinquency but it really hasn’t impacted us the way it has on the coasts,” he said.
Dana Rawlings, a member of the executive committee of the CUNA Lending Council and SVP/COO of Smart CU, agrees that although delinquencies are increasing, they tend to be regional in magnitude.
“Our first mortgages and refis are not a problem and again we’re very blessed because we have delinquencies that vary between 35 and 40 basis points,” Rawlings said. “We haven’t seen the effects of the economy that most credit unions outside of Houston are seeing today.”
Still, the uptick in delinquencies elsewhere is prompting some CUs, especially the smaller ones, to revisit the idea of outsourcing collections of their delinquent accounts, according to Busch.
Busch says that many credit unions stonewalled on the idea of beefing up collections activity as late as mid-2007 but are now realizing the need to get a handle on delinquency control.
“They have gone into different new markets and they realize there’s a different level of expertise necessary to do collections,” he said. “They realized they don’t have the have the expertise in-house. This is what I am being told by some of the larger credit unions and so they’re looking outside.”
CUs aren’t afraid to take on more volume but a side benefit of outsourcing is they can get out of the staffing side of it and as their volumes grow, they very often will see a material increase and sometimes the need to double their collections staff but are not sure where they can go find those folks, according to Busch.
‘Different Level Of Expertise’
“Now it’s a different level of expertise and technology and we have both,” he related.
You can achieve great economies of scale with the right technology, according to Bruce Cummings, chief marketing officer at Gila Group, but without the right technology, you don’t get efficiency.
“Unless you have a large call center, a dedicated phone system and a predictive dialer I just don’t think you’re going to do as good a job internally as an outsourced agency,” he said. “Some of the CUs are starting to realize that.”
“One of the things we do with our clients is work with them to specifically provide a payback period on the outsourced services,” Cummings said. “We’re going to let them know how quickly outsource pays back. That’s whether they have a full collections staff in house or whether they don’t have anybody in-house.”
Get Out In Front Early
Busch says that when he looks at a new credit union partner, he wants to learn everything he can about the CUs loan portfolio not just its delinquency portfolio. “We want to know if they are doing risk-based lending and what the mix of normal risk- based lending is,” he says.
Higher risk loans like “C” and “D” paper and auto loans are targeted to collect on them as early as five days delinquent. “Call them more frequently because we know those higher risk folks are a higher risk when the loan is made for a reason,” Busch said. “So we know we have to resolve the delinquency early so it doesn’t become repossession in the case of an auto loan.”
Busch says there has to be more communication between the loan department and the collection department because taking just one approach in collecting everything doesn’t work.
“You really have to target it,” he said. “We understand that your ‘A’ grade, top-quality member may only need one courtesy call if they’re one payment delinquent and that’s all they’ll ever need. But your person who is an indirect member that does not have a relationship with the CU and to ‘D’ grade paper, you’d better start calling them very early and frequently and make sure they follow up do what they promised to do.”
Rawlings adds that in addition to starting the collections process earlier, CUs need to have entrepreneurial strategies in place and start paying more attention to going after charged-off money too.
“There’s a lot of companies out there that would love to buy those portfolios,” Rawlings said. “They’ll pay you from 4 to 6, 7 cents to a dollar. When I first got here we packaged up about $13 million worth of charge-offs and generated several hundreds of thousands of dollars in revenue for our credit union.”
Credit unions need to be thinking more like that today because they’re going to need that capital and they’re going to be needing that revenue to offset some of the losses that they’re going to take during this difficult time, Rawlings said.
Get Rid Of Delinquency, Keep the Member
Rawlings says that whatever strategy CUs employ to boost collections, the member relationship must always come first.
He says that CUs shouldn’t be afraid to extend payment due dates or even offer hardship rewrites that extend terms or lower interest rates so that the member can afford to make the payments.
“Our message is very clear–we’re here to help you,” Rawlings says. We understand its embarrassing to return a phone call or its embarrassing situation that you’re in today but understand we’re the experts, allow us to help you out.”
Rawlings believes that CUs need to utilize all of the tools available to them in order to keep the member relationship intact. He says that collections have always taken a back seat at the credit union but should take a front seat.
“How good you collect and how good you maintain that relationship with your members allows you to do more things with them from a lending perspective, from a deposit perspective and all the other things we do within the CU world,” Rawlings said.
Busch agrees that CUs will have to be far more creative particularly with better customers than they have been in the past but each situation has to be appraised differently.
“Doing creative refis is not going to resolve a problem on the high-risk folks that have a real shaky situation but it does require different approaches to different types of loans,” he said.
