Strong-Arm Delinquency Tactics Yielding to Kid-Gloves Approach
Pasquale A. Castaldo, senior credit manager at Connecticut National Bank in Hartford, likens consumers who prioritize their debt -defaulting on some loans but keeping current on others - to over-inflated balloons. "Sooner or later, they are going to burst," he says.
Before the explosion occurs, Mr. Castaldo's bank is now trying harder to spot borrowers likely to fall behind on their payments.
The effort reflects the industry's new attitude toward managing consumer credit risk. As personal bankruptcies and consumer loan delinquencies soar, banks are abandoning strong-arm collection tactics in favor of a softer, more cooperative approach.
Taking their cue from the corporate side of the business - where loan "workouts" have become increasingly common - retail bankers are now willing to cut deals with their distressed consumer borrowers. Some are even willing to forgive small percentages of an overburdened consumer's debt.
"Things used to be more cut and dried," said W. Douglas Meredith, senior vice president at Liberty National Bank, Louisville, Ky. "It wasn't that we were insensitive," he said, |But if a customer could not pay us, their only alternative was to give us their car."
Bankers can no longer afford such tactics. Weak real estate markets around the country have discouraged lenders from repossessing the property backing mortgages and home equity loans. And bankers have learned that it is easier to work amicably with delinquent borrowers than to square off with them later in bankruptcy court.
More than 700,000 individuals sought court protection from creditors last year - up from 300,000 one decade ago.
Alarmingly high bankruptcies have pushed consumer delinquencies up significantly. According to the American Bankers Association, 2.67% of consumer loans at commercial banks were 30 or more days past due at the end of first-quarter 1991 - a seven-year high.
"A lot of it we have caused ourselves as an industry," W. Lloyd Congdon, executive vice president at American National Bank, Chattanooga, Tenn, said at a recent Consumer Bankers Association conference. "Whenever a loan gets in trouble, it always gets back to basics."
Less |Dialing for Dollars'
Many banks are trying to get back on track by changing their collections tactics. Clerks who once simply "dialed for dollars" are being asked to counsel consumers who may be having trouble managing their bills.
"We feel we can catch customers that aren't having serious problems before they do," said Mr. Meridith of Liberty National. "We might refer borrowers to our debt consolidation department or pick up some additional collateral."
Shawmut National Corp. provides a case study of significant change in the collections culture. The parent of Connecticut National has developed a comprehensive risk-management program to help spot borrowers who are likely to fall behind in their payments - before any trouble begins.
While much of the emphasis is now on managing risk in open-ended home equity loans, Shawmut hopes to apply the program to unsecured credits.
Role for In-House Counselors
Each quarter, the bank pulls credit reports on every equity borrower to look for early warning signs. Those who seem to be keeping up on secured loans but falling behind on unsecured debts, for example, are asked for updated financial statements.
If the income has suddenly decreased, the bank might freeze or reduce borrowers' credit lines. Consumers experiencing simultaneous increases in expenses and decreases in income are referred Shawmut's in-house credit counselors.
"If it's just a temporary situation of unemployment, we might want to consider an extension of their payment," Mr. Castaldo said. Other options include refinancing loans at longer terms or sending borrowers to local consumer-credit counseling services not affiliated with the bank. The counselors help borrowers negotiate with unsecured creditors to resolve some of their monthly debt.
"The idea is to free up their cash flow so they can make some payments to us," he said.
Once home equity payments are 30 days past due, the bank sends out bankruptcy avoidance letters. "Bankruptcy does not wipe your slate clean and give you a fresh start," the letter warns. "When you file for bankruptcy, it can stay on your credit report for up to 10 years."
The letter advises the debtor to contact the bank's counseling unit or ask for referral to independent counseling services.
"Most consumers who do go bankrupt have a reduction in income two years before they filed," Mr. Castaldo said. "When things get tight, people try to solve problems on their own" - often, unsuccessfully.
That is an especially acute problem today, he said, due to the "white collar recession." Many people falling behind on their debts have never before been delinquent, so are not always sure of the best solution.
"You have to make sure that people understand that, in times of need, the worse thing they can do is not talk to their creditors," Mr. Castaldo said.
The Bankruptcy Squad
Despite Shawmut's efforts, a significant number of its borrowers do declare bankruptcy. So last year a unit was charged with challenging each personal bankruptcy affecting Shawmut.
The unit currently handles about 100 cases a month. According to Mr. Castaldo, it has restructured one-half of all filings it faced.
Two full-time employees attend all meetings that creditors hold during bankruptcy proceedings, ensuring that the filings are not fraudulent. They also seek repayment deals with their borrowers' other creditors, leaving consumers with more money to repay Shawmut.
"We may just be prolonging the inevitable, but it's a chance I'd like to take," Mr. Pasquale said.