As I sit at the Jersey Shore and watch the waves break on the beach, I am reminded how the shifting sands caused by this action in nature mirror what many in the credit union industry have recently faced. Waves of delinquencies lead to charge-offs, causing capital positions (our beaches) to become eroded and in need of replenishment.
While credit union organizational structures provide many benefits to their members, the ability to quickly raise capital in the marketplace is not one of them. Rather, we must replenish our beaches through other means. As strategy for these other means are developed, it is imperative that the recoveries play a critical role in this replenishment process. In doing so, you can ensure that both short- and long-term member interests are best served.
The foundation for a recovery process should ideally be set before the loan reaches the point of charge-off. As a loan ages in delinquency, determinations should be made regarding its eventual collectability in the near and far term. The reason for delinquency will play a key role in making this determination. For example, a temporary job loss can suggest one course of action while a more permanent event like the death of a spouse may dictate a much different approach to recovery.
Once the causes for delinquency are identified, the path toward recovery can begin. Recovery strategies can run the gamut from settlement offers, to in-house recovery activities, to assignment to a third party agency, to assignment to legal counsel for judgment. Each of these strategies can be effective on their own or can also be used in conjunction with each other. Recently introduced recovery scores can also help to determine which course of action may be the best at a given point in time.
For those accounts that appear to be uncollectible in the near and far term, a settlement offer may be the best (and only) way to recover any portion of the loss. If the loss resulted from a more temporary setback that has since been cured, an in-house recovery program might be the best approach. This also provides the member with opportunity to avoid payment of the significant contingency fees that they are responsible for once the account is assigned to an outside agency.
If the situation warrants assignment to a third party agency for continued recovery activity, be sure to perform ample due diligence on the firms you select. Make sure that your organization is comfortable with the approach and philosophies employed by the agency. In many instances, a member may have one loan assigned to an outside agency, while collection efforts continue on a loan still on your books. Try to avoid an agency whose approach to recovery may adversely impact the member’s desire to make payments on the loan that is still on your books.
It is also important to use more than one third-party agency to recover your losses. Creating “champion-challenger” scenarios between firms tend to increase recoveries. Also, always be on the lookout for the next recovery firm to bring in as a challenger. Talk with other organizations to see who they have had success with, then test these firms out with a small (but recent) portion of your charged-off loans. Similar strategies should be used when looking for firms to assign second placements to as well.
Typically, the size of the loss you are attempting to recover will determine whether or not it is worth the cost of engaging legal counsel to obtain a judgment. Even if the decision is made to obtain judgment, a sub-strategy concerning collecting this judgment will need to be created and tracked.
In some instances, the member will have sufficient assets/income to pursue an immediate collection effort. In other instances, it may make sense to delay collection efforts on a judgment and check for a change in the member’s financial circumstances every nine to twelve months. Creating a system to keep track of these “delayed accounts” is vitally important and begins to shift the sands back in your favor.
Throughout the recovery process, it is important that you communicate to your employees that recovery of charged-off loans is an accepted and expected behavior. This helps engage everyone in your organization in the process, but this mindset also permeates to the members they interact with. Members actually being touched by recovery efforts also tend to communicate how committed the credit union is to its recovery strategies to other segments of the membership.
The combination of these employee and member communications will serve to remind the members that the credit union will exhaust every effort to collect the money owed to the membership. Hopefully, it will also cause members to think twice before defaulting on their loan obligation.