When it comes to collecting debt, some credit unions have turned to outsourcing models to gain the additional expertise necessary for this essential component of their lending operations.

“I don't say all credit unions should outsource their collections efforts. I maintain all credit unions should understand and keep an eye on delinquency and know that it's ok to look outside if it needs some help,” Karin Brown-Purtell, vice president for collections at Lending Solutions Consulting, said.

The company is a division of Lending Solutions Inc., an Elgin, Ill.-based provider of call center and collection services for credit unions.

Credit unions outsource collecting delinquent payments for a variety of reasons, Brown explained. After loan portfolios have grown, for example there may be a need for more collectors and outsourcing the job can be less expensive than hiring new collection staff. This is particularly true when a more experienced collections staff is desired.

Another reason to outsource is when another loan product line is added to the lineup and assistance is needed to train collectors on how to collect delinquent payments on the new offering, Brown said.

“The key thing is to have someone in the credit union whose job is to keep an eye on collections and delinquency,” Brown suggested. “Whether you do it in house or outside, someone at the credit union needs to be aware, generally, how many accounts are delinquent and whether and how many accounts have become newly delinquent because delinquency is one of those things that can get away from you pretty quickly.”

Brown differentiated between collecting on delinquent accounts that are still active and collecting on debt a credit union has charged off or considers no longer active. Some lenders, notably large, card issuing banks, have sometimes sold inactive debt to third-party debt collecting agencies, a practice that has drawn the attention of the CFPB.

“I am not in favor of selling debt,” Brown said. “Not only do you generally not get paid enough for it, a good collections effort can recover a better portion of those losses than if you sold it.”

She also pointed out that there can be liability involved. Brown recalled a client credit union some years ago that contacted her after it had sold some of its credit card debt to a third party. Because of mistakes made by the credit union and the firm, the latter ended up contacting one of the credit union's former members about the debt after that member had filed for bankruptcy.

“Of course, that is a supreme no-no,” Brown said.

The former member sued the credit union and the third-party debt collector. Despite the suit, the debt collection firm contacted the former member again for the same debt, which deepened the legal problem. According to federal law, once a consumer is involved in bankruptcy, a creditor is prohibited from collecting on debt that is part of that litigation.

“The point is that even if after you have sold your debt, it still has some of your name on it, but you don't have any real control over how it is handled or what happens to it or because of it,” Brown said.

Read more: How a $131M California credit union outsourced collections …

The $131 million C.A.H.P Credit Union in Sacramento, Calif., began to outsource part of its collections operation nearly 18 months ago, according to Audrey Pappas, EVP, and Kevin Myas, vice president of lending.

“We're definitely a blended shop,” said Pappas, who noted a number of factors that led to the credit union outsourcing its debt collection channel.

First, C.A.H.P. experienced significant growth in its loan portfolios, which increased the workload on the collections department, Pappas said. The credit union, which serves employees of the California Highway Patrol and other law enforcement agencies, also recognized that it needed to adjust its collections effort to communicate more efficiently with its members, she added.

“Our members work all sorts of different hours and on weekends and they are home at different hours and we saw that if we ran all our collections out of the Sacramento headquarters, we would soon run into scheduling and overtime issues,” Pappas said.

So C.A.H.P. outsourced all the early delinquency calls to Lending Solutions and set the limits on when LSI staff could call, when to start making the calls and how often to make them, Pappas said. Collection on delinquent accounts longer than 30 days remains with the credit union's staff.

Myas said using LSI allowed the credit union to broaden the expertise of its collection staff.

“The expense LSI saves us roughly the equivalent of the cost of a full-time employee, their benefits, as well as the expense of having our facility running two additional days a week,” Pappas said.

In addition to auto loans and credit card loans, C.A.H.P. also offers loans on recreational vehicles, jet skis and real estate.

“There is world of difference about how you might approach someone to make a payment on their car which they need to get to and from work or their home which they need to live in and a loan on an RV or jet-ski,” Myas said. “The car and the home are essentials, the RV and jet-ski are just about fun.”

David Brooke, EVP with LSI, said the firm's credit union clients come from such a wide variety of circumstances.

“Some credit unions have delinquency challenges and engage us to help bring that number down. In order to reduce their delinquency, they have to throw a little money/attention to the problem so, there really isn't a 'savings' in personnel costs but there would be some reduction in charged off balances,” Brooks wrote in an email to CU Times. “That, too, is a number that can't be quantified because we don't know which loans would have been charged off if there was a heightened amount of attention given to follow up.”

Other credit unions engage with LSI on a temporary basis.

“They want temporary help; following up while their staff gets comfortable [and] familiar with new collections software, Brooks said. “LSI might be assisting them for six months, nine months or a year in some cases. It's hard to determine what losses they would have incurred since their staff wasn't as efficiently working their accounts through the conversion.”

Instant Insights /

Outsourcing Helps Manage Growth, Delinquencies

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