1. Consider debtors who default on loans as non-members. Defaulted loans are broken contracts, and considering debtors as rejecting membership via their default removes them from the benefits and protections of the credit union.

2. Consider it a service to members to employ the most effective means possible to recover defaulted loans, rather than poor customer relations. The damaged parties are the members, not the debtors.

3. Consider selling or outsourcing non-performing notes to highly reputable external agencies. Many groups are able to take a customer-service approach to recovering delinquent assets. The debt purchasing and collection business appears to get a lot of bad press, but much of that comes from a minimal number of individuals and companies which have been pushed from the industry. Proper due diligence on a company, including references, time in business, license and bonding, and many other factors can be used to insure that a buyer or collector is reputable. Banks, federal agencies, and professional groups have high standards when they use collection groups in recoveries, and there is no reason credit unions could not do the same.

4. Understand the reduced value of defaulted loans. A reason exists why charged-off debts sell at a significant discount – the value, particularly over time, is severely reduced and recoveries are generally low.

5. Reject the "big banks do it, so we won't" mentality as a blanket policy – though it may work as a good rule in general, it limits some of the out-of-the-box thinking that serves credit unions well.  In the realm of charge-offs, big banks have a variety of solutions for charged-off debt.

Rather than bad debt sitting on the books hurting ratios, debt sales provide instant cash, which can be put to use. Usually, charged-off loans at smaller financial institutions become an afterthought and can sit for far too long, and become completely uncollectible. If they are sold, space and time are gained as well as a burst in cash flow. Credit unions are far more customer-based than the large banks, and have a closer responsibility to their members to maintain good business practices. Selling delinquent receivables allows a credit union to take an active role in handling all aspects of member services. 

What about relief for employees? Often at smaller financial institutions, loan officers perform several different duties, but their primary duty is making loans and managing customers, not collecting charged-off receivables. Selling the receivables allows loan officers to continue to provide members with the service they need, rather than distracting loan officers from the more productive activities. If open to exploring their options, credit unions have an excellent opportunity in the current market, as prices of delinquent debt are relatively high.

Good accounts recovery specialists exist and are eager to do business with credit unions. Many are licensed and bonded, with few incidents of violations (if any) and can work with credit unions to establish good business practices that both protect credit union members from defaulted assets, uphold customer service standards, and preserve credit union reputation within the community. 

Jeffery Hartman is president of Fitzgerald Debt Acquisitions, LLC. He can be reached at 567-694-0684 or via email [email protected].