BY MIKE HALES
Is your credit union still reeling from the past decade’s loan defaults? If so, abandonment and misappropriation are genuine concerns. Thinking of these losses – and the faultless members behind them – as assets can revolutionize your CU’s collection efforts.
The recent decade following the financial meltdown has produced the largest consumer loan losses in history.It is estimated that the credit union industry has written off more than $30 billion in unpaid personal, auto, HELOC, credit card and other consumer credit due in most part to economic factors that were outside of the defaulting borrowers’ control. As the “decade of losses” draws to a close, many of those borrowers have regained the capacity to repay their financial obligations, yet most of the charge-offs remain unrecovered.
Recoverable charged-off accounts are assets, no different from computers that have been depreciated to zero value.However, while computers and other depreciated assets are generally managedquite effectively by financial institutions, in many cases charged-off debt is not. Seldom are charge-off portfolios reviewed by management, supervisory committees or even examiners. As a result, potentially recoverable charged-off accounts are vulnerable to abandonment and even misappropriation.
It is not uncommon for collection departments to work delinquent and charged-off accounts internally for a period of time and then assign charge-offs to one or more third-party collection agency.Because collection agencies have limited resources and serve multiple financial institution and non-financial institution clients, the majority of assigned accounts eventually become ignored. They are then relegated to back-room filing cabinets where they collect dust until they become time-barred.Credit unions lose millions of dollars in recovery opportunities every month.
In addition to lost opportunity, compliance liability is escalating. There have been multiple cases where third-party collection agencies have violated established federal collection regulations and, most recently, the UDAAP provisions of Dodd-Frank. In these cases, regulatory agencies have been quick to find credit union liability for the actions of their third-party collectors.Several of these examples will be explored in future editions of this column.
Delinquencies and charge-offs are a natural byproduct of lending. While credit unions, banks and fintech companies are focusing on developing new technologies to grow loans and deposits, credit unions also need to focus on developing new methods of managing risk and recovering assets. Auto dialers and outdated collection software programs need to be replaced with compliant, member-centric and often creative approaches to helping borrowers manage their financial obligations.Traditional collection methods are ripe for disruption.