First came the mortgages. Now come the credit cards. And the HELOCs and auto loans for that matter.
As the recession continues well into the second half of 2009, credit unions are bracing for rising delinquencies across all types of lending. CreditUnions.com recently reported that at the end of the first quarter of 2009, credit union delinquency rates for credit cards had risen to 1.99%. Overall delinquency rates across all credit union loans and leases were 1.44% — a sharp increase from the .62% reported for the same period back in 2007.
With the rise of delinquencies come the questions about how to manage them. Given the current economic climate, do you allow members more leeway? Do you write off a higher percentage of the bad accounts? Or do you start active collections?
If you choose collections, there are some important things to consider before making that first call or sending out that first notice. The right approach is the key to maximizing returns while preserving those important member relationships. So here are five things credit unions should know about collections:
1. All accounts are not the same. Look at all of your delinquencies and review their similarities and differences. Consider variables like age of debt, credit history and of course, the type of loan. It may require much less effort to collect a credit card balance or auto loan than a home foreclosure. These types of considerations should inform your approach and help you optimize your collection efforts.
2. Collections are not member service. Any attempt to collect on delinquent accounts should be made professionally with regard to business ethics and respect for your members. However, the reality is that you are trying to protect the financial interests of your organization. Keep your eye on the ultimate goal.
3. In-house collections or outsourced? Each approach has its merits. By handling collections in-house, you maintain complete control of how and when your members are contacted. But the process can be costly and time-consuming, which can divert valuable resources away from the business of running a credit union. If you outsource to a collections agency, you gain access to specialists with expertise in consumer-contact strategies, account segmentation, operations and so on. But you do give up a certain level of control. A more balanced approach involves hiring a collections management firm that works directly with you to devise and implement a collection strategy. The firm works on your behalf to assign the collections to a series of selected agencies.
4. Will "member" or "shareholder" status affect your approach? Having consumers who are considered "shareholders" or "members" makes the collections process a bit more complicated. So consider how aggressive you are willing to be in your collection efforts. Are you comfortable calling someone directly at his or her home or workplace? Will you pursue legal action if necessary? These are not easy questions, but you should think through the answers before starting any collection activity.
5. Identify and rank your priorities. Think about your overall objectives for your collection strategy. Do you value speed over the total amount or percentage collected? Do you expect to write off any of the delinquencies? Are you willing to lose a member to collect on his or her delinquencies? The answers to these questions will play a key role in determining how you manage the collections process.
The five key considerations I've listed here are a starting point to any collections discussion. There are many other factors to consider before finalizing your strategy.
Collections are always a delicate matter, even more so for credit unions. By identifying your goals and priorities at the beginning, you're much more likely to successfully collect revenue and preserve those delicate customer relationships.
Lauren A. Irwin-Szostak is the founder and president of Business Processes Redefined, a New Jersey-based accounts receivables management. She can be reached at 800-470-6622 or via e-mail at firstname.lastname@example.org.
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