TRIMMING THE TIDE
PROACTIVE STRATEGIES CUT DOWN ON BANKRUPTCIES
As a collections and bankruptcy expert, Bill Mapother keeps a close eye on bankruptcy trends and he's concerned about what he's seeing.
Mapother notes more than 400,000 bankruptcies were filed in the second quarter this year, the highest ever for a three-month period. If that continues, 2001 will set a new record, beating 1998. "Some of it is the economy, but I don't think that is the biggest reason," he says.
"People say the bankruptcies are because people are out of work. When people are out of work, they can't file Chapter 13, and collectors can't pressure them for payment because they don't have a job. So typically what happens is the person who loses their job falls deeper in debt. When they finally get a job, collectors start pressuring; that's when they file."
Mapother points his finger at lawyer advertising as a major impetus luring people into bankruptcy court. Each time Congress nears approval of a new bankruptcy code, lawyers crank up their advertising, saying: "If you have financial problems, you better file now, because it's going to be much harder under the new law."
He predicts that, when legislation does pass, advertising will increase dramatically and continue for six months until the law actually goes into effect. Mapother offers some advice to credit unions hoping to deal with that eventuality:
* Cut back on unsecured lending to less credit-worthy members. Quit giving credit cards to C and D paper. Quit giving them big signature loans.
* Take those funds and put them out in car loans.
* Close loans to C and D paper differently, and collect them differently. "When you make a loan to an A or B member, you don't have to talk to them about the importance of making payments," Mapother says.
"You have to be more careful about closing loans to C and D paper. The same is true about collections. If you're 15 days late on a payment to a sub-prime car lender - the buy-here-pay- here people - they're talking about repossessing the car.
"You wouldn't dare talk that way to an A or B," Mapother adds. He stresses the need for collectors to be able to identify what lending tier a member belongs in when the name pops up on the computer screen.
"I find people that are bad are always bad. People with high principles will find a way to pay bills in a bad economy unless they suddenly have a serious illness or something," she says. How can credit unions protect themselves? "I don't want to bash loan officers," Boyle stresses, "but the primary thing I hear when I'm teaching collections is loan officers are very quick to give loans to people who can't pay." In turn, "loan officers wish collectors would stop blaming the loan officers. They basically want the collectors to try a little harder."
If this suggests loan officers and collectors need to understand each other's job better, Boyle agrees. She also believes it's important to give the member the first impression the credit union is serious about getting paid.
"When the loan officer is about to give the member the check, that's when you're going to have the most attention. That's when you should reinforce some very simple things: You're going to get a payment book; this is what the due date is; if we don't get it on that date, we're going to call you the next Monday or whatever," Boyle suggests.
It's also important to hire the right people to do the stressing, she adds. "A good collector should never beout of work. If you're looking for someone, you don't necessarily look at credit unions or banks. You don't necessarily want someone with money experience. You want someone withtalking experience."
Be a little creative, she says. Former school teachers make great collectors. In Massachusetts, where she lives, many teachers will be taking early retirement. One of Boyle's clients hired a human resources recruiter who had spent a lot of time on the phone trying to hire people. When a credit union needs a new collector it can be tempting to move someone from the loan department into collections.
But Boyle suggests a loan officer is a little more focused on numbers. You may be better off taking someone from the teller line who is used to talking with people.
Like Mapother, she advises at least mentally dividing members into A, B and C categories. "When you see someone who is A or B slipping, that is usually a sign there is some kind of trouble in that household. I always tell people, call at that very first sign and find out what's going on.
By the time we find out about a bankruptcy, it's too late. "I also urge people, especially a credit union serving a community or job group, to know what's happening. Was there a big flood in the community? Did a bunch of people get laid off? It's very simple, but you do want to be looking for signs of disaster. When there are layoffs, a lot of people will call the credit union and say, 'Well, Im not paying the loan. You laid me off.' You have to point out the problem is not with the credit union."
"Loan officers sometimes feel they can just ignore that. Then when the collector gets hold of it, or it's needed from a bankruptcy perspective, the reaction is, 'Gee, I wish that information were there,' especially if you want to prove a fraud case in bankruptcy. If you don't have the documentation, you're not going to be able to do that."
Chorost notes some CUs just use pre-approved forms. They're going to take losses, he says. If they are hit with a bankruptcy loss, it's their own fault. They might be making more loans, but on the collection side, not filling in the application is going to hurt them,
Then there are those with excellent application forms. They're thoroughly thought out ... but not filled in.
"We need to get the collections department together with the bankruptcy department and the loan department. What I see is the loan department operating in their own quadrant, then wondering why the collectors can't collect," Chorost says.
A cross-collateralization clause may or may not help a CU get its money, he notes. The clause must be on all documents, not just be on the car loan documents and not on the line of credit, and visa versa. You also face a Reg D problem if you're trying to do cross-collateralization on a credit card.
It also depends on your state. ln Arizona cross-collateralization is frowned upon. On a positive note, in Arizona, a new criminal statute provides if someone doesn't pay on a car loan for 90 days, the car can be reported as stolen. This makes it easier to repossess the vehicle. It also prompts people to return the vehicle when they see on the loan documents they could face colony charges.
Many lenders are tightening credit policies, says Roxanne Anderson, VP/corporate counsel for ACA International, Association of Credit and Collection Professionals, Minneapolis. "There's definitely a trend, so we don't have innocent consumers having access to credit they really can't afford," Anderson says.
"It shows a willingness, if not a need, on the part of lenders and creditors to take some responsibility for the bankruptcy situation we're now facing with U,S. consumers," she adds. "A policy that does not address individual situations can fail Credit unions are in a unique position to understand their members and tailor their credit policies to the specific needs of those members. A credit union that tightens its lending policies can also tailor those policies so there is perhaps an appeal process, A credit manager can meet with the member, thoroughly discuss their situation and structure a loan that's right for that particular family."
Anderson believes bankruptcy often arises from absolute frustration. Peeople believe it's their only option. Instead, it's a good first step if a credit union can guide a member to consumer credit counseling and prevent bankrupecy.
"They may not have the resourses,new tools euch as behavior scores, credit scoring or stratification on making collection calls by credit score or behavior score."
What can a small credit union with a limited budget do? "Certainly I think there's the option of checking with a larger credit union in the area about the possibility of partnering," Tourer suggests.
He adds it's also important to update basic information about the member each time someone from the credit union talks with that member. Sometimes you can pick up a lot of information about an individual's current situation by taking the time to talk to him or her If there's a change of address, has there been a divorce? Has the member moved in with a relative because of a lost job or becoming disabled?
Theururer agrees it's important to hire the right collections people. However,he indicates it's very, very difficult.
"We've interviewed several people who responded to the ad we run for collection professionals and wanted to be trained. They really had no experience. I see that over and over," he says. As for whether it's more important to look for experience or provide training, "each individual comes with their own set of positives and negativee. If they have a good base, we certainly can train from there," Theurer notes. "Sometimes they use certain buzzwords that make it seem they might be familiar with the terminology and process. But if they are hired and put in a queue, it's how the act with an individual that's very, very important. You usually can't determine that until they actually make calls," he adds.
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