Repossession Done Right

Credit unions aim to minimize the numbers and optimize the return.

Behind every late car loan payment, there is a story. The trajectory of that story determines whether and when Commonwealth Credit Union will pursue repossession or continue to work with the member to bring the loan current.

In the rare case of a death or arrest, the $961 millionFrankfort, Ky., credit union with 82,000 members will proceed with repossession under the default clause of the loan contract if no one in the family wants to work out an agreement to pay off the loan. In the more common instance of financial hardship-especially of late for Commonwealth CU, whose core membership includes state and county employees and public school teachers and their families-the outcome hinges on the member's unique circumstances.

"We've noticed a spike in the last six months-more repossessions than we've ever had," says Emmett Mills, Commonwealth CU's collection and legal department manager.

Commonwealth CU's approach provides one example of how credit unions' collections and repossession practices have evolved through tough economic times. The recession was late in coming to Kentucky and has been exceptionally tough on public employees.

"Probably over the last six years, there have been no raises for state employees and most teachers, but their cost of living has continued to rise," Mills notes. "Some people are letting their cars go back, taking a different attitude about their credit."

With 13 employees in collections (including seven collectors and one repossession specialist), some with more than 20 years experience, and four employees in the legal department, Commonwealth CU relies on its experienced staff to handle every case individually. The standard is to begin repossession when a loan payment is 60 days past due. But the credit union may hold off with a member who's six months behind, but working to settle a worker's compensation claim, or accelerate repossession if a member ignores collection efforts.

Commonwealth CU uses a collections package available with its core processing system from CUES Supplier member Symitar, a Jack Henry Company (www.symitar.com), San Diego, to manage contacts with members. Vehicle repossessions are tracked with an Excel spreadsheet; each entry comprises 40 fields to record all pertinent information, such as member's name and account number, loan balance, date of repossession, date a title is ordered, vehicle value, date of liquidation. The spreadsheet provides an easy way for supervisors to track progress.

The sale of repossessed vehicles is handled in house via a listing on Commonwealth CU's website (under the Repos link at www.ccuky.org). The credit union maintains strict dual controls in conducting inventories and condition reports and setting listed prices based on National Automobile Dealers Association (www.nada.com) values and prices for similar models at area auctions. The credit union works with a local vendor to detail the vehicles, and it may replace a battery or worn tires to get the best price.

The "asking price" is a set price that anyone can purchase the vehicle for. "We place a repossessed vehicle on our sale line for 30 days, attempting to get the asking price or a sealed bid," Mills explains. "If no one purchases the repossession, we then open the sealed bids to see if there is an acceptable bid. An acceptable bid is one that is at least equal to the prices that are being paid for a similar vehicle at the area auto auctions. If no acceptable bid is received, the price is adjusted to a lower amount and re-bid. If the second sale is not successful, we send the repossession to the area auto auction.

"Other lenders may take vehicles straight to auction, but we've been very successful in keeping our deficiency balances down. We've had as low as $1,800 deficiency balances as a result of this approach," Mills says. "There is a downside: It's easy to take them to auction, but if you want to sell to get the most out of them, that takes a lot of staff time."

The credit union aims to recoup that investment in time by optimizing the return on repossessed vehicles and convincing members to repay the balance of their loans.

"We typically pay about $350 to a repossession agent to pick up the vehicle, about $65 for the delivery fee and $65 for a detail fee," he adds. "The typical costs total about $480 for a standard repossession. Occasionally we have expenses that may include replacing a battery ($95) or other minor expenses that we try to keep below $250." The CU is on track to repossess about 300 vehicles this year, repossessed 212 last year and 165 the previous year.

"It's bad enough to lose a car, but when they see everything you're doing to get the most out of that car, it increases the chances they'll pay you back," he says. "But not everyone does."

Heading off Repossession

Pasadena Service Federal Credit Union has a solution for members "who may have only two of the three Cs of credit" (creditworthiness, collateral and a capacity to repay), says VP/Lending Miguel Roman, a CUES member: With the installation of a payment reminder/antitheft device on the car, the credit union could possibly offer a loan at a lower rate than other lenders.

The device, offered as iPAY from Lender Systems, Inc. (www.lendersystems.com), Temecula, Calif., functions as both a GPS locator and a payment alert, programmed to emit blinking lights and beeps as a reminder every day a payment is past due. "On the 16th day, if you still haven't paid, your car will not start," explains Jeanette McColl, collection specialist for $108 million Pasadena Service FCU.

Members have an emergency code they can use twice per payment period to restart their cars.

"This is an effective tool for collections. The system gets their attention," she adds. "Members react quickly, and they're more likely to call me" before the credit union begins contacting them.

Since Pasadena Service FCU introduced this option in early 2012, it's made $1.5 million in auto loans (average loan $13,900, average rate 10.62 percent) to qualifying members with only two losses, accomplishing its goal of increasing loan volume with a program that, given the tiered-rate schedule, more than pays for itself, Roman says.

"These members would have paid a much higher rate or not been able to get a loan at all," Roman notes. "They have the option to have the device removed when they pay off the loan, but all so far have chosen to keep it as an antitheft device that can possibly decrease their insurance rates."

If their car is stolen, members can arrange to have the vehicle deactivated by providing Lender Systems with a police report about the theft. The thieves won't get far, and the police can locate the vehicle with the GPS coordinates.

When Pasadena Service FCU initiates a repossession-13 times a year, on average- "we want our members to redeem if that's in any way possible," McColl says. "We speak with them about their situation. Why are they unable to pay? What other items are keeping them from paying? We evaluate the collateral to see if a modification or consolidation would apply and consider each situation individually, which ultimately benefits both members and the credit union."

Pasadena Service FCU sells repossessed vehicles at dealer auctions, aiming for 80 percent of value. McColl reviews all condition reports and bids and has the option to counteroffer "low-ball" bids. The credit union's policy is to charge off the loan balance in excess of the value of the collateral less the cost of sale at the end of the same month the vehicle is repossessed.

On those rare occasions when the credit union resorts to repossession, the skip-trace abilities and contacts McColl has developed in her 20-plus years on the job come into play. Through networking and social media, which can be "a goldmine of information," she can often track down useful leads. The credit union relies on a network of agents for what are considered routine recoveries and specialists for more complicated cases.

McColl estimates that each involuntary repossession costs the CU between $300 and $385, and that voluntary repos cost between $160 and $275. Transportation to auction for any repossessed vehicle might cost $85 to $125.

Proceed With Caution

The economic turmoil in recent years dialed up Americans' proclivity for mobility, increasing the challenge for credit unions trying to locate members behind on their loan payments and their collateral. How would a small credit union on the West Coast know which recovery agency to contact in Chicago? That's especially a concern now that the Consumer Financial Protection Bureau (www.cjpb.gov) dictates that credit unions should work only with agencies that comply fully with federal regulations related to repossession, says Claudia Plascencia, SVP/sales for Repo Remarketing (www.reporemarketing; com), Citrus Heights, Calif.

In fact, compliance may be the "hugest challenge" facing credit unions both in managing their internal processes and in selecting vendors, says Rob Daley, president of Intelligent Banking Solutions, (www.ibshome.com), New London, N.H. In the ever-evolving regulatory landscape, a growing concern is that "If I comply with new regulation A, I may be out of compliance with regulation B."

"But credible vendors know the game, and they should be able to provide full vetting and disclosure" of their compliance efforts, Daley says-along with the flexibility to farm out some or all of your repossession cases. IBS partners with a variety of companies offering support through the repossession process, giving clients options to link up with these services directly through its Collection and Asset Recovery Manager (CARM-Pro) software. However, most of those credit unions seem to prefer to rely on bcal recovery agencies with whom they have established relationships.

This summer, Commonwealth CU had so many repossessions on hand, it offered 0 percent financing on those vehicles, which might pay a dividend in the form of new members. "We can make nonmember loans for repossessed and foreclosed property here in Kentucky, but we would like for those loans to lead to a membership," Mills says.

"If every financial institution followed the credit union philosophy, there'd be a lot fewer problems" with loan defaults and charge-offs, he adds. "Credit unions won't make a bad loan, but occasionally something happens from the time we made that loan until it went bad that caused the loan to go bad. When that happens, we stay on these accounts" until the matter is resolved.

Each credit union must develop its own approach to repossession, Mills suggests. "Our policies fit our environment and our credit union." @

"It's bad enough to lose a car, but when they see everything you're doing to get the most out of that car, it increases the chances they'll pay you back."

Emmett Mills

Resale Know-How

Knowing how much to invest in reconditioning a vehicle to maximize the sale price at auction is largely a matter of experience and knowledge of the local market, suggests Claudia Plascencia, SVP/sales for Repo Remarketing (www.reporemarketing.com), Citrus Heights, Calif.

A detail to clean up the engine and interior can make a big difference in how much a late model car sells for, she notes. "But with an older model RV, you might just go with a wash and vac. The same idea goes for replacing a cracked windshield. It makes sense for a 2010 Lexus, but maybe not a 1982 Honda. That's where experience comes in, knowing the valuations and what dealers are looking for."

Beyond a vehicle's condition, its seller's "presence at the auction" has an impact on the sales price. Plascencia says Repo Remarketing's aggregation of vehicles from client cred it unions, its reputation among buyers, and "its representation up on the block brings buyers and more competitive bidding to push the dealers for the most money," resulting in bids 8 percent to 10 percent higher than those of credit unions selling just one or two vehicles on their own at an auction. Credit unions can test that premise by watching how much vehicles they take to auction sell in comparison to similar vehicles.

When credit unions work with companies like Repo Remarketing, with a nationwide presence and network of partners, they typically have the option to contract for one or more services involved in the process for all of their repossessions or just the toughest cases.

Resources

Read a bonus article at cumanagement. org/093013headoff.

Read a free article about using Facebook for skip tracing at cumanagement.org/08231 lloanzone.

Also read a free article about starterinterrupt devices at cumanagement. org/091707loanzone.

Karen Bankston is a long-time contributor to Credit Union Management and writes about credit unions, membership growth, marketing, operations and technology. She is the proprietor of Precision Prose, Stoughton, Wis.