Who’s Making the Calls? [Credit Union Management]

Some CUs prefer to hand off collections to a third party. When is this the best decision?

As the economic malaise drags on and collections continue to pose a serious challenge, credit union executives are exploring and discovering effective ways to balance what is outsourced and what staff should do.

While holding onto sensitive collections is still a popular concept in the CU world where member service is sacrosanct, some degree of outsourcing is becoming more acceptable to CU executives, reports John Basco, a collections consultant who helps CUs organize, staff and train collections staff. In better times, CUs often could get by with soft collecting - just sending out notices on schedule when delinquencies occurred, notes Basco, SVP/client services at Solutions in Finance (www.solutionsinfinance.com), Los Gatos, Calif. Now collections is a more critical activity and quality counts more than ever, he says.

Indeed, at $340 millionUMassFive College Federal Credit Union (www.umassfive.org), Hadley, Mass., "we do whatever makes sense," says Richard Kump, chief operating officer. Because first mortgage servicing is so complex, a sub-servicer (Midwest Loan Services Inc., www.membersforlife.com, Houghton, Mich.) handles all collections up to the point of foreclosure. Then the CU takes them back for final resolution.

"Midwest does stuff we can't do - like managing escrow for taxes and insurance and servicing VA and FHA loans," Kump notes.

Likewise, student loan collections at the credit union are entirely outsourced. "We own the loans, but a highly successful CUSO, CU Student Choice (www.studentchoice.org), handles the underwriting, servicing and insuring," Kump reports. That CUSO was formed just as the 2008 credit crunch caused many private student loan lenders to pull out of the market as Wall Street money dried up, he explains.

UMassFive College FCU keeps all collections for the rest of its loan portfolio - credit cards, auto loans, equity lines, etc. in house - only outsourcing when recovery seems unlikely, Kump reports.

"We consider collections part of our service," Kump says. "If you turn all collections over to a third party, you lose control over part of your service quality. Third-party collectors are usually commission driven. We aren't confident they will have the empathy to help one of our struggling members. Once it becomes uncollectible, we'll turn it over to an attorney or collection agency, but while there's a glimmer of hope, we want to be the contact point for the member."

Being "uncollectible" is closely tied to the length of the delinquency, Kump points out. "There is a psychological hurdle around 60 days. If they are one payment behind, borrowers usually want to catch up, but once they get two payments behind, it starts to look hopeless to them. It's very hard to collect on loans that are 60 days or more delinquent."

That's why UMassFive College FCU moves more aggressively in the early stages of collections, making calls and sending repo notices before 30 days past due, he explains. Backing up this idea, the primary metric the CU uses to evaluate collector performance is the percentage of loans that are 30-59 days delinquent at the beginning of the month that are brought current. The CU reported a delinquency ratio of 1.24 percent and a charge- off ratio of 0.3 percent as of Oct. 31.

$70 millionFirst New England Federal Credit Union (www.fnefcu.org), E. Hartford, Conn., "is always looking for back- office functions that can be outsourced to avoid adding employees without jeopardizing member experience," reports CUES member Victor Petroni, SVP/lending and president of the CU's Mortgage Markets CUSO (www.firstnewengland.org/ProductsServices/Mortgages.aspx). He uses third parties for things like collections and mortgage loan servicing when it works strategically. The CU reported a delinquency ratio of 2.07 as of September.

Beating Other Creditors

First New England FCU and Mortgage Markets have outsourced servicing on all first mortgages to Midwest Loan Services, which handles everything from loan set-up to pay-offs, including collections, loss mitigation, foreclosure and property liquidation if necessary. The credit union reaches out to more members faster and more frequently by using third-party collection and mortgage loan servicing, Petroni says.

"It is important to get to members' limited funds before others do," he explains. "I know they are calling the day after a payment is due; competition is fierce."

Consumer loan collections were kept in house until 2004, when the employee who did that collecting announced his retirement. Petroni initially worked with CUES Supplier member Lending Solutions Inc. (www.lendingsolutions.com), Elgin, Ill., then moved in 2009 to CU Collections (www.credit unioncollections.com), based in suburban Washington, D.C., partly for cost savings. Lending Solutions charges by average number of accounts; CU Collections charges a flat monthly fee, which worked out better for First New England FCU.

Collecting through CU Collections costs less than the salary and benefits of an employee, and CU Collections does the calling evenings and weekends, when people are more likely to be home. The company also has bilingual collectors, Petroni points out.

"Our costs went down and our time coverage improved when we outsourced. I have no interest in taking it back in house." But he adds that "if we were much bigger, at some point it might be more cost effective to hire people and do it ourselves."

For credit unions looking to staff up, talent is definitely available, due partly to layoffs by the large banks. "I worked with one CU that advertised a position in collections and they had 75 applications," Basco reports.

Size certainly matters. At $18 million in assets, Northern Lights Federal Credit Union outsources all collection activity, including overdrafts, after the 11th day to Credit Union Service Alliance Group LLC (www.cusag.com), reports Rita St. Arnauld, CEO of the St. Johnsbury, Vt.-based CU and a CUES member. Credit Union Service Alliance Group is a former credit union service organization.

In the world of small credit unions, affinity often matters more than economies of scale. Using CUSAG is a lot like "having our own collections department," St. Arnauld says. "They always apply your policies and preferences. If I'm open to workouts, they do workouts. I want them to check with me before approving larger workout agreements, so they do. We stay involved as much as we choose. I like weekly reports, sol get them. IfI wanted reports more often, they would provide them."

The records in Northern Lights FCU's system are just like they would be with in-house collections, she adds. "It's a very smooth integration. They link right into our system by virtual private network and post notes. If an account is flagged, that pops up right where the teller can see it."

Cutting Costs

The arrangement is also economical. CUSAG charges by the hour. Northern Lights FCU used a collections attorney in the past and had to give up a third of the amount collected, St. Arnauld reports.

"With CUSAG, our cost is only the hours we invest in trying to collect," she notes. Doing it in house would make the cost harder to calculate. And, using the vendor, St. Arnauld doesn't have to worry about sick days and vacations.

"We're always covered," she points out. It's also good business strategy. "We want our lenders making new loans, not spending their time on collections," she notes. And CUSAG brings a knowledge of state laws beyond New England, so Northern Lights FCU saves on attorney fees, she adds. As of Sept. 30, the CU had a delinquency ratio of 1.84 percent.

Outsourcing strategy can be dictated by staff size. "At a small credit union where I worked in the past, we farmed out collections after 15 days, but that was a staffing decision," Kump says. "Small credit unions are more likely to outsource the heavy lifting simply because of staff limitations."

The economics of outsourcing also varies by location. "We're in a high cost-of-living area," says JuIi Anne Callis, president/ CEO of $550 millionNational Institutes of Health Federal Credit Union (www.nihfcu. org), Rockville, Md., and a CUES member. "If we were located in Tennessee or Arkansas, it might be different."

When Callis was hired in 2009, she found a rising tide of credit card and real estate loans that were at risk. Real estate values were falling and many legacy loans could not be sold. The performing portion of the credit card portfolio was sold to Elan Financial Services (www.elanfinancialservices. com), but the remaining delinquent credit card accounts, coupled with the growing challenge in real estate, swamped the in-house collections department.

To fix the problem, the consumer loan portfolio was segmented and Solutions in Finance was brought in to establish best practices. Because of the volume, Solutions in Finance recommended outsourcing with SWBC (www.swbc.com), a CUES Supplier member in San Antonio that works with many credit unions across the country. "We went through a total overhaul, from stem to stern," she reports. "Improvements came quickly."

The real estate portfolio was moved to a loss mitigation unit, headed by Rob Ulmer, VP/legal and legislative services.

"While property values continue to weaken, we now have a stronger structure for meeting the challenge," Callis concludes. The CU reported a delinquency ratio of 0.72 percent as of September.

Staffing Considerations

$40 millionGuardian Federal Credit Union, Portsmouth, Va., outsources virtually all its collection work to Hampton Roads Contact, Virginia Beach, Va. The credit union's president/CEO, Chris Anuswith, says doing so costs slightly more than one fully burdened full-time collector, but it also provides better coverage. The arrangement works smoothly; having HRC is almost like having "a contract employee that we actively manage," says the CUES member.

HRCs principal is a former collector for the former Atlantic Fleet Federal Credit Union, now Bank @lantec, www.where ibank.com, Chesapeake, Va. The principal and/or an HRC collector comes weekly to Guardian FCU offices for meetings and understands and applies the CU's policies, Anuswith reports.

The arrangement also works smoothly because HRC, which only works for a handful of CUs, uses a virtual private network connection to do its work on upgraded collections software that Guardian FCU installed just before starting the outsourcing arrangement. That, Anuswith says, is important.

"If you ever had to terminate, you'd want all the records on your system. You wouldn't want to have to transfer them."

Guardian FCU also accelerated its collection procedures - system-generated notices are now sent at five, 15 and 25 days - before outsourcing them. Outsourcing should be part of an integrated business strategy, Anuswith insists. "Look at every collection task that you do and question it. Make sure you are handing off the right thing. Make sure it's documented and actively managed." The CU's delinquency rate was 0.96 percent as of June.

When CUES member Richard Webb came to $88 millionAtlantic Financial Federal Credit Union (www.affcu.org), Hunt Valley, Md., in 1993 as president/CEO, he ultimately replaced one full-time collector and two part-timers with CU Collections. Now 75 percent of the credit union's collections work goes to CU Collections.

The CU's delinquency ratio is 0.71 percent as of September, compared to an industry average close to 1.1 percent, Webb explains. Collections themselves are fairly traditional and rigorous. "Before we send out the first notice of delinquency at seven days, we Io ok for sources to repay ourselves. If the borrower has funds on deposit, we take our payment. If a parent has co-signed the loan, we take funds from the parent's account."

The workload puts CU Collections on routine cases, all the way to liquidating collateral, Webb explains.

"They have the staff to perform consistently. I don't have to worry about my in-house collector being sick or on vacation. We only get involved in what we consider serious situations." He particularly likes CU Collections because "their way of dealing with our members is supportive and sympathetic. They think like one of us."

"We want our lenders making new loans, not spending their time on collections. With CUSAG7 our cost is only the hours we invest in trying to collect."

Rita St. Arnauld

Resources

Learn more about the CUES School of Consumer Lending(TM), slated for May in Cambridge, Mass., and for September in Schaumburg, III. Also consider attending the CUES Advanced School of Consumer Lending(TM), slated for September in Schaumburg, and the CUES School of Growth and Profitability(TM) in May in San Diego. More details on these programs are available at cues.org/schools.

Read free related articles. "Loan Zone: A collections dilemma" is about whether agents should leave a voicemail message when collecting. "Loan Zone: Effective collections incentives" is about what works and what's legal when compensating collectors. "Loan Zone: Facebook Skip Tracing" is about one CU's use of social media when collecting. "Giving Loans Life" is about how CUs are managing lending risks in this tough economy. Find these articles a t cum a nag em en t.org/arch /Ve/ index. Search for "col lections."

Richard H. Gamble is a freelance writer based in Colorado.