Is an Ineffective Collections Strategy Keeping your Credit Union Down?

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Bill Hultstrand ,Manager, Marketing & Communications, Lending Solutions, Inc.
9/12/2005
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Credit unions face many challenges on a day-to-day basis that prevent them from reaching and exceeding their goals. It makes it especially difficult for a credit union to thrive when delinquency rates and charge-offs are running rampant. Everyone knows the first step in winning the delinquency war is to implement and enforce sound lending policies. But, what happens if you have implemented these policies and still have a problem with delinquencies and loan losses? That's where a good collections program comes into play. Many credit unions are doing a great job of lending, but a very poor job of collecting when good loans go bad. Let's examine some of the challenges and solutions credit unions face in establishing an effective collections program.

Following is an excerpt from the July 2005 advice column by Brett Christensen of Lending Solutions Consulting, Inc. that appeared on www.rexcuadvice.com:

Please remember that successful collections is not rocket science - it is really very simple. You must do three things well to have an effective collections effort at your credit union:

1. Early Contact. There are two reasons why your collecting has to start as early as possible: First of all there are proven studies that you will get more dollars from a member with sugar than spice and by calling early your approach can be a whole lot more positive. The second reason for early contact is that you are beating other collectors to the limited funds that the member has for meeting their financial obligations. Calling early is especially important as credit quality goes down (i.e. on your D and E paper loans).

2. Frequent Contact. Frequency of contact is very important. I am speaking of every two or three days until the delinquent account is resolved. If your collector is waiting a week or two or three between member contacts, your member will be happy to take advantage of your hospitality. Frequent contact is vital because again, there are proven studies that "squeaky wheels get the grease."

3. Follow Up. Your collectors must follow up on the commitments a member makes and then breaks. If you do not, you will lose credibility with them and you will also lose more dollars come charge-off time. If your collections department does these three steps well, your members will quickly learn that your credit union takes collecting seriously. This is what you want them to learn. In the credit unions that have a weak collections effort, the members learn that they can take advantage of your generosity. You know, it is a great deal to be able to drive a nice car around for four or six months without having to make a payment on it! The role of a collector is very simple. Most collectors think their job is to contact a member in order to obtain a payment arrangement or collecting of a payment. No. No. No. The role of a collector is to resolve the account and to never add to the loss. What every collector needs to understand is that some loans were losses the day they were made and no matter how hard the collector tries, it is still going to be a loss.

In addition to keeping delinquency rates down, the other main collections-related challenge for credit unions is staffing. Turn-over rates for collections departments are notoriously high due to a number of factors including: low pay, job stress, having to work nights and Saturdays, etc. Christensen says, "Collectors should have individual performance goals and meaningful incentive pay. You would be hard-pressed to identify any employee at the credit union that has such a direct impact on the credit union's bottom line as a great collector." Depending on their geographic location, some credit unions may not have access to a talent-pool of experienced collection professionals. If that is the case, Christensen recommends, "For those of you that are really struggling to develop a competent collections effort, I would recommend to you that you seriously consider outsourcing the work. Having a strong collections effort is too important for you to put up with a mediocre effort and marginal results. If you are unable to find the leadership and staff to do collections well then you should certainly look to the outside for help."

The Ohio Educational Credit Union is one credit union that chose to outsource their collections program and they have been excited about the results so far according to Bruce Aiello, Credit Manager at OECU: "OECU partnered with Lending Solutions, Inc. to assist in the collection of past-due accounts within our expanding indirect auto-lending portfolio. OECU recognized that an aggressive program of tracking and contacting delinquent accounts was an essential ingredient to a successful program. We have been impressed with the results and professionalism of LSI and look forward to working with them further."

Credit unions, large and small, can benefit from taking a closer look at their collections program to examine areas that need improvement. With budget season approaching, now is a great time to identify those weaknesses and formulate a plan to finish 2005 on a high note and get off to a fast start in 2006.

Bill Hultstrand is manager of marketing & communications for Lending Solutions, Inc. and can be reached at bhultstrand@nlpc.com or (800) 937-4249.

Brett Christensen is a consultant for Lending Solutions Consulting, Inc. and can be reached at bchristensen@rexcuadvice.com. RexCUadvice.com is a subscription-based web site founded by industry expert Rex Johnson.

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