CEO at Ground Zero of Credit Defaults Seeking Comments on Action Plan

One credit union's credit quality plan needs feedback about their current actions. What more might be done?


Late last week, I received a plan from a large credit union which has experienced increased and persistent delinquency challenges as a result of economic trends. The credit union implemented their loss mitigation plan in late 2007. While they had a positive bottom line last year, losses continue in 2008. The management team is seeking comments about their current actions. What more might be done? Are some actions ineffective? Are there proactive steps to be considered as well?

The plan, printed below, is two pages. It has four areas of direct activity:

1. Responding to known current problem loans
2. Assessing the portfolio of potential problems
3. Actions for reducing future risk in loans
4. Changes in underwriting as a result of lessons learned so far

Please post all comments about the plan below. These will be read by the credit union and as necessary, responded to. We believe this discussion can help every credit union consider additional steps when facing similar issues of loan performance.

2008 Credit Quality Plan-Mitigating Risk in a Changing Credit Environment

I. Current Problem Accounts

  • Add 9 collectors & additional Collections Manager
  • Use Home Loan personnel for 10 days past due mortgage “soft reminder” calls
  • On current early problem mortgage loans:
    • Offer to extend initial rate for additional period to keep same payment
    • Modify the existing loan from an ARM to one of our fixed rate options
    • Extension of terms (reduced payment or no payment period up to three months, one time per year)
    • Forbearance (spread any past due payment evenly over next 12 months)
    • Support short sale if we''re at risk where member has to move
    • Deed in Lieu on home loans without liens behind the credit union

Immediately visit all past due home loan borrowers at our property collateral address. These field visits are being used to confirm property condition, see whether borrower occupies the home, and determine the cause of delinquency. We just started this effort in December and have more complete information as a result of reaching some of the members.

Expand outsourced collection calls to include credit card accounts and all auto loans at 15 days past due.

Assign auto repossessions at 30 days or earlier if no response to early stage collection efforts.

II. Add Analytics to Identify Prospective Problem Accounts

  • Obtain Automated Valuation (AVM) appraisals for all mortgage loans. Value information expected by mid-January. We will compile account level data, credit score information, and value information
  • Validate Experian credit scoring model. Results expected by mid February. In addition to validating the FICO2 credit score in use we are also appending the Vantage score and the National Risk Score for each of our loan accounts to ensure we''re using the best possible consumer scoring model. This validation is being done for the entire consumer loan portfolio.
  • Implement third-party analytics added for indirect auto portfolio risk evaluation.
  • Implementation first quarter 2008. This analysis will measure our indirect loan performance including metrics from the credit decision all the way to the dealer results overall.
  • Complete risk based pricing analysis currently underway by Experian. This will include quarterly performance updates and external monitoring for the next 18 months. It will provide an evaluation of overall program effectiveness to ensure additional rates charged for lower credit scoring accounts offset the additional charge-off amounts.

III. Tactics for Prospective Problem Accounts

  • Using AVM appraisal information referred to above:
  • Evaluate risk of mortgage loans by location using AVM data
    • Order drive by appraisals where needed (worst 5%+/-)
    • Credit Data review (compare to appended FICO scores)
    • Contact member by phone & mail
    • Revoke Lines of Credit/Visa credit limits after identifying risk
    • Take other evasive action to reduce loss and exposure – restructure debt or add collateral where possible
    • Send special mailing to riskier accounts advising “we''re here to help” (to be sent to decreasing value area borrowers w/loans from 1/06 – 7/07)
  • Review each home equity for limit reduction or revocation where appropriate. Member contacts will be made in writing and by phone where limits are being revoked.
  • Call all ARM home owners 9 months prior to rate resets. Early contact may identify credit and capacity issues we can resolve with more flexible terms or other forms of assistance such as those identified above for early problem loans.

Credit card portfolio monitoring and unsecured personal/overdraft lines of credit review/evaluations are underway for exposure and reduction/revocation of limits where risk is identified. These unsecured accounts have unused limits approaching $500M. We will evaluate each account with updated credit score information, cumulative balances from other creditors, and their complete credit union relationship for exposure. Where appropriate we will reduce or revoke credit lines extended to failing credit profiles if excess risk is identified.

IV. Credit Standards

  • Automatic approval scores/credit criteria have been changed for consumer loan underwriting. Any request for unsecured amounts where new cumulative unsecured debt total will be $20,000 requires 750 or higher FICO 2 score. Maximum unsecured debt multiple matrix limited to three times gross monthly income for credit union loan amount. Secured loans limited to 7.5 times gross monthly income and requires 680 or higher FICO 2 Score. For higher amounts FICO2 greater than 751 is required.
  • Maximum loan to value for second mortgages limited to 90%. 1 st mortgages have been limited to 80% loan to value without Private Mortgage Insurance in effect since September 2007.



Feb. 25, 2008


  • Very informative and actionable !
  • We have taken many similar steps. I''m curious as to whether you will be looking at HELOC monitoring in addition to unsecured lines. We are currently beefing up both our unsecured and secured monthly monitoring.
  • I think the credit union has a good plan. A few other things to consider: 1. Doing a lower rate plus interest only for an interim period (up to 12 months) for home equity loans to troubled borrowers. If you have someone in a 9% rate, a 6% interest-only payment over the next 12 months can really help. 2. Consider helping distressed borrowers sell their home through a reliable Realtor. In our market-Colorado-we had so many new entrants to the real estate market, that many of these people gave poor advice or no advice to the sellers. All they did was take a listing and hope it sold. 3. Consider adding on to some home equity loans an amount the borrower needs to fix up their home to sell it. We had such a loan we were considering. We had a $160k home equity loan behind a $300,000 first on a house that was terribly outdated and had been dropped in price from $575k to $499k. Our handyman we use on REOs said that the home needed $15k worth of work at his reduced prices to sell-that was after another Realtor we suggested to the member looked at the home and made a list of things needed to bring the home to market standards. We considered increasing this loan (which was on a 6-month modification at 6% and interest only) by $15k and controlling the disbursements so the member could re-list the home (was on the market at $499k with no second showings) and sell it on their own instead of us trying to sell as an REO. As it turned our, this new Realtor found a buyer at $475k who LIKED the ugly wallpaper that was terribly outdated. Who''d have known? However, to us it was a business we add $15k to our exposure to avoid us selling the home for maybe $50k less because it would be a "bank-owned" property? 4. Look for problem loans in their denials. Many of us simply turn down a loan, even if the member has other loans with us. I believe in these times, we need to take every existing borrower denial very seriously, and develop a specialized group who will talk to these borrowers and develop a plan to work their way out of trouble-sell the extra car, seek credit counseling, modify budgets to eliminate the luxuries, etc. 5. Consider re-naming their collections department. We are going to rename our collectors who do 7-30 day calls the "member solutions department." One thing we''re seeing is that members with previously perfect credit are having problems, and they don''t know what to do. They''re afraid to talk to a collector. They have no experience, and their only knowledge of collectors is from the horror stories they''ve read in the press over the years. They don''t understand that OUR collection department won''t yell and curse at them and that they are only trying to help our members, just like all of our employees. A kinder and gentler name for a kinder and gentler department. 6. Be very careful about reducing or eliminating credit lines. Each line has to have a business decision. The credit union should ask itself, what do we have to gain? What do we have to lose? If the member has a $50,000 line and a $49,000 balance, you only have $1,000 to gain. While it might not sound like a lot of available funds, to the member, it might be their only lifeline, so to speak. The credit union has $49,000 to lose if they revoke the line and the member gives up and walks away from the house. 7. Don''t just dump your REOs. In some cases, a $5,000-$10,000 investment can make the house much more presentable. Remember, we''re in the best buyer''s market this country has seen in probably 25 years. Why would a buyer want a home that needs some basic work? Get your Realtor involved and let them tell you what the home needs to briing up to market standards.
    Bill Vogeney
  • This type of shared problem solving is an excellent tool for the entire credit union community. A suggestion that I would offer to address both current and prospective problem loans is as follows: the credit union should allocate resources (i.e., perhaps one person) to work with a reputable credit counseling organization (Consumer Credit Counseling Services is now a division of Money Management International). Such organizations could work in conjunction with the credit union to provide both group and individual counseling to the members, as well as identify possible sources for grants/ financial assistance. Making this option available to all members could be enlightening. As we know, most of the problematic mortgages are not held by our credit unions, but rather by other lenders. The credit union will not know about this situation until the member falls into a delinquent status with the other lender or falls behind on their payments to the credit union for various credit obligations. Having a credit counselor at the credit union, along with a public campaign to encourage the members to use this tool, may alert you to problems that members are having with these other lenders; hence, providing you with the opportunity to mitigate the ultimate risk to the credit union.
    Jill Peterson
  • There are ways to be proactive. Do your members know they can call you for help? Use your marketing avenues (website, eBlasts, newsletters) to let members know they can call you and you''ll work with them before the problem gets too big. We''ve found that members are often embarassed or scared to call and by the time we get in touch with them they are in too dep.
  • We have seen a decline in our DQ''s for seveal reasons. 1. we are calling the members sooner rather then later. instead of adding collectors, add a dialer it will make more call then adding 100 collectors. 2. Keep your personell that don''t do collections out of your collections department. They can do more harm then good sometimes. 3. Give your collectors the tools to HELP the member, like re-ages, re-writes and lower rate loans. This may also help lower your charge-off''s. 4. It doesn''t say where you are with putting out your repo''s now but rolling it back to 30 days is a good idea but are you willing to give some of them back too? 5. INCENTIVE giving your collectors incentive will help (more than $100 or 200). If you save 10 to 30% from charging off and it only costs you $10 to $15K to do it, it''s worth it. Give your collectors the drive, means and motavation!
    Steve Theisen
  • In reading the problem and plans, it strikes me as strange that the root cause it not addressed, and that''s the basic underwriting protocols! Senior management should have a training program in place before an underwriter ever sees a real loan and it must be a challenging course developed to properly read and analyse a loan file. Where most of the problems in the mortgage market have come from is one, having loan programs that don''t make sense and two, having underwriting that isn''t catching unqualified loans! The solution is to install a system wherein underwriters have to take case studies and be graded on them before they are certified as underwriters, and this type of course is usually at least two to three weeks in duration with solid attention to the appraisal. My experience after 30 yrs in the business is greed and lax underwriting have always been the problems, so turning these two items around will be a challenge, athough less of one today, but the mindset of quick profits from mortgages as opposed to quality loans being make and sold is the challenge.
  • If your not proactive in the current environment and willing to adjust rates or terms, homeowners will walk away. With the increase of negative equity, there has to be incentives to stay.
  • My second reading comment #8, I am an extremely lucky lending VP in the sense I work for a CEO who grew up in the lending side of the business. Many CEOs and other senior managers are not well versed in lending. In fact, many of the credit unions who have problems with their portfolios have CEOs who pushed hard for growth-with little respect for the cost.
    Bill Vogeney