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.