With five branches in and around the nation’s capital, State Department Federal Credit Union ($1.4B, Alexandria, VA) serves roughly 60,000 stateside individuals, including a base SEG group, members of more than 250 recreation associations, bar funds, commissaries, and the American Consumer Council. They also meet the financial needs of around 7,000 overseas members at embassies and consulates worldwide.
With that footprint, the credit union still keeps low delinquency and charge-off rates, thanks in part to a strategic 2010 addition to their nine-person collection team.
The collection department already included a manager, a loss mitigation specialist who focused mainly on mortgages and Freddie Mac delinquency, a bankruptcy specialist, a recovery specialist, and four collectors. But their reliance on outsourced collection law firms was detracting from the department’s performance.
“Every time we would assign something to them, we’d run into the fact that we couldn’t change or modify behavior based on how we wanted the account handled,” says Veronica Trotta, director of lending at the credit union, in a recent webinar hosted by Callahan & Associates. Slow response time, lackluster efforts and attitudes, and a significant delay between judgment and garnishment were the norm.
“It was great to have a piece of paper saying we won the judgment, but at the end of the day what we wanted was the funds,” she says. “We were looking for a change.”
In 2010, looking to bring a legal expert in-house, the credit union began a five-month interview process, sifting through roughly 30 applicants, before finally finding an individual with a background in collections and licensing in the multiple areas they served.
“A lot of attorneys don’t go into that line of work [collections] or don’t expect to be salaried, but this candidate had worked on both sides of the business and liked the potential for stability,” says Trotta.
By that fall, he was onboarded as a full-time employee. But with this new talent came the need to develop new workflows, processes, forms, and scheduling to support legal efforts.
“He had an idea of how he wanted things to work and the process became increasingly automated over time,” says Trotta. “Now it’s just a couple clicks of a button and within five minutes we can get all our paperwork taken care of.”
The department, bolstered in part by this new addition, improved its average turnaround time from three to four months to just 47 days.
To make the most of his unique skill set, the legal counsel focuses only on straightforward collection tasks like judgments and garnishes, while others handled more time-consuming tasks like bankruptcy, foreclosure, or one-off litigation from members.
Many items never make it to court, with the member choosing to pay beforehand. But for the credit union, the ROI of the move is still clear ─ a 22% increase in recoveries in 2011 and a projected increase of 26% this year, more than covering the cost of an additional salary.
The new employee also directly contributed to cost savings, allowing the credit union to reduce its outsourced attorney fees by 75%. Because of their contract, the credit union may even recoup attorney expenses as part of some judgments.
“We have been awarded those funds back in about 22 or 23 judgments, but you still have to collect on them,” Trotta says.
Because the attorney is licensed in Virginia, Washington D.C., and Maryland, the credit union also has fewer issues with jurisdiction. The majority of claims can now be filed in Alexandria, VA, rather than where the member is, avoiding neighboring courts systems with a lot of backlog. State Department FCU also has the ability to act as a first-party collector, meaning no third-party collection notice is needed.
“We’re able to circumvent that, which immediately shaves 30 days off the process,” says Trotta. “It was a nice unexpected benefit.”
All of these factors culminate in the ability to start collections in a 60-90 day window from when the member begins to falter, and before other collectors come calling, which Trotta says is vital for success. Right now the legal counsel handles between 22 and 40 cases per month, but after the credit union works through this backlog, he will be handling somewhere around 10 cases per month.
This employees counsel has also impacted the credit union’s debt restructuring success.
“He will often use settlement offers or confessions of judgment in the workout process, which is different from how we handled it before,” says Trotta. "If the agreements aren't kept, we don't have to start the process over again from the beginning."
As of 4Q 2011, net charge offs as a percentage of average loans at State Department FCU is roughly half the size of its peer group with similarly sized assets.