Loan Extension Programs- Challenges and Solutions

With bankruptcy filing at an all-time high and national unemployment rates steadily escalating, credit unions nationwide are experiencing both an increase in losses and an increase in member demand for loan extensions to help ease their monthly payment burden. While many credit unions have loan extension programs in place, they are

With bankruptcy filing at an all-time high and national unemployment rates steadily escalating, credit unions nationwide are experiencing both an increase in losses and an increase in member demand for loan extensions to help ease their monthly payment burden. While many credit unions have loan extension programs in place, they are often informal, inconsistent, or intimidating to the member- and may just be delaying the inevitable charge-off.

It’s likely your credit union offers a hardship or loan extension program to struggling members. But what’s the motivation behind it? Probably, it’s some combination of commitment to member support, protection of your bottom line, and desire for a continued member relationship. If your program isn’t achieving the goals set when it was developed, you aren’t alone. Many credit unions are frustrated by the challenges and limitations of a traditional loan extension program.

5 Common Challenges to a Successful Loan Extension Program

1. Difficult or burdensome processes
In many programs, the process of requesting assistance is difficult, bogged down in bureaucracy, or simply intimidating to members. The result? Members in need either not going through with the request (and instead calling their local bankruptcy attorney), or if they do make the request, they need staff assistance and resources to help them through the process.

2. No objective substantiation of need
Without a complete analysis of a member’s financial situation it’s difficult to determine how much, if any, flexibility is needed. However, many consumers are hesitant to disclose financial details to a creditor, for fear it will be held against them later, or they question the objectivity of the advice of a credit union employee. So, frequently, loan extension decisions are made with limited information and no documentation (from an auditing standpoint) of the validity of an extension request.

3. Not addressing the bigger problem
Your members owe money to other financial institutions. While you may be willing to be flexible and helpful, their other creditors collection action may be pushing them closer to bankruptcy every day. Offering a loan extension without resources to address the entire situation is putting a band-aid on what could be a very large wound.

4. A neutral or negative relationship with the member as an end result
If the member ultimately defaults on their arrangement, or finds the experience only minimally helpful, you haven’t gained much from extending assistance. An effective loan extension program is a great differentiation opportunity- a chance to reinforce in the mind of the member that the credit union is there to help. One day that member will turn his life around and want to find a good mortgage or auto loan, or start investing. You’ve missed an opportunity to build loyalty if the assistance program doesn’t have an element of long-term financial support.

5. Many members in need don’t know help is available
How many bankruptcy losses have you had from members who were never delinquent on their credit union debt? Probably quite a few- many consumers will keep their credit union accounts current far longer than their other creditors, whether out of loyalty or because payments are automatically drafted from their accounts. These members- the ones who aren’t asking for help- are the ones who may be costing you the most.

The Solution- Incorporate Financial Counseling Into Your Loan Extension Program

Offering financial counseling as an element of the loan extension program is a simple solution to all of these challenges. The process requires a commitment from the member to take steps to improve his situation by working with a counselor, but minimizes the element of intimidation. A counselor establishes a relationship with the member, helping him sort out the details of his entire situation and the prognosis for improvement, while exploring the pros and cons of his options, and providing him a plan of action- which he can share with the credit union.

Cathy Martin, Collections Manager for MCT Federal Credit Union, recalls recognizing the need to make changes in their loan extension program, In the past, we’d ask members to write a letter explaining the problem, but some felt threatened or uncomfortable expressing themselves in writing. Often we’d have to struggle to get the information. We also weren’t sure we weren’t being abused. It was hard to tell which members were really in need and which were trying to take advantage. We felt if we talked about the whole picture, we could find out the facts.

MCTFCU had a financial counselor on staff for a time, but he couldn’t be available to every member all of the time. They decided to outsource their financial counseling to BALANCE, making counseling and education immediately available to members, so they’re able to get help while they still have options available- and adding an element of objectivity that provides a comfort level to the member and documentation for the credit union. Further, help isn’t limited to credit union debt. Financial counseling addresses the entire picture, from root causes to short- and long-term solutions to help members in financial hardship regain control and avoid bankruptcy.

The results MCTFCU has seen are very positive. It seemed like so many of them would get an extension and then go to charge off- we’d just be delaying the inevitable. Since we changed the procedure and started providing them counseling, very few have charged off, Martin said.

A financial counseling and education program impacts more than just the loan extension process. By promoting it to the membership at large, you can reach those members who haven’t asked for help, and haven’t been identified as being at-risk, but whose circumstances with other creditors make them prime candidates for bankruptcy. It’s hard to say how many surprise bankruptcies we’ve prevented, says Joanne Budde, President of BALANCE. It’s impossible to know for sure whether any particular member would have filed if we hadn’t helped him. What we do see, though, are members who came to us delinquent on their car loans, their credit cards, or their mortgages, who were close to giving up. After working with our counselors, they’re able to turn their situation around and within a year they’re back in touch with us to work on developing savings plans or to prepare for a home purchase- through their credit union.

BALANCE Financial Fitness Program partners with credit unions nationwide to reduce losses and develop stronger member relationships through comprehensive financial counseling and education services. For information on how a partnership with BALANCE can help your members establish personal financial control and protect your bottom line, call 800-808-4327 or log on to www.balancepro.org.

April 15, 2016

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