We recently sat down with our Collections Department Manager, Anne Marie, to learn more about how delinquency rates are affected by mergers.
Why do credit unions merge? Name some of the advantages of credit union mergers, and compare and contrast the positives of the merger with the unforeseen increases in delinquency.
Credit unions merge for a number of reasons, for example, to increase assets and member share. When a merger occurs a credit union increases delinquency because risk increases, but a credit union’s capital increases because assets increase.
Sometimes delinquency increases, but not a credit union’s capital. Credit unions can get membership shares, which may be more important than capital depending upon the market. When a credit union has high delinquency and is going through a merger, NCUA may disregard the inflated numbers or may excuse an excessive amount of write offs.
Why do you see a rise in delinquencies as a result of mergers?
Every credit union has different standards. They are all supposed to try and achieve NCUA peer standards, but that doesn’t necessarily mean that all credit unions subscribe to those standards. One credit union client we partnered with was at 12% delinquency, which is nine points above peer standard. They should have been at the normal level of 1% to 2% to begin with, but they were at 12%, which is pretty excessive when you look at that number translated into dollars. In six months, United Solutions was able to get the credit union to 9%, then to 3% and now they are all the way down to 2%. While lowering the delinquency we worked with the credit union to look at their entire lending procedures, because everything starts at the front line. If you make bad loans, you get bad delinquency.
Do credit unions sometimes hide delinquencies? Have you ever found fraud?
Yes, and no. Fraud can happen at multiple levels. It can happen at the member level, the credit union level, and even environmentally. Fraud isn’t just that someone hacked into Target and stole a bunch of credit card numbers. Fraud hits the credit union hardest and on multiple levels, because it’s the neighborhood Target and your members shop there. Now the credit union’s delinquency is temporarily heightened, but fraudulent transactions are not considered true delinquency and there are protections for the member against these fraudulent transactions. So those transactions don’t really affect your delinquency, unless it’s not caught or reported.
If a credit union manipulates accounts to show less delinquency, which is illegal, it always comes out in the wash. If you are reporting delinquency and then you “un-report” it, then you have executive embezzlement. There was a credit union CEO that embezzled over $60,000. Sometimes the manipulation is in good faith and just a mistake. For example, “Oh well, we made all these on the 29th of February,” yet there was no 29th of February last year. It’s an ‘oops’ so then the date is changed. Sometimes it’s not a mistake and the engineering is malicious. Everyone has insurances and a system of checks and balances in place, but no one can completely prevent a rogue employee from creating fraud.
What preparations can a credit union take to expose potential hidden delinquency prior to the merger?
Credit unions need to comb through their loan portfolio and review how their loans originated. Sit with your potential merge partner and their loan departments and look at how they evaluate loans, what their loan process is like, if they get references, what income ratios are taken into consideration. Through this evaluation period you learn what type of paper they are willing to hang. Looking at those factors will be a big indicator of how easy their delinquency will be to resolve.
Preparing your collections staff to fit the new procedures is important, whether it’s saying “we are temporarily only going to do risk-based lending collections” or “we are going to send out mass mailings.” When United Solutions Collections takes over for a client, it’s similar to a merger situation because we create a partnership and adopt the credit unions philosophies and procedures. The credit unions have two options: one, let their members know that they are going to have USC calling them to discuss their loans, or two, just go ahead and let USC start making the calls. The second option shocks the members because they’re now dealing with a third party and ultimately creates confusion. Preparing your members is just as important as preparing your staff.
Do the different collections practices at each of the credit unions affect the ability to collect from members’ post-merger?
Typically, collections practices do not differ because the credit unions join their collections policy to create one new policy. They set new standards and incorporate best practices of both previous policies. Many of the new adaptations will err on the side of caution making sure both the member and the credit union are protected.
Don't forget to check back in on Wednesday, March 30th for Part Two!