6 Strategies for Credit Unions to Reduce Member Delinquency Rates
Written by Cynthia Wylie
It is always in a credit union and a member’s best interest to reduce loan delinquencies. This has become especially important during the pandemic due to the high unemployment rates of the last 12 months. Presently, there is an interesting trend in delinquencies. What are financial institutions doing to keep their delinquency rates low? And, is it working?
Spanish philosopher George Santayana is credited with the aphorism, “Those who cannot remember the past are condemned to repeat it.” As we navigate our current economic challenges, looking back at our most recent economic downturn, the Great Recession in the late 2000s, might provide some helpful lessons.
In early 2009, I attended an economic forum with guest speakers from the banking, real estate, stock brokerage, and economic industries. I was actively looking into investing in real estate. The stock market was in a free fall, interest rates were anemic, and the real estate market bubble had burst. In a stroke of impeccable timing, my partners and I had just sold our company. We had money and weren’t sure where to put it.
At that time, there were many real estate properties in foreclosure, but the banks didn’t seem very interested in selling them. We would make offers at the reduced market value and nothing happened. My favorite part of the forum is when the banking executive told me why. Banks had such an excess of properties in foreclosure on their books, that to sell them at their market value (about 40% less), and write-off the losses, would render the financial institutions insolvent. So they were playing a waiting game by taking offers, not accepting them and waiting until the housing market recovered. Their risk was juggling a huge portfolio of homes that were in foreclosure, not to mention other loan delinquencies. They foreclosed and sat on their loans and took a big hit on the loss of revenue. In addition, many of the foreclosed assets fell into disrepair.
Today, the latest unemployment rate from the Bureau of Labor Statistics shows both the unemployment rate at 6.2 percent, and the number of unemployed persons at 10 million. Although it is much lower than their April 2020 highs, they remain well above their pre-pandemic levels in February 2020 (3.5 percent and 5.7 million, respectively).
However, loan delinquencies are down—even with the high unemployment rate and the strong historical association between the unemployment rate and loan defaults.
A recent article in Fortune Magazine, based on a study by business schools of Columbia University, Northwestern University, Stanford University, and the University of Southern California, found that in the Great Recession, mortgage delinquencies jumped from 2% to 8%. But in the pandemic’s first seven months they fell from 3% to 1.8%. “This is especially striking,” the researchers note, “given an unprecedented increase in the unemployment rate that reached almost 15% in the second quarter of 2020." And, they found that the explanation went beyond just stimulus checks.
Here are six strategies financial institutions, including credit unions, are now deploying with positive outcomes that you can consider as well:
1. Utilize forbearance. Instead of cracking down on delinquent borrowers, offer forbearance. That way, borrowers can delay loan payments without you declaring the borrower delinquent. It also improves your borrower relations by not diminishing the borrower’s credit rating. You will still take a hit on revenue, but only temporarily, and you don’t have to worry about a portfolio of foreclosed assets to liquidate.
2. Offer a variety of payment options. You can decrease your delinquencies by offering various payment options to your borrowers. Anyone struggling financially can pay principal-only, interest-only, or a combined payment. You could also reduce the minimum payments if possible. Be creative.
3. Encourage recurring payments. Offering recurring payments makes bill payments easier and more timely. This is especially helpful for busy borrowers or those who travel.
4. Encourage paperless adoption. Studies show that those borrowers who receive electronic bills tend to be more satisfied and reliable borrowers. According to an article from My Billing Tree: “By encouraging paperless adoption, you are in turn developing a more satisfied customer base. These customers, in many cases, are then more likely to be receptive to other types of account management features, including enrollment in recurring payments.”
5. Accept payments regardless of method or channel. In addition to different payment amount and delivery options, you can also provide different payment methods and channels. Borrowers can call and pay by phone, or even text to pay.
6. Improved information from technology. With online and mobile banking, borrowers can check their balances in real-time. Upcoming loan due date reminders can be emailed or texted to them. Pending payments can be posted to avoid overdrafts. We cannot overestimate the importance of technology in avoiding delinquencies and making borrowers happier.
Loan delinquency rates could improve even more, as the new $1.9 trillion federal stimulus plan will put money in pockets and hopefully drive up employment rates. The important thing to remember is that most borrowers want to pay their bills and pay them on time. With these proven methods, credit unions can do their part to help with the economic challenges their members have. By smartly learning from the past, financial institutions, including credit unions, can improve their delinquencies, borrower satisfaction, and bottom line.