Areas of Interest

by Bill Merrick

Taking the right approach to collections can help keep the lid on charge-offs and bankruptcies. And having the right collection policy can improve loan collectibility and keep loan losses low.

"A collection policy should provide for the accurate accounting of delinquencies and timely recognition of losses. The goal of a collection policy is to minimize losses to the credit union," according to "Credit Union Policies: Blueprints for Success," written by Alan Stabler for CUNA's center for professional development. "A collection policy should include guidelines on when accounts are to be contacted for payment and under what circumstances more stringent tactics such as repossession or foreclosure are to be initiated. The policy should be reviewed by the credit union's legal counsel" (see "Sample collection policy").

When developing a collection policy, it's important to consider the laws and regulations affecting every step of the collection process, suggests "Directors' Easy Reference to Regulation ," written by Robert Burns and Steven Rodeman. The Fair Debt Collection Practices Act is the predominant federal law controlling debt collection. It requires institutions to give debtors specific information at various steps in the collection process and places strict controls on other collection activities.

"Directors should pay particular attention to procedures prohibited by both federal and state collection acts," according to "Directors' Easy Reference to Regulation ." "If you're helping another credit union, make sure your credit union doesn't assume unnecessary liability by collecting for any other creditor (including other credit unions) without knowing all the ground rules."

Sample Collection Policy

Summary

ABC Credit Union requires all members to repay their obligations according to the rates, terms, and conditions agreed to at the time of the contract. We realize, however, there are times when modifications to existing loans are warranted to assist members in financial crisis and to improve collectibility. Our philosophy is:

- No unreasonable demands will be made of our members.

- It's preferable to have an earning asset vs. a nonearning asset.

- Losses should be recognized as soon as they can be identified and quantified. Gains should not be recognized until collected.

Goal

It's the goal of ABC Credit Union and its collection activities to protect the credit union's assets and to maximize return. We'll work with our cooperative members in their efforts to regain their "member-in-good-standing" status so they may use all of the services offered by ABC Credit Union.

All practices and procedures will be structured to adhere to all applicable laws, rules, and regulations.

Procedures will be in place and updated as necessary. Policies will be reviewed annually by the board of directors.

Authority

Authority is expressly given to the chief executive officer and senior vice president of lending to make settlements and/or adjustments as to terms, interest, principal, and fees. They're further authorized to appoint qualified collection department staff to act on their behalf. A written evidence of this authority will be kept in the personnel file of all appointed staff.

Settlements regarding principal will be in the form of charged-off loans or reductions in the value of credit union-owned assets and will be reported to the board of directors on a monthly basis for ratification.

Settlements that affect only terms, interest, or fees will be reported only in those cases where the losses can be projected to be $10,000 or more over the life of the settlement. Interest loss will be computed by taking the difference between the settlement interest and the cost of funds plus 2%.

This article was reprinted with permission from Credit Union Magazine.