CARMEL, Ind.—Lending experts are advising credit unions to carefully evaluate the decision to sell their delinquent debt—since that might not be the best move for the bottom line, they say.
“Many lenders choose to sell their delinquent debt to third-party debt buyers in lieu of recovering these assets on their own or with a debt collection partner,” noted Anne Holtzman, vice president of claims and recovery with Allied Solutions. “While there are some advantages to selling debt, the inherent risks and disadvantages of doing so could place your lending institution in a net worse position than holding onto your delinquent assets.”
Holtzman advised CUs to carefully consider their options.
“Debt sales are not always the right choice for lending institutions. If you sell your institution's charged-off debt to a debt buyer you immediately lose ownership of that asset and the relationship with the indebted borrower,” she explained.
Holtzman said, when selling charged-off debt, the following happens:
- A credit union foregoes any future cross-selling opportunities to that member.
- “You run the risk of permanently damaging your relationship with the borrower making it harder to win back his or her business, as many consumers have a negative perception of third-party debt buyers,” she said.
- “While you can sell the debt, you can never sell the risk and potential lawsuits associated with regulations like the Fair Debt Collection Practices Act, which could result in financial and reputational damages to your business,” Holtzman said.
- “You lose the opportunity to monetize your assets in the most effective way with a debt sale, as the debt is usually purchased by a debt buyer for pennies on the dollar. Whereas, collection partners generally return as much as $0.67 of every dollar collected back to the lending institution,” she said.
Holtzman said that evolving and leveraging the collection and recovery practices in place of selling debts can greatly reduce financial loss risks, while also offering new revenue growth opportunities.
Optimize Collections Strategies
Eric Johnson, vice president of business development with Navient, told CUToday.info there are practices an institution can adopt to “amplify borrower awareness, choice, and convenience for debt repayment, which will very likely result in a higher response rate and fewer outstanding delinquencies.”
Among Those Practices:
Evolve communication strategies: “Think about how you are communicating with borrowers about their outstanding debt. The key is to use multiple channels to engage these borrowers, to get in front of your customers,” he said. “You can take this one step further by using personalized communications to customize the message to motivate the borrower to take action.”
Diversify your repayment options: “Give borrowers more freedom to choose from different loan options so they can select the repayment option that better suits their lifestyle and finances. Doing so will greatly increase the likelihood these loans will be paid on time, which will result in fewer delinquencies and charge-offs for your business,” Johnson said. “Non-traditional loan repayment options that could help the borrower include balloon note financing, loans with flexible payments, short-term loans, and loan rate adjustments on transferred loans.”
Be intentional with collections efforts: “Be selective about how, to whom, and when you collect debts,” Johnson said. “This is an essential piece of the puzzle when trying to reduce negative equity and increase returned revenue to your institution.”
Johnson said to consider the following when building “more intentional” collections processes:
- Use reliable data to determine which borrowers present the most risk, and which offer the most reward to help determine to whom and how often to communicate with each individual borrower.
- Address early stage collections with targeted outreach to preserve these relationships and get borrowers back on track so they can take advantage of other loan products.
- Place more attention and resources on borrowers who have other loans, products, or an account with the financial institution, so the CU is retaining and recapturing these high-value consumers.
Enlist Expert Support
Johnson said that working with a full-service debt recovery partner to collect charged-off and delinquent debts on behalf of the CU is one of the best ways to ensure faster and more effective debt recoveries while managing compliance risk.
“As such, outsourcing debt collection practices to one of these vendors can help preserve or even elevate your business’s reputation and bottom line,” he said. “These recovery partners essentially accomplish the same goals of a debt sale while reducing the inherent risks. In fact, Navient returns an average $0.67 for every dollar of outstanding debt collected on behalf of the lenders they serve…All in all, establishing smart collections practices and partnering with a vendor that is experienced in the art of debt recovery far-and-away offers more value and benefits to your lending institution than selling your debt to a debt buyer.”