CUs Learn What Works and What Doesn't in Loan Modifications

As banks come under fire for a disappointing performance on loan modifications this year, credit unions appear to be doing a much better job.

That's according to numbers from one of the country's largest credit union lenders, the $18.6 billion State Employees CU, Arlington, Va.,and statistics compiled by NAFCU. Both sources indicate that loan modifications and redefaults are up, but not at a significant rate.

NAFCU president Fred Becker cited findings from the trade association's monthly Flash Poll that showed at the end of October 15.4% of 170 CU respondents said that redefaults were on the rise over the last 12 months. "I'd say it's a very good sign for credit unions that 84% of those we polled said their loan modification programs were working very well."

At SECU, which has a $10.2 billion first-mortgage loan portfolio, 4,300 members have enrolled in the credit union's loan modification program and 2,300 are back on track, shared SVP Phil Greer. While there have been redefaults, Mr. Greer said that most of the remaining 2,000 are still in some phase of the loan modification process and it is too early to say if they have turned around their situations. "We'll find out next year how they do," he said.

Based on SECU's track record, Mr. Greer believes only a small percentage will redefault. "We have had only 151 properties out of 125,000 that have become REOs so far this year."

What is working for the Raleigh, N.C.-based SECU is insisting that members seeking a loan modification come to a face-to-face meeting with the credit union. "If it is a joint loan, we require the meeting be face to face with both parties at the same time," Mr. Greer said. "That sometimes brings out the fact that husbands are concealing the delinquency from their wives and vice versa."

The face-to-face, insisted Mr. Greer, also lets the credit union gauge members' commitment to resolving the problem, and to also help SECU better understand a homeowner's financial problems and choose the correct course of action. "I don't know any financial institution that can come up with a solution for a problem that they don't understand," he added.

To turn members' situations around, SECU relies on a variety of solutions. One approach it does not use is extending maturity dates and re-amortizing the loan, which he stated does little to lower a payment. What works, he said, is giving members the time to "catch their breath" and find better ways to manage their budget. "Sometimes it's simply a loan extension, maybe for two to three months. Maybe in two months the bump in the road they experienced is not as big of a problem."

It can also mean doing an extension and a rate reduction (only to current rates), as well as a term change. "Maybe it's a matter of saying we'll agree to take a partial payment for the next six months." SECU has also introduced SECURE Mortgage, which consolidates members' mortgage balance with any other outstanding loans or credit balances into a lower-interest first mortgage that can be financed up to 100% of the value of the members' homes.

Of all the steps SECU takes to make a modification successful, the most important, Mr. Greer said, is changing the tone of collections to encourage members to come to the face-to-face meeting.

"Typically, collectors send a letter or make a phone call that says in one way or another we expect your check by a certain date," he said. "That's not the way to resolve this issue. Most of these members are good members, not deadbeats, and they want to pay but can't. So on the phone call or in the letter we say, 'It's obvious you have a problem. How can we help you?' Relaying that different attitude has been instrumental in getting members to agree to sit down and talk with us."

Ray Birch is a correspondent for the Credit Union Journal.