An E-publication from the Delaware League Services

Third Quarter 2007



Selling Your Debt Makes Dollars and Sense

By Christa Scalies, President, Dahlink Financial Corporation

Your distressed debt accounts (seriously delinquent and charged off consumer accounts) may be represented by a zero on your balance sheet but they are far from being worthless. Unquestionably, real dollars – cash – can be extracted from them using proven “mining” strategies. The question credit managers must address is what strategy makes the most sense for the institution. The answer will always be the one that scores highest on this test:

• Does it require a minimal investment of your time and effort?
• Will it yield the highest possible return?
• Will it yield quick cash? and
• How well does it insulate the institution from residual liability?

There are three basic strategies employed for collecting debt. I will briefly mention the first two but will not go into detail because by the time debt is charged off, these collection strategies have already been tried at least once.   

This requires the greatest investment of time and resources. It is only recommended where the institution can afford a dedicated (i.e. full-time) effort, backed up by systems, procedures and adequate personnel training and resources and only then after it conducts a proper ROI analysis.

Third party collection agencies can be an effective but sometimes slow and unpredictable way to liquidate debt. Credit unions get the best results from collection agencies in those instances where a) the debtor will respond to letters and/or telephone calls, b) the balance due is fairly low, and c) the debtor has the present ability to pay. Credit unions should closely monitor their outside collectors for performance and compliance with consumer law.

3.  Selling Debt

Most credit managers are familiar with the concept of debt sales. They realize delinquent consumer debt is a marketable asset, even if it has zero book value.Selling your debt outright will provide immediate cash while requiring little or no additional investment on your part and may reduce liability risk as compared to continued in-house or agency collection. The issue to consider, then, is which of the two basic debt sales avenues will yield the highest return: debt resellers or debt end-buyers.

Resellers

Resellers are the wholesalers of the debt buying industry.  Many are large national firms who purchase debt to resell it to end-buyers or other resellers on the open market. Some may also retain a portion of purchased debt to work on their own. They are, in essence, “middle-men” who must cut the price they pay to you to leave room for their mark up. For the longest time, they were the only game in town for a credit union looking to sell its distressed debt. In such transactions, the advantage often tilts away from the credit union and toward the reseller.  

End-buyers

End-buyers, like Dahlink Financial, work the purchased accounts as their own. Absent a “middle-man,” end-buyers are in a better position to offer you a higher price resulting in a balanced, win-win scenario. The mark up that otherwise would have gone to the reseller remains on your side of the ledger – in the profit column. Advantage you.

While maximizing your cash flow is a driving force, there are other factors you will want to consider when selecting the right avenue to sell your debt.

Resellers have little, if any, control of the debt after they sell it. There are horror stories of accounts being double-sold, violations of privacy rights, and abusive collection practices.

Because Dahlink Financial is not a debt broker, we control all the accounts we purchase and we conduct all collection activity through experienced debt collection attorneys. Importantly, we do not resell the debt we purchase.

Visibility is Money

So now you know that the first “secret” to getting the highest price for your distressed debt lies in the avenue you choose: end buyer over reseller. The other “secret” is visibility. Having maximum visibility into the characteristics of the debt triggers a chain reaction on the Buyer’s part. Reducing uncertainty diminishes the need for buyer’s contingencies (which never work in your favor), mitigates their risk (which usually does work in your favor) and ends up in a higher offer price.   

You would no more offer top dollar to purchase a used car where you are not permitted to inspect or drive it than you would grant advantageous loan terms to an applicant who refuses to provide the information you need to assess his/her credit worthiness.
 
In order for a reputable buyer to prepare a bid for you, they will need a data file with account information such as debtor’s name, Social Security Number, last known address, loan type (signature, credit card or auto), account number, account open date, last payment date, last payment amount, charge-off date, principal balance due and interest rate. Most buyers will not purchase known bankrupt, deceased or fraud accounts so you’ll need to remove them from your list.

Many buyers will want to see examples of loan documents so as to factor in such considerations as statute of limitations and ascertain whether the debtor is obligated to pay collection costs and attorney fees.

Buyers will also ask due diligence questions about the general make-up of your portfolio and your collection efforts to date in order to properly assess the collectibility of the accounts. Before sending any data, be certain to check buyer’s references and, most importantly, obtain a Confidentiality Agreement concerning their use of the data.

Other factors

When selecting a buyer for your debt, consider the ease with which you will be able to deal with the Buyer. Are they located nearby or at a distance? Do they have a stake in the local economy? Are they a large firm with inflexible “deadlines”, or are they small, agile and responsive to your needs? How easy will it be to develop and maintain an ongoing relationship with them?  

The sale of non-performing receivables has proven to be a smart financial move.

• It transforms zero-valued assets into instant cash.
• Improves your bottom line without effecting quality of service.
• It reduces uncertainties associated with problem loans, and
• Eliminates administrative costs and headaches.  

According to a 2006 study by Price Waterhouse, asset buyers, like Dahlink Financial Corporation, helped return $2 billion dollars to lenders in 2005, an amount equal to the roughly 3% of new consumer debt issued that year. 

Maximizing recovery of bad debt is a critical component for the overall health and longevity of your credit union. Each of the debt collection strategies we outlined here has its place and should be considered as part of your overall debt collection procedure. Selling your charged-off accounts for cash should be your end-game strategy.

Why?

Dollars and sense. If your recovery procedure terminates too early, or if you fail to use the avenue yielding the highest return, you may be leaving chips on the table and that simply does not make good sense

.                          
                   Christa Scalies

Remote Branch Capture for Businesses

The check processing industry has experienced very little change since the early 1990s, when the industry began using check imaging for long-term storage of processed items, eliminating the need for microfilm. But, change occurred in 2004 with the introduction of new Check 21 laws, which started moving the industry towards the implementation of remote branch capture (RBC) for checks. RBC is the process where branch locations have the capability to digitally image deposited checks and send those images electronically for forward collection processing, instead of sending the original items.

As we move into the second half of 2007, nearly all credit unions will have, or plan to have an RBC solution in place within the next twelve months. However, the check industry is not going back to its quiet and stable past. As RBC becomes commonplace, many credit unions are moving into business level remote branch capture and deposit. 

Business level RBC will allow credit unions to extend their business service offerings by supplying business members with a Check 21 compliant check scanner to capture and make deposits, regardless of where their business is located in relation to the credit union office. This creates a win-win situation for both the business and the credit union. The business member appreciates the convenience of scanning received checks daily and sending them to the credit union electronically. This RBC solution benefits the business member by eliminating the need to bring items into the branch each day. This also can result in the business receiving better availability of deposited funds.

Credit unions benefit from business level RBC because essentially the credit union has established a branch at every business member location. This helps the credit union effectively compete for business member deposits, while extending its service offerings for businesses. In addition, credit unions often find that they can save time and expense at branch locations, since the need to manually process business deposits is reduced.

Although there are obvious benefits, before your credit union begins handing out scanners to every business member, you will need to establish rules for the storage and destruction of checks. Some credit unions have the business mail them the original items. This ensures the business deposits the images only once, eliminating the chance of depositing the check electronically with the credit union and then depositing the original items with another financial institution. It also ensures the items are stored in a secure location where the private information contained on the checks will not be stolen, compromised or disclosed. This also allows the credit union access to the originals in case any claims are made that the image deposit is incorrect or invalid.

As many of you already know, Mid-Atlantic offers credit union level teller and branch RBC solutions. We also offer a Business RBC solution. While our solution for Business RBC is very similar to our credit union level solution, a few more controls have been put in place so the credit union can limit their business members’ activity, if they choose to do so.  The best benefit to our Business RBC solution is not what it does today, but what it will be able to do in the next 6 to 9 months. This Business RBC solution is designed to be flexible and allows the business the ability to process the item as an image check deposit or to convert it into an ACH transaction. Depending on how the business receives the check, they may be able to convert the item from a check into an ACH lockbox (ARC), a point of purchase (POP), or a back office item (BOC). Once the business establishes that an item is eligible, the system will automatically convert the item into the proper ACH transaction for the business. The advantages of this is that ACH items often clear quicker, are less expensive to process than a check, and do not carry the same requirements regarding storage and destruction of the original item. 

Our Business RBC solution can help credit unions build a stronger relationship with business members, streamline the deposit process, and offer flexibility in transaction processing. For more information on Mid-Atlantic Corporate’s Business RBC solution, contact your Corporate Account Manager, by calling toll-free (800) 622-7494.

Credit Line Management – The forgotten strategy!

By Bill Lehman, AVP Portfolio Consulting, CSCU

Since unveiling CSCU’s portfolio consultation services back in September 2006, I have had an opportunity to consult with over twenty different CSCU member credit unions.  It has been a great opportunity for me to talk to them about specific acquisition, activation, usage, and retention strategies that they can implement to help improve portfolio performance and profitability. 

It is important to know that research shows that revolvers (those members that carry a balance on their card every month) will typically choose the card in their wallet with the lowest unpaid balance and the largest open-to-buy. Research further explains that cardholders typically seek additional credit elsewhere when they reach 35 to 40 percent of their credit limit. This is why regular credit line management that grants credit line increases to qualified cardholders is so important to the success of stimulating increased card volume and usage.

Also consider that by regularly managing your cardholder’s credit lines you can help reduce voluntary attrition in your portfolio. Wouldn’t you expect that your members are less inclined to call you and ask for the limit increase that they feel they deserve, than to easily accept the next generous offer they receive in their mailbox? Why not thank them for their outstanding cardholder behavior with your credit union and award them the increased credit line that they have earned, so that they don’t look for credit elsewhere?

Lastly, realize that by not regularly managing your cardholder’s credit lines, there is a chance that members may not have adequate credit limits to take advantage of other usage strategies that you have implemented or are considering implementing.  Without adequate credit lines in place, usage strategies like balance transfer promotions, statement checks, and letter checks are not going to be nearly as effective. 

In my opinion, regular credit line management and review is a usage strategy that needs to be employed by many credit unions. I would encourage you to consider how long it has been since the last credit line increase program and think about if it is time to run another.  Increased credit card usage depends on it! 

Please feel free to call me at 1-888-930-2728 with any questions. 

Opportunity begins at home with flexible mortgages and financing solutions.

Even as home prices continue to fluctuate, homeownership in America is soaring to record highs. And, many people who didn’t think they could afford to buy became homeowners sooner than they imagined. What happened? 

The answer lies in a new crop of flexible, affordable mortgages and home financing solutions that give homeowners more choices and more control over their financial and investment strategies. 

Fixed, Adjustable or Flexible – It’s your choice.
“The stereotype of the hard-working homeowner shackled to large monthly mortgage payments for 30 years doesn’t hold true anymore,” says GMAC Mortgage’s District Manager, Kim Grim,  “While many buyers still prefer traditional fixed rate or adjustable rate mortgages, others are choosing mortgages that allow them to manage their cash flow and have the flexibility to enjoy life without dipping into their savings.”

Depending on the buyer’s life stage and lifestyle, these mortgages can be very attractive. For an active family who’s outgrown their first home, a bigger one – possibly their dream home – can be purchased sooner and still leave them with cash for vacations, recreational activities, tuition and other things. And someone relocating or simply planning to stay in a house for just a few years could use an “interest-only” loan to enjoy the most home for the least amount of out-of-pocket cash each month.

There’s also a “natural” by-product of these mortgages. “Even if the homeowner chooses not to pay principal in the early years of the loan, equity continues to build over time if the home’s value appreciates,”  Grim says.

Your demand. Our supply.
Your home is the smartest investment you can make – and today’s homeowners are smarter than ever, according to Grim.  “That’s why there’s a demand for specialized programs and products for people at all stages of life. Whether you’re a first-time buyer, a growing family or a secure empty nester ready for new enjoyment, your home puts opportunity, choice and control all under one roof.”

CTA: To learn more about flexible mortgage options and versatile home financing, call GMAC Mortgage, Kim Grim, at 302-428-3014 or, stop by your local credit union.

Automatic Features Drive 401(k) Plan Growth

It’s still too soon to measure the ultimate impact that automated enrollment features will have on credit unions offering employees 401(k) retirement plans. However, early returns show a dramatic upswing in plan participation, meaning a more secure retirement picture for many current credit union employees nationwide.
           
The automatic enrollment features, expanded and clarified by the Pension Protection Act (PPA) of 2006, enable employers, including credit unions, to automatically enroll employees in defined contribution retirement plans, better managing and investing employee funds. In most cases, employer-managed funds will yield higher returns, resulting in a greater financial security for employee participants in the plan, according to Scott Knapp, CFA, vice president of employee benefits markets for CUNA Mutual Group.
           
“The full intent of PPA was to enable, but not to require, plan sponsors to make investment decisions on behalf of their employees,” says Knapp, who recently has been speaking to credit unions and groups about the program’s various advantages. “Automated features rank at the top of the list as a major advantage to making the plan work.”
           
Automatic enrollment features turn the tables on the formerly employee-driven investment options that lie at the heart of most 401(k) plans, enabling employers to make investment decisions on behalf of employees, Knapp says. This ability, while not required of credit unions, removes responsibility from employees who lack market knowledge and sophistication sufficient for making wise investment decisions. Current programs feature three separate steps in the automated process:

            • Automatic enrollment, in which employees are automatically enrolled in the program if they fail to make an affirmative election.
            • Automatic deferral increases, through which employers can increase the amount of employee income deferred into the program.
            • Qualified Default Investment Alternatives (QDIAs), a list of investment programs in which 401(k) participant funds can be invested by employers without incurring fiduciary liability.
           
Under PPA, employers who participate in the program and invest in a QDIA receive some protection from suits filed by employees who feel they’ve been harmed by their employers’ decision to enroll them and invest their retirement funds. While employees may be automatically enrolled, they do have an opt-out option that they must exercise in order not to participate in the program, or participate at a different level of contribution. Credit unions may choose to offer employees any or all of the three options, but those that choose QDIA investments by default must also offer automatic enrollment, Knapp says.
           
“The new law gives employers who invest employee funds ‘safe harbor’ protection,” says Knapp. “Thus far, the increase in employee participation in these plans has been very impressive.”
           
According to research from Hewitt Associates, a benefits consulting firm, plans that adopt auto features experience an increase in participation rates from 50 percent to 90 percent. Since most existing plans have not yet crested the one-year mark since the law was enacted, there’s no real indication of how effective automated deferral increases have been. Since most plans operate on a calendar-year basis, pickup has thus far been a little slower, but experts predict a groundswell of activity early in the new year, Knapp explained.
           
“In general, credit unions are cautious to embrace new ideas and plans such as these,” Knapp said. “In most instances, such caution and conservatism is a good idea.”
           
To learn more about pension plan options in the post-PPA environment, contact your CUNA Mutual relationship manager about speaking with a pension specialist at 1-800-356-2644. Scott Knapp also is available to answer questions and can be reached through the same number at ext. 8486.

© CUNA Mutual Group 2007.  Used with permission.

FREE SCAM PREVENTION RESOURCE AVAILABLE FOR CUs AND THEIR MEMBERS

Credit unions and their members can find out about the latest scams and how to avoid being victimized by them through a free new resource from TraceSecurity, a CUNA Strategic Services alliance provider.

TraceScam Alert educates and protects subscribers from current and potential online and offline scams with a database containing the latest scams, specifics on what the scam is looking for, and how to avoid being victimized.  Examples of current scam topics include: the wireless network scam, the white plastic scam, vishing, phishing, the jury duty scam, the account verification scam, the eBay order processing scam, the scholarship scam, the get-out-of-debt scam, and more.

Users can also submit any potential scams they have encountered, which will be investigated by TraceSecurity. Subscribers will be notified if a potential scam is found to be a true threat, and the scam will be added to their database list of scams and warnings.

Scams involving credit unions will be reported in a general format, without the credit union name, to protect the privacy of individual credit unions as well as the people submitting information on the potential scams. 

A second free new resource, called Ask the Experts, allows credit union professionals to submit any questions they have relating to security issues in general, scams, and security compliance. The questions will be answered by TraceSecurity's team of experts, who have hundreds of years combined experience in the security and security compliance field.

Credit union professionals need only create an "Ask the Experts" account to start asking questions. In most cases, an answer will be provided in less than 24 hours of submitting a question.

Both resources will remain free at least through the remainder of 2007.  For more information or to subscribe, visit www.strategicservices.cuna.org, select the TraceSecurity products link, and scroll down to the appropriate product. Questions on the TraceSecurity, CUNA Strategic Services alliance may be directed to Deb Bergenske, associate product manager for CUNA, at (800) 356-9655, ext. 4340, or by e-mail at dbergenske@cuna.coop. 

Thank you for reading Service Issues!
Jane Bailey, Editor
Delaware Credit Union League
www.jane@dcul.org