Recovery? Who are we? Who do we want to be?
When appropriate collection efforts have occurred; is it possible to increase Recovery Income? Before that question is answered you have to ask, “Who are we?” The second question is, “Who do we want to be?” (These are tough questions and require complete honesty in order to achieve the desired outcome.)
There are many variations or combinations of “Who are we?” and “Who do we want to be?” Once this has been determined, you can align your efforts for maximum results.
The financial organization in the middle is the one that is pulling in below average income and is just above paying the bills. They are attempting to salvage troubled accounts with average or slightly below average resources for mitigation. They are conservative on loan pricing and critical on loan qualifications. This financial institution is not contributing to the efforts to climb out of a recession. They are playing it safe and biding their time for the economy to turn around without assisting.
Best Case: A strong or stable financial organization, that is invested in the philosophy of assisting it’s debtors with re-establishing their credit worthiness and maintaining the current troubled accounts, will place attention on ensuring the collection efforts are exhausted up front prior to charge off. This starts with the staff in the collections area. They should be knowledgeable and empowered. Staff should understand the philosophy of the organization and the direction of the efforts. Once a loss is identified the efforts must be exhausted to ensure that recovery can be captured at a later date.
Loan growth is maintained and losses are measured for loan policy and procedure adjustments. Rates are competitive and loan quality policy is monitored closely.
Worse Case: A financial organization that is in trouble financially and is NOT looking to assist in re-establishing the credit worthiness and accounts of current troubled debtors, will work to increase recovery (efforts after charge off) and show it as an increase in profit to the bottom line. These efforts do NOT include obtaining judgments. Additional staff and expenses for incentive payouts are expected.
Loan growth must be maintained to offset and cover the increased losses identified in a recession. Typically rates for new loans have to be increased to cover losses and loan qualifications are relaxed to allow for the new loan volume required.
A charged off account without a judgment does NOT ensure recovery payment within the next 7 years. A charged off account with a judgment increases the possibility of recovery payment over the next 10 years.
Is your financial organization working with a Bank Mentality or a Credit Union Mentality?
Banking Mentality is straight to the bottom line. Banks will work to increase income by passing on the fees to the account holders. Losses are created early so the need for new loan volume and fees can be identified quickly and passed on to account holders. If losses are lower than anticipated, increased fee income means bigger bonuses. Account holder retention is not considered.
Credit Union Mentality is placing a combined effort and investment on the stability of the Credit Union and the member. Possible losses are identified and efforts are made to re-establish the member’s credit worthiness. Credit Unions understand it is in the Credit Union and member’s best interest to maintain the member relationship.
So, is it possible to increase recovery? Yes. However, do you want to do it the right way or the fast and now way? Do you want to retain account holder members? Do you want to become the Primary Financial Institution (PFI) for current account holder membership? Do you want to be around in 5 years or do you want to add to the bottom line now?
Now you know, “Who you are” and “Who you want to be.” Next, you have to get there and/or stay there. Create a plan that is measured and re-measured periodically. New recovery initiatives should be measured for adjustments and to ensure success. If new procedures are to charge off quick and increase recovery staff; are the recovery dollars coming from the new NO judgment accounts or are the recovery dollars coming from the older charge off accounts with judgments? How long has the account been charged off? Was the reason for charge off listed as unemployed? And, are the employed now? What profession while loan was conforming? And, what is the new profession?
If you settle a charged off or open loan; measure it. What was the final settlement fee? What was the timeframe to receive payment once details were agreed and committed?
There are 5 basic questions that must be asked before you can identify possible areas to re-evaluate for improved processes within procedures and /or policy.
5 basic questions:
· What is the strength of the economy?
o What is the current unemployment rate?
· Research to determine the normal rate to your demographic area in a good or stable economic economy. Compare to recession economy unemployment rates.
o Divorce rates.
§ Are they stable, up or down?
o Medical expenses.
§ Out of pocket medical expenses due to no job - no insurance.
· Unexpected increase in child birth.
· Are you looking for Quick Recovery or Recovery that protects the best interest of the financial organization?
o What is the current financial stability of the financial organization?
· In trouble? Need recovery?
· Stable? Looking to maintain accounts by working with debtors and exhausting collection efforts geared toward that initiative.
· What is the financial organizations philosophy?
o Bank mentality or Credit Union mentality?
· Do you have a Mitigation process in place?
o Are there clear guidelines?
o Does the process include best interest of debtor and / or financial organization?
· Do you want to maintain the debtors that are experiencing late or no payments?
o Again; what is the strength of the economy?
§ Is the economy coming back? When is stabilization expected? How long?
o Unemployment rates?
o Is current unemployment increasing or decreasing?
o Financial organization philosophy.
(If unable to obtain statistics from published polls, track your current collection effort communications with debtors.)
You must keep the possibility of Bankruptcy in the equation. An increase in BK filings is expecting during the harsh economic times as well as when the economy begins to stabilize.
Recovery that protects the best interest of the financial organization: All collection efforts must be exhausted prior to charge off. This recovery is typically received 3-5 years down the road after judgments have been obtained. The economy plays a major part in this recovery. (EX: When unemployment stabilizes. Mortgage rates are low and economy is good; consumers attempt to borrow for major purchases. Judgments must be paid or settled prior to loan closings.)
Quick Recovery: Recovery on accounts that are charged off prior to collection efforts being exhausted or settlement on an account that is charged off and forgiving the remaining balance. Judgments are null and void.
Settlement: This typically does not include interest and fees due and should be negotiated starting at 75% of BALANCE. Reducing the BALANCE by 50% or more is more attractive to interested debtors. Judgments are null and void.
Remember; you are forgiving the remaining balance, interest and fees. You will not be able to collect them at a later date and you will not be able to maintain the member.
A 1099-C should be considered on all Settled Accounts. Finance must be involved in the 1099-C reporting process. Recovery reporting errors are most common. Segregating the true money collected from the settled or forgiven money.
Approved settlement percentages and 1099-C requirements should be identified in your policy and procedures. (EX. Settlement percentages are negotiated at the discretion of Collection Management. OR Settlement percentages are at the discretion of Collection Management up to 50% of Balance. Settlement percentages below 50% must have Senior Management or CEO approval. AND 1099-C reporting is required on all settled accounts over $1,000.00. OR 1099-C reporting is at the discretion of Collections Management. )