If Jim Croce were writing his classic song today, he could end his list of things a wise man doesn’t do, “and you don’t mess around with CoastHills.”
That’s because Lompoc, Calif.-based CoastHills Federal Credit Union has made it known in the community that if members have the capacity to pay their modified loans, CoastHills FCU will do whatever it takes to see that they meet their obligations.
That doesn’t mean the $630 million, 65,000-member CU is heartless—quite the opposite. “Any loss that we take affects the entire membership,” says VP/Collections Dal Widick, a CUES member. “It’s inconceivable that people who pay their bills should take that loss.”
CoastHills FCU takes steps to see that modifications meet the needs of both the credit union and members with problems, with the resulting modification success ratio hitting 72 percent.
Widick believes that if CoastHills FCU had the opposite reputation–if it were known
for easy modifications–that would create a mindset among members of “Why not me?” And even worse, it would set an informal precedent in court; local bankruptcy judges would know that members generally get a pass on their obligations.
|The Case for Expulsion—and Against it
Many credit unions have policies that allow them to kick out a member who has caused a loss. But should CUs take such a drastic step?
Countryside Federal Credit Union in E. Syracuse, N.Y., doesn’t expel members who have caused a loss to the credit union, but it does limit services. Such a member may have a non-interest-bearing savings account only, Henjes says. Still, he mentions that he knows of a large CU that still holds a meeting to vote to expel such loss-causing members: “It sends a message,” he admits.
“My members are owners,” Henjes adds. “They have an obligation to each other.”
But even if a CU has such a policy in place, it must be used carefully. It’s vital to know if the member in question has filed for bankruptcy, says Daniel F. McGarry, an attorney with Madison, Wis.-based Whyte Hirschboeck Dudek S.C.
If the member has done so, the credit union may want to wait for the bankruptcy to be discharged before taking any action.
“Expulsion policies should be worded carefully and followed precisely,” McGarry says. “Any communication with a member in bankruptcy should be carefully crafted. A number of bankruptcy court decisions in this area turn not on the policies themselves, but on the content of the letters sent to the members advising them of the policies.”
Denying future services to a member who has caused a loss to the credit union is permissible, but such policies must be applied on a non-discriminatory basis and can’t be used to coerce a member into reaffirming a debt, McGarry cautions.
In his experience, though, credit unions rarely expel members, he says. “They want to work with members as much as they can. Only at the very last moment will they resort to kicking the member out of the credit union.”
About three years ago, the credit union created a “very dynamic tool” to stop loan losses, Widick says. It identifies members with high loan-to-value ratios, then takes a close look at their entire financial profile, including loan scores and bankruptcy watch scores.
Members whose figures show that they are on rough terrain are invited to the credit union for a candid conversation. CoastHills FCU makes clear its expectation to be repaid, and offers to set up a modification plan even if payments are current.
If the modification doesn’t work, then a credit union staffer will visit the member and examine the original modification to see if it didn’t meet his or her needs.
With all this care, why don’t some modifications work? Most credit union executives and experts point to a few major reasons: The member has lost his or her job, had a salary cut, had a serious medical issue or gotten divorced. In CoastHills FCU’s area, job transfers also can play a role–either military deployment or an employee of a defense contractor being moved. In those cases, even if the member is underwater on his mortgage, the house must be sold.
But CoastHills FCU will sometimes refuse to agree to a short sale.
“We have the member put together an extensive financial package, like a credit application,” says Widick. “If they have the clear capacity to make payments, then we will not be as generous” as with those who can’t pay. If the member can pay but chooses not to, CoastHills FCU will take legal action. According to California law, the CU can file for either non-judicial foreclosure on the collateral or judicial foreclosure against the borrower(s). In fact, the CU does one of those two things three or four times a month. “No one wants to be sued,” he comments.
Widick makes it clear, though, that the credit union doesn’t pursue a case where the money simply isn’t there; that would be wasting members’ money in a different way. “We make sure there’s a high probability of success, and achieve that by working diligently with counsel,” he says.
Set Them up for Success
David A. Reed of the Oakton, Va.-based law firm Reed and Jolly, PLLC, says the best way to avoid re-modifications is to be thorough about the initial modification. “The workouts need to be set up for success, not failure,” says Reed, author of Sheshunoff’s Bankruptcy Guide for Credit Unions. “Some credit unions rush into these workouts. They don’t do a good job of looking at a member’s particular circumstances.”