TCT Can Help Credit Unions Manage Loan Delinquencies

By Dennis Child, Research Specialist, TCT Risk Solutions, LLC

For the past nine years, credit unions have enjoyed loan growth by extending loan payment terms and loosening borrower standards. Larger credit unions especially have been seeing growth in their loan portfolios. Much of the new loan activity in the past several years has been in the “less-than-prime” market. This could be good news providing loans are priced appropriately and managed carefully – especially when it comes to less-than-prime loans.

Reports from financial institution regulators show the same adverse credit trends may be emerging as those leading up to the financial collapse of 2008. National statistics show that less-than-prime borrowers are falling behind on their car loan payments at the highest rate in more than six years. Subprime borrowers were behind by more than 60 days on about 4.85 percent of auto loans in August 2016, the highest level since January 2010. The rate was 4.14 percent in August of last year. For prime loans, delinquencies in August rose to 0.5 percent from 0.41 percent in the same month in 2015. Delinquencies are rising even though the U.S. economy appears to be improving. Furthermore, losses on risky less-than-prime loans rose to 8.35 percent in August, the highest since 2010. Many experts project less-than-prime loans will continue to deteriorate.

The primary job of credit union CEOs is management of risk. Most assuredly there is risk in loan portfolios and delinquencies in particular. It is of utmost importance that credit union CEOs have robust delinquency-control systems in place. Now is the time to take steps to assure that loan delinquencies are being managed carefully. Managers need to be sure they are controlling their past due loans and are maximizing their collection efforts by using tools specifically designed for tracking delinquent loans whether they further deteriorate or improve.

Most delinquency reports are a mere reflection of loans past due for a moment in time. It is much more important to know the movement of past-due loans toward improving or worsening status. The greatest predictor or influencer of charge-offs is how each and every past-due loan is moving up or down the delinquency spectrum.

A number of years ago, TCT developed a stochastically derived Delinquency Tracking Tool that has proven to be invaluable for controlling delinquent loans. This tool helps credit unions manage past due loans with greater expediency and efficiency.

TCT’s Delinquency Tracking Tool tracks individual delinquent loans as they digress or improve and provides detailed reports (using numbers and graphs) on a monthly basis. As individual past-due loans move from one delinquency “tranche” (or “bin”) to another (improve or fall further behind) loan managers need to have this information so they can take appropriate action.

Here’s how TCT’s Delinquency Tracking Tool helps manage loan delinquencies:

· Tracks overall trends in delinquent-loan portfolios and helps determine action needed

· Tracks the improvement or digression of delinquent loans by pools and by individual loans

· Provides a clear picture of risks in a loan portfolio

· Measures the effectiveness of delinquency control methods

· Measures the effectiveness and performance of collection staff

· Indicates critical changes needed in loan and collection policies and procedures

· Helps determine the amount to set aside in the Allowance for Loan Losses

TCT’s Delinquency Tracking Tool is especially powerful when it is used in conjunction with TCT’s Credit Migration Tool. For more information, visit TCT’s website or contact a TCT representative.


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