Banks and credit unions make their money by lending, so delinquencies are inevitable even in the best economic environments. The figures vary, but as of 2023, the national delinquency rate for consumer loans is about 2.23 percent.
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Debt collection is necessary for banks and credit unions to recover loans and credits extended to borrowers who have defaulted or failed to adhere to the repayment terms. However, it’s important to note that debt collection should be carried out in an ethical manner, respecting the rights of borrowers and following the regulations set by relevant authorities. Here are some of the commonly used debt collection tactics by banks:
- Initial Contact and Notification: The bank usually sends a notice to the borrower informing them of the default and the need to clear the outstanding debt.
- Payment Reminders: Banks may send regular reminders via email, text, or calls. These reminders are usually polite and serve as a nudge for the borrower to fulfill their obligations.
- Repayment Plan Negotiation: Banks often work with the borrower to come up with a revised repayment plan that is more manageable for the borrower’s financial situation.
- In-House Collections: Before taking any legal action or outsourcing the collection process, many banks use their in-house collections department to attempt to collect the debt.
- Credit Reporting: Banks may report the defaulted loan to credit bureaus, which could affect the borrower’s credit score. This is often a big incentive for the borrower to settle the debt.
- Use of Collection Agencies: If internal efforts don’t succeed, the bank may hire a third-party collection agency to pursue the debt. These agencies specialize in debt collection and usually work on a commission basis.
- Legal Action: As a last resort, the bank may initiate legal proceedings against the borrower to recover the debt. This can lead to a judgment and potentially wage garnishment or property liens.
- Debt Settlement Offers: Sometimes banks might offer to settle the debt for a lesser amount than what is owed, especially if they believe that the borrower may not be able to pay the full amount.
- Charge-Offs: If collection efforts have not succeeded within a certain period, the bank may write the debt off as a loss. This doesn’t relieve the borrower of the obligation to pay, but it means the bank has given up on collecting the debt as an asset.
- Repossession: If the debt is secured, such as in the case of a car loan, the bank may repossess the collateral (such as the car) if the borrower defaults.
- Communicating Through Authorized Channels: Banks should respect the borrowers’ preferences and legal requirements regarding communication channels (phone, email, etc.), time of contact, and language.
It’s important for banks to follow the rules and regulations set by governing bodies, such as the Fair Debt Collection Practices Act (FDCPA) in the United States, which outlines the legal and ethical boundaries in debt collection.
Collecting a debt is a complex process that interweaves law and strategy. Debt recovery is a vital part of all financial institutions as unpaid invoices can hinder business success. Financial institutions must create strategies to manage a regular collections caseload.
Without a communication strategy, collection is impossible.
Many reasons can cause a customer to miss a payment. Part of the challenge is getting to know your customers’ financial struggles without bogging down your collection process. Communication is the best way to maintain a positive relationship with a customer that can weather financial struggles and lead to successful collection. There is an adage in collections that if you don’t call, you won’t collect; this holds true, especially for lenders and other financial institutions.
Strive to communicate frequently and proactively with customers. Encourage them to answer your calls and letters by adopting a collaborative tone. Be a resource for your delinquent borrowers by offering solutions. It’s a challenge, as debtors can easily enter a mindset of burying their heads in the sand. Show them a light at the end of the tunnel, and they may be more likely to work with you. Even if your communication efforts fall flat, at least you have maintained contact and can leverage the information you obtain from your calls to power more advanced collection efforts.
Use a pooled approach for maximum efficiency.
While it is crucial to maintain a positive relationship with your debtors, this nurtured relationship cannot be at the expense of efficient collections. Pooling collection resources is ideal because it reinforces consistency and leverages tools like a dialing system. The traditional method of financial institution collections involves assigning a dedicated agent. This traditional process has many benefits in nurturing a close relationship, but the efficiencies of a pooled approach offset these benefits. A pooled approach also forces a financial institution to operationalize a collection strategy — to make it uniform and regular.
Beyond uniformity and the ability to use a dialer, a pooled approach also has the advantage of data analytics. With all your collections resources aimed at a common goal and working on a common group of collection accounts.
Use collection tools and know the law
Creditors have numerous tools at their disposal for collections depending on the stage of the collection process. The overall goals are to obtain an agreement to pay the amounts due, or a portion, and fulfillment of the agreement. Collection tools that help reach these goals include the communication strategies we discussed but can also involve something unique to financial institutions — the right of offset.
Offset is when a financial institution can tap into deposits of a borrower to satisfy a debt. This practice has federal and state limitations, and financial institutions should become fluent in the applicable rules and regulations. For example, the Federal Reserve Board’s Regulation Z prohibits banks from using the right of offset for credit card debts. California state law stops a financial institution from depleting a debtor’s bank account to below $1,000. Other state laws protect certain deposited funds, such as disability, social security, or unemployment income.
Another tool is the use of credit reporting. Accurate credit reporting incentivizes payment and can be a tool to work with a delinquent borrower. For example, a financial institution should clearly communicate the ramifications of nonpayment and of entering a repayment agreement.
Engage the help of a collection agency for maximum results.
Banks, credit unions, and other financial institutions are in the business of investing and lending money. While collections is a component of banking operations, they can also distract and bog down operations. By hiring a collection agency, banks can more efficiently operationalize collections, reaping the benefits of the tips we discussed and more. Professional collectors can execute an organized and well-managed communication strategy, pool resources for efficiency and effectiveness, and know tools and legal strategies to maximize recovery.
Credit card debt is the largest category of collections for banks, but the other two major ones would be auto and home loans. Home loan collections are often handled by servicing companies – but also for all types of bank collections, there are at least 2 stages – collecting on a past due balance, then collecting on judgments and enforcing lines for secured debt. The four largest banks in the USA have 4 billion in credit card charge-offs – a huge number.
Contact us today for more information on how a professional collection agency can help your financial institution lower delinquency rates and increase collection revenue.