Loan Modifications: A Good Option

Daniel Penrod
November 17, 2009 | COMMENTS

As the old adage goes, “sometimes less is more.” It can be argued this applies to profits in the current economic climate. While this may seem fairly counterintuitive, there is one area which shows that not only is it possible, but it can even be the best option: loan modifications.

Following the current presidential administration's emphasis on mortgage modifications, it is hard to turn on the radio, watch television, read the newspaper, or go online without seeing the topic in the news or being bombarded by ads.

As the media and various companies try to tout this as a new option, those in our industry are experiencing a Back to the Future moment. Credit unions have always done loan modifications, but there has only recently been formal reporting of them.

As a former branch manager, I experienced countless times when a member in need came in with a financial issue and we worked out a payment program for the loan. Sometimes there was deferment, sometimes a rate adjustment, and sometimes payment skips. While I thought this was a unique occurrence, time has shown me that working with members through hard times is a common credit union practice.

California and Nevada credit unions have combined to modify more than $1.2 billion in real estate loans over the last year (since the reporting began).That's an average of more than $5.3 million per credit union, and does not take into account the millions of dollars modified for other types of loans (auto, personal, etc.).

Back to the original point: Modifications are the epitome of the less-is-more mentality. Instead of a member damaging his credit score and the credit union charging off a loan—a lose-lose situation—a modification allows both the credit union and the member to benefit.

Granted, immediate and near-future revenue is lost when a rate is modified or past-due funds forgiven, but the long-term effect of keeping the loan alive and allowing the member the dignity of paying it off cannot be measured—not to mention the loyalty garnered. Chances are the member and his family will need financial products and services for years to come, and they're not likely to forget who helped them when they were down.

This gigantic benefit of credit union membership is so common to the industry we've actually lost sight of how unique it is. When something this significant wasn't even seen as such until the federal government wanted to see it, we know the industry continues to put members right where they belong—ahead of profits.

This article was reprinted with permission from Credit Union Digest, the publication of the California and Nevada Credit Union Leagues.