Executive

Delinquency: Automation Can Improve Management Controls

Published in Executive
The Management Journal of Credit Union Professionals

Losses from loan management inefficiencies may be difficult to calculate, but the effects are indisputable. Your staff is busy tracking late payments, compiling aging reports and tracing posting errors instead of processing new loans. The results: increased delinquency, lost interest income, diminished cash flow and poor member service.

One of the most damaging effects of inefficient loan management is a high delinquency rate. And behind most high delinquency rates are inferior reports and ineffective collection policies.

You may not be fully aware of the scope of your delinquency problem because it takes substantial amounts of time and money to compile useful reports. So you end up with reports that are infrequently drafted and aren't very useful. But timely reports are essential to effective loan management. The information they contain helps you anticipate potential problems and identify distressing trends.

To gain control over your loan portfolio, scrutinize current loan-management practices to identify problem areas, consider automating or upgrading systems and improve the performance of your collection department.

Evaluate your system

First, understand your present and future needs. Then, objectively evaluate your loan-management system in light of these needs. Is your present system capable of meeting your future needs? If not, consider automating your loan-management system.

Many credit unions mistakenly assume that an automated system is a panacea. But if your manual system doesn't work, a computer will only make your mistakes faster.

Make a list of your system's strengths and weaknesses. What problems can you eliminate or smooth out? Which problems must you tackle immediately? Which ones can wait? Make a "wish list" of features you'd like to add.

If you carefully examine your current system, you can determine the type of system and software that will meet your loan-servicing needs. Complete your evaluation within two months so you'll move beyond problem-identification to problem-solving.

Cost justification

Purchasing a loan-servicing system represents a significant investment for your credit union. First, establish your existing costs for loan servicing and look for hidden costs associated with employee productivity. Consider how an automated system could resolve your problems and help employees improve member service. Does the cost of mistakes and delays justify the operational changes necessary for computerization? Before committing to an automated system, consider the pros and cons of your alternatives, shown in Table I.

Table I

	Pros:	Cons:
Manual System	Flexibility is greater than with alternate systems Initial price usually is less than an automated system	Error-prone Time delays Lack of current statistical information Probably not as productive as an automated system Higher operating costs
In-house automated system	Current data available in desired format Reduced long-term costs Adaptable to new policies No need to add personnel when loan volume increases	Initial costs are higher for mini- and mainframe computers Need continuing software support
Service bureau	First year costs less than in-house system Programming changes done for you Documentation updating done for you	Lack of control over programming and reports Limited applications available No control over rising contract costs

Automating

To control delinquencies you need software that can process loans and adapt to your credit union's needs. Many credit unions have an abundance of data about their loan portfolios, but they don't synthesize it into useful reports.

But it's not only credit unions with manual systems that have problems. If you are using a service bureau, better management controls may not be available. If your credit union uses a mini- or mainframe computer, software enhancements and modifications may be too costly. A stand-alone personal computer (PC) network or a PC-based system that interfaces with a mainframe might be the answer.

There's little standardization of loan-servicing systems, so your credit union must develop a system that works with many variables. Many software products will help control your portfolio, but very few are flexible enough for every financial institution.

Most credit unions need software that has the ability to generate reports, audit trails, agings, detailed member histories, transaction reports, and customized reports. Some other important features to look for in loan-management software:

A menu-driven feature, to keep training costs down
Automated data input through "lock-box" features
Variable repayment schedules; i.e., weekly, bi-weekly, monthly, quarterly, semi-annually and annually
On-line, real-time response for quicker, more accurate member service
Ability to generate 1098 forms. as well as annual statements to members giving interest and late charges paid
Ability to produce loan-aging reports for 30, 60, and 90 days past due
Loan ledgers for individual members

Service

Software is only as good as the manufacturer supporting it. You have a right to expect strong customer-service support. The manufacturer should provide training programs, phone and written support, and upgrades.

A reliable telephone-support program is essential. After you purchase your software, the phone-support service department will be your primary link to the manufacturer.

Inspect the manufacturer's literature. The manufacturer's newsletters help answer your questions and keep you abreast of pending product changes.

Also, the manufacturer's training programs and seminars help you better understand the software's functions. Talk to other credit union executives who have attended a manufacturer's seminar; find out if their problems were solved and suggestions incorporated in program upgrades.

Make sure the manufacturer has a history of upgrading software. If the system you're replacing is obsolete, it's only a matter of time before a new system becomes obsolete. Examine the frequency and extent of program updates and new releases. Ask sales representatives about past upgrades and why they were made.

Your credit union may have to expand its services in the next five years. Look at the other financial software programs the manufacturer offers. Will you need to switch software programs to accommodate these services? Can you add complementary support programs to the basic software? Ancillary programs should have the same menus as the basic loan-servicing software so that employee retraining is minimal.

Idea ownership

A common mistake some credit union executives make is to impose a new system on the organization rather than to make the decision based on a consensus of all key employees. The strongest commitment should come from one level above the person who will do the work. Making an automated system work properly requires commitment to the concept.

Successful implementation of a software system requires a key person to show commitment and to take responsibility for implementation. The person one level above the software operator should focus on coordinating realistic goals. These middle managers generate loan portfolio data and compile it into timely reports.

Middle managers must have significant input in the decision-making process. Successful control of the loan portfolio depends on how much time middle managers spend servicing members as opposed to servicing their paperwork.

Collections

With an automated loan-servicing system in place, attack the other bottom-line bandit - ineffective collection policies. Regardless of your collection department's size, you can improve its performance by establishing objectives for your collection manager, organizing the collection area, and listening to your collectors' suggestions. It's also important for your collectors to remember they are contacting members; they need to collect in full while treating the debtor on a personal level.

Have your collection manager list the seven most important tasks performed on the job. Next to each task, write a specific goal relevant to that task, with its deadline. For example, an important task might be to "train collectors". A relevant objective would be "to establish a collector's training program by Jan. 31, 200X".

When you attain an objective, replace it with another objective relevant to the task. When the task changes, make that change on the seven-item list. This amounts to a continuous management-by-objectives program for your collections manager. The next step is to organize the collection area. Your collectors should:

telephone debtors to collect money
do very little else

A collector's assistant should bring information to collectors and receive and handle incoming calls (referring difficult cases to collectors). Successful collections depend on maximizing the collector's telephone time. Collectors should concentrate on making phone calls. As collectors spend more time on the phone, they contact more debtors, and they collect more delinquent loans.

Encourage your collectors to come up with collection-improvement ideas. Not all ideas will work. But discuss each idea; don't quash any of them for fear of inhibiting others from voicing their ideas. Collectors need encouragement and reinforcement to perform their jobs.

Nevertheless, you don't want to waste time either. Collectors with ideas should come to you prepared to talk. Have them describe situations, express ideas, and make proposals. This discussion often results in improved operations.

Conclusion

Deciding to switch from a manual to an automated loan-servicing system is the easiest part of your decision. From there on, the decisions get tougher. By carefully evaluating your credit union and asking the right questions of manufacturers, you can prevent rapid hardware and software obsolescence. Incorporating automated loan servicing with an organized collections department will enhance cash flow and increase control of your loan portfolio.