POLICY: Collection and Charge off Approved Board of Directors, July 2017

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1 Introduction It is the philosophy of NorthPark Community Credit Union to help as many of our members as possible. Our Credit Union believes in relationship building while maintaining the highest standards of business conduct by using only legal and ethical means in all business activity. While making contact with our past due members, employees engaged in collection activities will be fair and respectful to member, employees, and vendors in all business or professional relationships. It shall be deemed professional misconduct for a [collector]; to knowingly violate the United States Fair Debt Collection Practices Act, where applicable, with reckless disregard for its provisions; To knowingly violate any federal or state law pertaining to collection and credit industry practices and procedures, with reckless disregard for its provisions; To engage in conduct involving dishonesty, fraud, deceit or misrepresentation in an attempt to collect a loan; To harass a person on the basis of race, sex, age, creed religion, color, national origin, disability, sexual preference or marital status in connection with a [collector s]professional business, organization activities or while acting in a representative capacity of the Credit Union; To engage in dishonorable, unethical or unprofessional conduct of a character likely to deceive, defraud or harm the public; To knowingly misrepresent an institution or organization with which the [collector] is affiliated or conversely, to knowingly represent that it is affiliated with an institution or organization when such an affiliation does in fact not exist. Additionally it shall be deemed to be the ethical and professional responsibility of each collector not to communicate, share or distribute any information which the collector acquires in the course of performing his or her duties which could have a detrimental impact upon the [member]. Guidelines We believe debt collections has been and still is a judgment business. While we will instruct our employees to use good judgment in decision making and actions, they must be careful not to judge someone s character. We realize that bad things happen to good people. We also understand that under enough pressure, some members can and will make mistakes. Our goal is to come up with repayment solution that will help our members pay us. In order to do this we must have the best trained employees and we will not compromise training. Page 1

2 Table of Contents Past Due Range Delinquent Notice Routine Cross Collateralization Fee or Late Charge Reversal Fee, Late Charge of Interest Waiver Delinquency Right to Offset / Share Withdrawals Security Documents Outside Collection Agents Freezing Accounts Debt Management Accounts Non Loan Collection Backward Change of Due Date Forward Due Date Same Month Forward Due Date Change Different Month Loan Modifications or Extensions Charge Offs / Write Offs Length of Delinquency Early Charge Off Bankruptcy Membership Privileges Small Balance Loans Loan Charge Off Approval Process Negative Depository (Share) Negative Share Charge Off Approval Process Loan Settlement Pre and Post Charge Off Negative Share Settlements Repossession Tow Liens, Mechanics Liens and Abandoned Units Small Balance Loans Settlements on Secured Loans Government Seizure of Pledged Collateral Repossession of Collateral Due to Default Broken Promises First Payment Defaults Cross Collateralization Assignment for Repossession Post Repossession Process Member s Redemption of Repossessed Collateral Bankruptcy Chapter 7 Bankruptcy Chapter 13 Wage Earner Plan Workout Loans Lending Authority Foreclosure Summary Page 2

3 Past Due Range With the exception of a mortgage loan and unless otherwise stated, an account is considered past due the day after the due date if no payment has been received. The Credit Union considers the account past due until they become 60 days or more past the due date. At this point, the account is considered delinquent and reported to the Board of Directors. Delinquent Notice Routine Past due and delinquent loans will be sent a system generated past due or delinquency notice when the loan falls within specified parameters outlined within the Collection procedure. These parameters are established by the Collection Manager or CEO. Past due accounts are reported to nationwide credit rating systems after 30 days on the first of the following month. Loan status updates are communicated to nationwide credit rating agencies which accurately reflect the loan status at the time of reporting. Cross Collateralization The security and disclosure agreement includes a clause disclosing that, property securing one loan may also secure any other loan the member has now or will receive in the future. This clause makes collateral securing one loan also serve as collateral for current and future loans. When a member becomes past due (excluding mortgages and some specialized loan products) the Collection Manager or their designee has the authority to declare the loan in default, demanding the balance in full and claiming collateral securing the past due loan. However, because courts are split on honoring cross collateral clauses, the Credit Union will not routinely repossess collateral based solely on the strength of the cross collateral clause contained within the loan documents. If the Credit Union wishes to make an exception to this policy, the Credit Union will seek legal counsel prior to repossessing based solely on the strength of this clause. Fee or Late Charge Reversal Employees of the collection department may refund one late fees or NSF fees without management approval per member within a 90 day period in order to resolve incorrectly stated accounts or on going member service issues. Additional requests must be approved with a manager. When a member becomes past due collectors are authorized to waive fees as an additional incentive to encourage repayment. Collectors can authorize up to 6 months of waived fees without management approval. Additional fees can be waived with the approval of the Collection Manager or their designee. Page 3

4 Fee, Late Charge of Interest Waiver The Credit Union may choose to waive late charges, fees or interest due while the member is participating in a credit counseling program. These are considered loan modifications and require the completion of the loan modification form. With the approval of the Collection Manager or their designee, collectors may waive late charges, fees or interest in order to negotiate past due payments and avoid additional loss. Delinquency Delinquency is defined contractually, i.e., the member has not made sufficient payments on the loan according to the schedule of payments defined in the loan agreement. The Credit Union considers all accounts delinquent when they have exceeded 60 days past the current due date. Actions to collect past due and delinquent loans will be taken commensurate with the age and severity of the past due account. Right to Offset / Share Withdrawals In addition, any property used to secure the obligation, the member also pledges a security interest on all current and future shares on deposit for moneys owed to the Credit Union. If the member becomes past due on their obligation, the Credit Union has the right to apply the balance of all shares on deposit to satisfy the obligation. The Credit Union has the right to exercise this right of offset without prior notice to the member. This right of offset does not apply to mortgage obligations. Share exceptions include IRA s and Escrow accounts. Along with sound judgment and good member service, the following guidelines should be followed when exercising the right of offset: Negative/Overdrawn Accounts: If a member(s) has a negative/overdrawn account and has available funds in any eligible individual or joint account, funds will be immediately transferred to offset and cure any negative balance unless prior acceptable arrangements have been made. Collection employees are empowered to complete these transactions. The member will be notified by phone or mail immediately after the offset. Base Loans & Lines of Credit: The collector should exercise reasonable recovery efforts prior to exercising the right of offset from the member s transaction account. If there is no response from the member(s) the account will offset the loan before it becomes 30 days past due. If an account becomes greater than 30 days past due, the collector is authorized to offset the account without prior notice. Collection employees are empowered to complete the transactions and must document their actions into the on line collection platform. Security Documents As outlined in the security agreement, any member who fails or refuses to perfect the Credit Unions security interest of collateral held as security may be considered in default. Page 4

5 Outside Collection Agents Outside collection agencies or attorneys [acting as an agency] may be utilized by the collection department to collect delinquent obligations. Delinquent accounts may be assigned to an outside collection agency or attorney when accelerated collection efforts are deemed necessary. Prior to agency assignment, the collection department will review the account in an attempt to determine the cause of delinquency followed by contact attempts via the telephone and/or letters to the member. After review by the Collection Manager, or their designee, an account may be assigned to an attorney or outside agency for stronger collections efforts until satisfactory arrangements have been made to resolve the delinquent status of the account. The Collection Manager, or their designee, will establish parameters regarding assignment to and from outside collection agencies. Unsecured Loans & Credit Cards: Unsecured Loan and Lines of Credit including Credit Cards may be assigned to outside collection agencies when internal collections efforts have been exhausted or it is deemed that it is no longer cost effective for the account to be worked internally. In some cases where the individual member(s) have multiple accounts at different stages of delinquency, all the unsecured accounts may be assigned at the same time, regardless of their stage of delinquency. Secured Loans: Secured loans may be assigned to an outside collection agency or attorney for further collection efforts after the collateral has been liquidated. In cases where the Credit Union has been unable to locate the unit, the Credit Union may consider legal intervention to force the debtor to disclosure the location of the collateral (replevin action). If a business decision has been made not to repossess the vehicle, the loan may be charged to loss and subsequently assigned to an outside collection agency for further collection efforts. Freezing Accounts The collection department may freeze a member(s) share, share draft or loan account if their account becomes past due or they have identified the account as a potential loss risk. All employees of the collection department, management, or their designee are authorized to place or remove administrative account holds. Debt Management Accounts The collection department is responsible for the processing of accounts where the member(s) seek financial help though a debt management company also known as Consumer Credit Counseling agencies (CCCS). These accounts are handled separately from usual collection activities. In addition, the Credit Union may pay a Fair Share Contribution to approved debt management companies that help our members. The following guidelines are used for accepting or rejecting debt management proposals. 1. Only unsecured debt may be paid through a debt management agency. Secured loans are typically not eligible for reduced payment under this program. Payment reductions are handled in house under the Credit Union s loan workout programs. Page 5

6 2. In an effort to help our financially troubled members the interest rate may be waived or reduced to a rate approved by the Collection Manager, or their designee. 3. During the duration of participation in the debt management program, the Credit Union may waive future late fees and over limit fees. 4. Proposed payments on open lines of credit accounts should not be accepted for less than 2% of the outstanding balance. 5. Proposed payments on unsecured debt should not be accepted if the lower payment would require that the loan would become amortized longer than 60 months from the beginning of the repayment plan. 6. Proposed payments on unsecured loans and lines of credit loans should not be accepted if the lower payment would create a negative amortization situation. A Collection Manager, or their designee, must approve any exceptions. Non Loan Collection Certain transactions like negative shares result in a member owing the Credit Union a sum of money which may require collection action. These transactions include: Withdrawals in excess of available funds Returned checks Fees in excess of available funds, and Courtesy Pay Collection efforts should be made relative to the amount owed. Generally, the collection efforts should include contact attempts by telephone and letters, collecting in the same manner as in the loan portfolios. Due Date Changes Due date changes will be monitored by an employee outside of the collections department on a monthly basis to show there is a separation of duties. Backward Change of Due Date Certain transactions, i.e. the posting of proceeds from the sale of repossessed collateral or returned loan payment, may result in an incorrect due date. In these cases, the due date must be adjusted to reflect accurate data. Employees of the collection department are authorized to perform backward due date changes. The due date changes must be completed by the last business day of each month to ensure that delinquency has been accurately reported. Reasons surrounding all due date changes must be documented in the on line note system and the File Maintenance Log. Page 6

7 Forward due date Same Month In some situations, a member may request a change in the due date of their loan the member due to changes in their scheduled pay dates. All such requests must be in writing. Once the written request is received, any employee of the collections staff may process the change so long as the account is not delinquent and the due date is within the same contractual month. The written request should be maintained in the members file and documented in the on line note system and the File Maintenance Log. Forward due date change Different month A due date on a loan or the past due amount on a credit card, may be incorrect due to large payments applied differently from the member s intentions (e.g. double payments or payments applied incorrectly). When a like error is discovered, the due date may be corrected without a Loan Change Agreement or Subsequent Action form. The Collection Manager, or their designee, may authorize the advance (move forward) of any due dates. Reasons surrounding all due date changes must be documented in the on line note system and the File Maintenance Log. Loan Modifications or Extensions Loan modifications are used to defer delinquent payments when the member has provided evidence of short term or temporary financial circumstances which have caused financial hardship. This solution may be used to assist members who are unable to resolve delinquent payments but show evidence of an on going ability to meet future payment commitments. If qualified, all signers on the original notes are required to sign a subsequent action form. Reasons surrounding all due date changes must be documented in the on line note system and the File Maintenance Log. The Collection Manager, or their designee, must authorize all loan modification requests. The requirements for loan modifications are: The borrower should make three minimum consecutive payments before executing a loan modification of a delinquent account. An account should not be re aged, extended, renewed, deferred, or re written more than once within any twelvemonth period unless extenuating circumstances prevail and where without an additional extension the Credit Union would suffer a loss. Additional modifications will only be made on an exception basis. An account should be in existence for at least twelve months before it can be re aged, extended, deferred or rewritten unless extenuating circumstances prevail and where without an additional extension the Credit Union would suffer a loss. Additional modifications will only be made on an exception basis. No more than two re agings, extension, renewals, deferrals, or rewrites should occur during the lifetime of the account unless extenuating circumstances prevail and where without an additional extension the Credit Union would suffer a loss. Additional modifications will only be made on an exception basis. Page 7

8 The re aged balance should not exceed the pre delinquency credit limit Decisions to re age sub prime loans should only be made on an exception basis and, The Collection Manager will present all potential modifications to the CEO, or their designee, for approval before the modification is approved and only then will it be modified and tracked accordingly. Charge Offs / Write Offs It is the policy of the Credit Union to recognize losses as soon as they are identified. Unsecured loans shall be submitted for charge off during the month the loss has been identified. Secured loans shall be charged off when the actual chargeoff amount is known, which could take up to 210 days. Secured loans that are in impaired status, but the charge off amount is unknown, will continue to be listed as an impaired loan until the charge off amount is known and can be charged off. Negative deposit (shares) accounts will be written off and reported to the Board of Directors on a monthly basis. It is the responsibility of the management of the collection department to conduct the charge off processes for the Credit Union. Length of Delinquency The longer a loan or credit card debt is delinquent, chances of collecting the account decrease exponentially. As a result, all loans or credit card debts will be considered un collectible and should be recommended for charge off when they become over 180 days past due without a payment of at least 75 percent of a regular monthly installment within the last 90 days. An exception to this could be when a loan is out for a skip claim. This may delay the write off by an additional 30 days. Exception: Loans, which are considered to have Substantial Objective Evidence (SOE) supporting their designation as a performing asset, will be excluded from charge off until such time they no longer meet this depiction. Exceptions must be approved by the Collection Manager or their designee. Early Charge Off It is permissible that a loan may be charged off prior to the 180 day time frame when evidence suggests that it is prudent to do so. The Collection Manager, or their designee, must approve all accounts recommended for early chargeoff. Rationale for early charge off would be if the member cannot be located (i.e. a skip account), the member refuses to pay or it is determined that the member is unable to pay. Bankruptcy In all no asset bankruptcy filings, unsecured loans or credit card debts will be recommended for charge off within 60days of receipt of notification of filing from the bankruptcy court unless payments are being made through the bankruptcy plan. As long as plan payments are being made and there is enough evidence to support continued loan performance, Page 8

9 loans will be considered a performing asset until such time that either: 1) the plan has been completed, 2) the plan has been terminated and the case has been dismissed or 3) the bankruptcy has been discharged. Exception: Any debt where it is the members intention to make voluntary or court approved reaffirmed payments. Bankruptcy, Secured loans In cases where the collateral has been devalued (i.e. crammed down) by the bankruptcy court, the Credit Union will charge off down to the value of the collateral, less the costs to sell. If the debtor loses protection of the bankruptcy court or if the debtor stops making payments, the Credit Union will act quickly to recover their collateral on these loans. Other Reasons for Charge Off An estimated loan loss, where the Credit Union has foreclosed on, but has not yet sold the property securing the real estate loan at the fair value of the property. The Credit Union will charge off any outstanding loan balance in excess of the value of the property less the cost to sell. An estimated loan loss where the Credit Union has repossessed but not yet sold collateral on hand. The Credit Union will charge off any outstanding loan balance in excess of the value of the property less the cost to sell. A delinquent loan in the hands of an attorney or collection agency, unless there are extenuating circumstances to indicate the Credit Union will collect the loan; A skip where the Credit Union has had no contact for 90 days; A fraudulent loan, no later than 90 days of discovery or when the loss is determined, whichever is shorter A loan of a deceased person when the loss is determined; A loan, where a deficiency balance remains after the sale of repossessed collateral and where the Credit Union has received no payment and has no apparent course of action; and A loan deemed uncollectable, where additional collection efforts are non productive regardless of the number of months delinquent. Membership Privileges If a member causes the Credit Union to sustain a loss membership will be revoked. In some situations, a member may wish to re establish him or herself with the Credit Union. Page 9

10 Future Services The Credit Union recognizes that bad things can happen to good people and feels these members may want to continue their relationship with their Credit Union once they have brought their accounts current. The Credit Union has several plans that encourage future services (including loans) provided the member meets the following basic qualifications: Stable employment. Direct deposit or payroll deductions. Demonstrated ability and intent to repay the new debt. No evidence of escalating indebtedness, and The member previously repaid similar type loans. These and any other qualifications will be decided on a per member basis by management depending on the amount of the loss. The Credit Union understands that while they may have lost money on the previous loan, they will not seek to enforce repayment of any debts discharged in bankruptcy. If the member applies for a new loan and: Wishes to voluntarily repay their previous Credit Union indebtedness (which was included in the bankruptcy); the Credit Union will treat them like any other new or existing member and will finance the new loan based on their last FICO score prior to filing bankruptcy providing they meeting the basic qualification listed above and they sign a voluntary repayment statement. The previous indebtedness will be repaid at 0% interest. The loss will not be refinanced into the new loan. However, if the member does not wish to voluntarily repay the loss, the Credit Union will not seek to enforce repayment of any debts discharged in bankruptcy and will treat them like any other new or existing member. The Credit Union will charge them a rate on any new indebtedness consistent with their current score. Granting of new loans to members who have caused the Credit Union a loss will be decided on an individual basis considering: The amount of the loss The reason for the loss The length of the membership What has happened since the bankruptcy and is the Credit Union comfortable they will get paid back. Page 10

11 Small Balance Loans Delinquent accounts with loan balances of $100 or less will usually be recommended for charge off when the loan is ninety days past due unless there is a strong likelihood of repayment. Delinquent accounts having small balances, which also have other loans with the Credit Union will be recommended for charge off based on guidelines for the larger balances. Loan Charge Off Approval Process The management of the collection department is responsible for creating the charge off list on a monthly basis. Negative Depository (Share) It is the policy of the Credit Union to recognize losses attributed to negative deposit accounts the same as loan losses. The longer an account remains negative, chances of collecting the account decrease exponentially. As a result, all negative deposit accounts will be considered un collectible and should be written off when they cannot be collected and have been overdrawn greater than 45 days. Accounts, which have shown evidence of collectability, will be charged off within established periods and any funds paid after charge off will be identified as a recovery. To identify members who may represent an undue credit risk to the organization the Credit Union will establish a process that monitors courtesy pay by loss type. The collection department will be responsible for the monitoring of this process and taking appropriate action to limit the loss exposure. Negative Share Charge Off Approval Process The management of the collection department is responsible for the creating of a monthly negative depository write off list. This list shall identify all accounts that will become overdrawn greater than 45 days at month end. The collection department shall write off these accounts on a monthly basis. Before the accounts are written off, the totals will be reported to the Board of Directors. Loan Settlement Pre and Post Charge Off In some situations the acceptance of less than the total amount owed to the Credit Union is preferable as an alternative to taking a complete loss. However, collectors must exhaust all other repayment options prior to discussion of a settlement offer. In situations where the member wants to settle the debt for less than the full balance due to financial hardships, collectors will obtain a full financial statement and supporting documents in order to verify the member s statements prior to presenting the settlement offer to management. Page 11

12 Regardless of the mitigating settlement reasons, if agreed upon, settlement offers should be made as a lump sum and received within 10 days of acceptance of an offer. In most situations since the Credit Union is sustaining a loss, the acceptance of discounted settlements would result in the revocation of membership. However, in some situations and when authorized by senior management, a member may retain limited or full membership and privileges. Settlement accounts will be reported to the credit bureau as settled for less than full balance. Secured Loans and Share Secured Accounts: Accounts secured by physical collateral or depository accounts typically should not be discounted. In rare situations where it is in the Credit Unions best interest to accept a settlement, it must be approved by a Collection Manager or their designee. Negative Share Settlements In some instances, it is better to discount the negative amount and let the member make a lump sum payment rather than taking the entire amount as a loss. If agreed upon, settlement offers should be made as a lump sum and received within 10 days of acceptance of an offer. In most situations since the Credit Union is sustaining a loss, the acceptance of discounted settlement would result in the revocation of membership. However, in some situations and when authorized by senior management, a member may retain limited or full membership and privileges. The remaining balances will be charged off within 30 days of accepting the settlement, but not to exceed the established 45 day maximum period. Settlement accounts will be reported to the credit bureau as settled for less than full balance. IRS Reporting 1099c When an individual has received forgiveness of a debt or a portion of a debt in which the total amount is greater than $600, the amount must be reported to the Internal Revenue Service. The form used to report these settlements is 1099C. It is the responsibility of the collection department to ensure that the Credit Union complies and reports all settlements amounts greater than $600. These forms will be generated and mailed to both the member and the IRS by January 31 of the following year. Repossession It is the policy of the Credit Union to recognize losses as soon as they are identified. Secured loans that are considered uncollectible shall be repossessed and the collateral liquidated in the most expedient and profitable manner to mitigate losses. The Credit Union may take possession of units pledged as collateral if it is considered to be in jeopardy of being damaged or that there is a potential of excessive loss. It is the responsibility of the management of the collection department to handle the repossession processes for the Credit Union in a legal and expeditious manner. Voluntary Surrender of Collateral In some situations, a member may realize that they have over extended themselves and wish to surrender the collateral. The Credit Union may take possession of the collateral; selling the unit to mitigate losses. Although the member surrendered the vehicle, they will still be responsible for any deficiency balance. The member may request that this Page 12

13 balance be turned into a workout loan for repayment. The Credit Union reserves the right not to offer a workout loan in lieu of a lump sum payoff or to keep the original terms of the contract in tact based on the best interests of the organization. Bankruptcy A member may file bankruptcy and include their loan(s) that are secured by collateral. The collection department will process these accounts in accordance with US Bankruptcy laws. However, in Chapter 13 cases, should a member not abide by the repayment plan set by the US Bankruptcy Court; once the automatic stay has been lifted the collection department may repossess the collateral and liquidate the unit to mitigate further loss. Tow Liens, Mechanics Liens and Abandoned Units The Credit Union will be notified of members who have their collateral towed or they have abandoned the units. If it is in the best interest of the Credit Union, the unit may be redeemed from the storage unit, officially repossessed, and sold to mitigate losses. In some cases, the estimated value of the collateral will not cover the tow or mechanics lien and the outstanding loan balance. In these situations, the Credit Union will make a business decision to release their lien and pursue collection of the debt as an unsecured balance. The member is still bound by their contractual agreements and remains responsible for any deficiency balance after the vehicle has been liquidated. The member may request that this balance be turned into a workout loan for repayment. The Credit Union reserves the right not to offer a workout loan in lieu of a lump sum payoff or to keep the original terms of the contract intact based on what is held to be in the best interest of the Credit Union. Small Balance Loans The collection department reserves the right to recommend small balance secured loans for charge off after completion of normal collection efforts in lieu of repossession. This approach may be preferred when the estimated value of the collateral does not provide an adequate chance of recovering the loan balance and all associated costs normally incurred during the repossession process. In most cases, the Credit Union will not release their lien on the unit until the charged off balances have been paid. Delinquent accounts having small balances, which have other loans with large balances will be recommended for charge off based on guidelines for the larger balances. Settlements on Secured Loans As a rule, the Credit Union does not discount the payoffs on secured loans. However, in some instances it may be in the best interest of the Credit Union to discount the loan and let the member make a lump sum payment rather than taking the entire amount as a loss. A 1099 C will be forwarded on the member s behalf to the Internal Revenue Service (IRS) for any given balance. Page 13

14 Government Seizure of Pledged Collateral In the course of their duties, law enforcement agencies may seize property or collateral from individuals accused of committing a criminal offense. After determining ownership of the seized conveyance, the head of the department or agency that seizes the conveyance must furnish a written notice to the owner and other interested parties (including lien holders) of the legal and factual basis of the seizure. The lien holder may be allotted a one time option to redeem their collateral under the provision of the one time innocent third party rule. Should the lien holder release the unit back to the registered owner and the collateral is seized a second time, the lien holder would forfeit their right to redeem the collateral. Therefore, it is the position of this Credit Union when notified that any collateral used to secure a loan is seized, we will consider our collateral in jeopardy and shall accelerate the note by demanding the loan be paid off in full before the unit will be released to the member. The Collection Manager, or their designee, can make exceptions to this procedure. Repossession of Collateral Due to Default Collateral that is pledged to secure a loan may be assigned for repossession in accordance with the note and disclosure agreement and local regulations of the member s residence state. The following guidelines will be used in cases where the Credit Union wishes to issue a repossession order due to payment default. In all situations, the Collection Manager, or their designee, is responsible for reviewing all loans recommended for repossession. Broken Promises If a member allows their account to become delinquent and where there are broken payment arrangements; based on the collection investigative history, the account may be forwarded to the Collection Manager, or their designee, for repossession approval. If the Credit Union determines that repossession is the best decision for the organization, the appropriate steps will be taken to recover the collateral from the member. First Payment Defaults If a member does not make their first payment allowing the account to become past due, based on the collection investigative history the account may be forwarded to the Collection Manager, or their designee, for repossession approval. If the Credit Union determines that repossession is the best decision for the organization, the appropriate steps will be taken to recover the collateral from the member. Cross Collateralization The security agreement includes a clause disclosing that property securing one loan may also secure any other loan the member has now or will receive in the future. This clause makes collateral securing one loan also serve as collateral for past and future loans. Page 14

15 When a member becomes past due (excluding mortgages and some specialized loan products) the Collection Manager, or their designee, has the authority to demand the balance in full, declaring the loan in default and claim collateral securing the past due loan. However, because courts are split on honoring cross collateral clauses, the Credit Union will not repossess collateral based solely on the strength of the cross collateral clause contained within the loan documents. Assignment for Repossession Once the account is reviewed and approved for repossession, the account will be assigned to a licensed and bonded recovery agency for repossession from the member. If the agency is unable to recover the collateral, the account may be assigned to a licensed and bonded asset locate and recovery agency for repossession. If the member refuses to surrender the collateral, the management of the collection department may assign the account to an attorney to seek replevin action. In cases where neither the member nor the collateral can be located and the account has SKIP coverage, the collection department will file a claim with the insurance company. Post Repossession Process Once the collateral has been sold and a notice of sale has been sent to the member and any secondary obligor; the collection department will make reasonable attempts to collect the deficiency balance prior to charge off. Deficiency balances may be assigned to an outside collection agency for further collection efforts after the collateral has been liquidated. If a business decision has been made not to repossess the vehicle, the loan may be charged to loss and subsequently assigned to an outside collection agency for further collection efforts. Member s Redemption of Repossessed Collateral After the collateral has been repossessed, it is customary for the Credit Union to require the debtor to pay off the outstanding loan balance along with all repossession expenses prior to releasing the collateral back to the registered owner. In states that do not have specific redemption or reinstatement regulations, the member may be allowed to redeem the collateral if it is in the best interest of the Credit Union to do so as long as the following criteria have been met: 1. The outstanding loan balance and all recovery expenses are paid in full or all delinquent payments, late fees and expenses have been paid and the loan is considered in a current status or some other decision has been made and approved by the Collection Manager. 2. All other loans are brought up to date and current including credit card accounts. 3. All negative shares and share draft accounts reflect a positive balance. 4. The member supplies proof of full coverage insurance for all secured loans with not more than a $500 deductible or as outlined in the loan disclosure or security agreement. Page 15

16 5. Contact information is updated, including residence and employment information. All contact information should be verified to ascertain validity. 6. The Credit Union has ascertained that the member has the ability to maintain their accounts in good standing. Bankruptcy Chapter 7 Upon receipt of a Chapter 7 bankruptcy notice from the US Bankruptcy Court the debtor is protected by an automatic order of protection and all collection activity must cease. These accounts must be handled professionally and within the parameters set forth in the bankruptcy code. Whenever possible, the Credit Union will attempt to reaffirm the outstanding obligation, thus providing additional protection to the Credit Union while limiting loss. The Credit Union will review bankruptcy petitions for possible objections to the bankruptcy filing. If possible, objections exist; the Credit Union will file appropriate motions to protect their interests and limit their loss. The Credit Union will submit unsecured loans for charge off within 30 days of notice of discharge. Some examples are listed below: Reviewing secured loans for cross collateral opportunities to secure or partially secure any unsecured loans. Reviewing the petition for filing abuse; e.g. accounts filing bankruptcy within 90 days of loan origination or advances within 90 days of the filing date. Reviewing the account for increased repayment opportunities on crammed down loans, recognizing the true retail value of the collateral or vehicles protected under the PSMI provisions of the Act. Bankruptcy Chapter 13 Wage Earner Plan Upon receipt of a Chapter 13 bankruptcy notice both the debtor and co maker are protected by an automatic order of protection and all collection activity must cease. The Credit Union will review the case looking for any objection to discharge. A proof of claim (POC) will be filed on all debts. In the case of secured debt, POC will be filed securing our interests and reducing our loss. Some examples are listed below: Reviewing secured loans for cross collateral opportunities to secure or partially secure any unsecured loans. Reviewing the petition for filing abuse; e.g. accounts filing bankruptcy within 90 days of loan origination or advances within 90 days of the filing date. Reviewing the account for increased repayment opportunities on crammed down, recognizing the true retail value of the collateral or vehicles protected under the PSMI provisions of the Act. Reviewing an on line valuation service to determine true real estate value. Reviewing the account for purchase of luxury items that may not be dischargeable in bankruptcy. Page 16

17 Reviewing the schedules for inflated plans. Reviewing the schedules for other objectionable items. Lifting the automatic stay to seek repayment from a co signer or repossessing the collateral. Upon approval of the Chapter 13 plan, the Credit Union will continue to monitor the account for timely trustee payments. The Credit Union will follow up any lapse in payments with the trustee and take appropriate action should the trustee dismiss the bankruptcy due to lack of plan payments. Since unsecured loans are paid last in the plan, these loans will be routed for charged off within 30 days of plan confirmation. Payments received from the trustee will be posted as a recovery. Workout Loans This type of loan should be processed only when it is in the best interest of the Credit Union These loans will be used to improve the Credit Union s position when the collectability of a loan is in doubt. This would include delinquency, deterioration of ability to repay, or a level of indebtedness that suggests that a high potential for loss due to bankruptcy may exist. The collection representative will make loan workout recommendations to the Collection Manager, or their designee, when it is in the Credit Union s best interest to securitize its position. All workout loans will require approval by the Collection Manager or their designee. No new monies in excess of what is currently owed to the Credit Union, except settlement of delinquent real estate taxes, insurance, and other amounts that protect the Credit Union s collateral position may be added to the loan. Loan to value ratios or debt ratios will not be used in this situation as the funds are already owed to the Credit Union and this loan will only serve as a restructuring of existing debt in an effort to avoid a loss to the Credit Union. In situations when the member s unsecured debts with the Credit Union are outside normal Credit Union guidelines and where there is a high possibility that the member will file bankruptcy, this policy will allow the Credit Union the ability to restructure existing debt owed to the Credit Union in an effort to avoid a foreseeable loss. When there is a strong likelihood that without intervention the Credit Union would suffer a loss, the collection representative may recommend restructuring recommendations after a thorough analysis which considers various options for arriving at an affordable and sustainable payment solution. Clear documentation must reflect the reason we are granting the workout loan. All workout loans meeting TDR requirements will be reported as past due until the borrowers affordability and willingness to repay the loan has been established. The borrower s ability and intent to repay the debt will be reestablished after the borrower has made a minimum of three and up to six consecutive monthly payment based upon the situation. To measure the success of the Workout Program, all workout loans will be monitored and tracked for a 12 month time period. Page 17

18 The borrower should make a minimum of three and up to six consecutive payments before being re aging the loan based upon the situation. An account should not be re aged, extended, renewed, deferred, or re written more than once within any twelve month period unless extenuating circumstances prevail and where without an additional extension the Credit Union would suffer a loss. Additional modifications will only be made on an exception basis. An account should be in existence for at least twelve months before it can be re aged, extended, deferred, or rewritten unless extenuating circumstances prevail and where without the aid of the modification, the Credit Union would suffer a loss. Modifications will only be made on an exception basis. No more than two re aging, extension, renewals, deferrals, or rewrites should occur during the lifetime of the account unless extenuating circumstances prevail and where without an additional extension the Credit Union would suffer a loss. Additional modifications will only be made on an exception basis. The re aged balance should not exceed the pre delinquency credit limit and, Decisions to re age sub prime loans should only be made on an exception basis. Lending Authority The Collection Manager may be granted limited lending authority; however, he/she cannot make lending decisions regarding delinquent loans or rewrite requests. Loan officers should solicit input from the collection department regarding lending decisions involving members who are currently or previously past due. The Credit Union recognizes that workout loans are essential to help troubled borrower repay their obligations with the Credit Union, therefore a loan officer who is not risk adverse and who understands the importance of work out loans will be assigned to work closely with the collections department regarding these loans. Foreclosure Once determined that the member either cannot or will not bring the loan current and make required payments, the Credit Union will consider foreclosure action. Foreclosure action will be considered after four full payments are past due on a first mortgage and after four full payments are past due on a second mortgage or where a contractual breach exists. The Credit Union will begin foreclosure action immediately upon notification of abandoned property. It is the goal of the Credit Union to avoid foreclosure whenever possible by analyzing member and property data to assess whether an alternative to foreclosure is appropriate. Page 18

19 If keeping the home is not an option If the borrower does not believe that they will be able to reinstate the loan and cure the default, a private sale may be the best option and will allow the debtor to retain any equity they have in the property. In these cases, selling traditionally is probably the best option provided there is enough time before the foreclosure auction and the homeowner doesn t owe more than the house is worth. To avoid foreclosure, if there is sufficient equity, NorthPark Community Credit Union may consider lowering or deferring payments giving the borrower sufficient time to sell the property. If the borrower is unable to cure the default and a private sale does not appear realistic, the Credit Union may consider accepting a deed in lieu of foreclosure. The Credit Union will consider securing a deed in lieu of foreclosure whenever possible to avoid the costs and time of foreclosure action. Short sale or short payoff or pre foreclosure sale may be considered in cases where the borrower has found a buyer for the property, but the sale proceeds are less than the amount owed. In this case, the Credit Union will either negotiate an unsecured repayment plan with the borrower for the additional amount owed will forgive the remaining debt. Foreclosure considerations Determination of adequate protection Property condition Lien holder position During the foreclosure process, the Credit Union will ensure that the property physically remains in salable condition. All Credit Union personnel will handle all foreclosure accounts in accordance with applicable procedures and laws. Appropriate attorneys will be utilized for the foreclosure process. Where applicable, the Credit Union will adhere to all Fannie Mae/Freddie Mac foreclosure defaulted loan guidelines. Summary The intention of this procedure is solely as a guideline for the collections of past due debt owed the Credit Union and to mitigate losses. Sound judgment, along with the information available, should be used to balance member service and risk management. If any situation arises, that is unusual or where legal opinions are necessary, the Credit Union will seek a legal opinion to limit loss exposure before any actions are taken. Page 19