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Why Do We Make Hardship Assistance So Hard?

Part two of a two-part series on hardship assistance.

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By Catherine York Powers, CEO, Constant
July 8, 2024

In part one, shared that credit union members often face challenges when seeking relief due to a lack of policy around hardship assistance, with every application being treated as a one-off. Credit unions can simplify the process by understanding the various hardships and developing policies to facilitate timely and straightforward assistance. Learn more about standardizing hardship program below.

Creating Standardized Hardship Programs

By understanding the hardship types and available programs, it’s easy to match the program to the hardship reason to create a board-approved policy. A reduced payment plan is appropriate for short-term reduced income. A deferment or extension is appropriate to short-term no income. Loan modifications are appropriate when a borrower has a reduced level of income for a long period of time. And a liquidation should only occur when the borrower has no or very little income permanently.

Much like new loans, hardship programs can be easily standardized. For example, a standard reduced payment plan can require 50% of the payment to be made for the next three payments. Each reduced payment plan does not need to be tailored to each individual borrower. If the borrower can pay more or return to full payments after only two, that’s a great outcome! If the borrower needs more than three months on a reduced payment plan, then the hardship is more long-term than short, and a loan modification may be necessary.

A credit union might decide to avoid lowering interest rates altogether and simply extend the maturity date to repay the loan. This helps simplify the process and lowers interest rate risk.

Successful institutions typically consider the loan amount and type when standardizing loan modifications. For example, for non-real estate secured collateral, such as autos or boats, a standard loan modification program could extend the term by 6 months for balances under $5,000, 12 months for balances from $5,000 to $10,000 and 18 months for balances greater than $10,000.

Mitigating Risk

As with any policy, it’s important to consider risk when standardizing hardship assistance. Payment history, particularly the duration of payment history, is a critical factor when considering approvals. Requests submitted within the first six months of the loan may indicate an issue in the original underwriting process rather than a genuine hardship and may bear tighter scrutiny.

Credit unions may have rules disallowing borrowers who are frequently 30 or 60 days late on payments or have reinstated after repossession to skip payments.

Consider setting limits on how often assistance can be provided or combined. Too many extensions or granting extensions on top of a loan modification may be extremely averse to the borrower’s position in the collateral, doing more harm than good. Considering the payment history after implementing an assistance program is crucial to determining its future success. For example, you may require 12 months of timely payments before a member becomes eligible for assistance again. These are important guardrails to have in any formal assistance policy.

Lastly, much like a credit policy, a board-approved hardship assistance policy should allow for well-documented exceptions. Most situations will adhere to established guidelines, but from time-to-time unique situations may arise. Having a plan in place for members to request exceptions and for the credit union to individually decision these requests quickly should be included in the policy. Be sure to also set guidelines around who and how often these exceptions can be approved.

Move Hardship Assistance to Online Banking, Let Members Self-Serve

Credit unions can openly offer hardship relief options to members through online banking with a well-defined assistance policy that addresses most situations. Today, it's possible to ask members about their difficulties to assess the duration and severity of their hardship, guide them to the approved solution for their specific situation, and enable them to implement the solution without the need for back-office involvement. If they don’t meet the criteria for assistance or if their situation fits the acceptance criteria, their request can be moved to a conditional approval queue for the specialized team to decision.

Conclusion

By clearly defining the hardship assistance policy and exceptions, credit unions can accelerate their response to members and even move the program online. This in turn can reduce overall call volume and pressure on the back office to address these time-sensitive requests. Members who are struggling financially may prefer to avoid live conversations in favor of online assistance.

The silver lining for digital hardship assistance? By engaging at-risk members digitally, credit unions can gather real-time data on financial stress – an early indication of delinquency – and in turn help members avoid collections altogether.

Connect with Constant to learn more.


About Constant

Constant's executives, experienced in managing billions in retail debt, grew frustrated with legacy core system constraints and manual operations. They boldly transitioned loan servicing from manual to digital self-service, reshaping the operations landscape. Constant’s mission is to empower members to self-serve online and help credit unions grow through meaningful interactions with their members.