Why Do We Make Hardship Assistance So Hard?

By Catherine York Powers, CEO, Constant

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

Imagine a world where:

• Your website doesn’t advertise loans available to members, and your branch employees aren’t trained to offer them
• Members could only learn about new loan options by consulting a loan officer or submitting a letter
• Members must wait for the loan officer to analyze their request, often assessing their share account usage, and then seek approval from a credit committee

It would never work.

Applying Originations Mindset to Hardship Assistance

In the real world, credit unions offer loans online, train staff to match offers with member needs, and establish credit policies for automated decisions or loan officer approval or denial.

During the life of a loan, a borrower's finances may change, impacting their ability to make loan payments. Yet credit union members often face challenges when seeking relief because there is no policy around hardship assistance; every application is treated as a one-off. Limited options, restricted access to those options, and a cumbersome, manual application process can make it difficult for members to receive timely assistance.

It doesn’t have to be this way. By understanding the various hardships that arise, credit unions can develop a board-approved policy that facilitates timely and straightforward assistance to members – in digital banking – while effectively managing risk and reducing losses.

Understanding Hardship Types

When we underwrite an auto loan, we typically don’t think of it in terms of “Susie needs $30,000 to purchase a 2021 Toyota 4-Runner.” We think of it in terms of “the borrower wants $30,000 to purchase collateral at 80% loan to value and repay over the course of 72 months.” The same should be applied to hardship requests. The issue at hand is not necessarily “Susie lost her job,” it’s that Susie is in a short-term no income situation.

It’s important when considering a policy to stop thinking about hardships in terms of a borrower's particular situation, but rather in terms of the four types of hardship categories that exist. All individual circumstances can be sorted into these four distinct categories that revolve around level of income and duration.

Short-Term Reduced Income: This type of hardship is typically resolved within 90 days and can occur when a:

• Borrower moves from full to part-time employment for any reason
• Co-borrower loses employment altogether
• Borrower’s income is reduced due alimony or child support payments for a set duration

Short-Term, No Income: This type of hardship is typically resolved within 90 days and can occur when one or more borrowers on the account are no longer employed, are unable to work due to injury or illness, or are required to relocate.

Long-Term Reduced Income: This type of hardship can affect the borrower for a period of months or years. It occurs when: One or both borrowers move from full to part-time employment for any reason The co-borrower loses employment altogether or is deceased Alimony or child support payments end

Long-Term No Income: The rarest of hardship situations occurs if the borrower has a hardship so extreme that there will be no income for months or years because of a permanent disease, disability or incarceration, or when a borrower is deceased.

There are only four types of hardship assistance programs that exist, but there are variations as to how they can be administered.

Reduced Payment Plan: This temporary solution enables the borrower to make reduced payments for a specific period before returning to regular payment terms. Members can make 50% of the regular payment amount or pay interest or interest and escrow only. This may result in a balloon payment at maturity if the borrower pays only the regular monthly payment for the remaining term.

Deferment/Extension: This temporary solution enables the borrower to skip payments for a period of time. This may result in:

• A balloon payment at maturity if the borrower pays only the regular monthly payment for the remaining term (deferment)
• An extension of the maturity date so that those payments will be due over time (extension)
• A balloon payment equaling all skipped payments at the end of the plan rather than the loan term (forbearance)

Loan Modification: This long-term solution permanently changes the loan agreement to achieve a more affordable payment for the borrower. Common modifications include lowering the interest rate, extending the term or a combination of both. A loan modification with a term extension can be risky for the borrower (and the credit union!) especially on an auto loan if the collateral depreciates faster than the borrower can reduce the principal balance. This may impact their ability to sell or trade the vehicle or increase the likelihood that insurance pays the balance of the loan if total loss occurs.

Liquidation: Liquidation is less of an assistance plan than a loss mitigation exercise on the part of the credit union. The most successful liquidations occur when members or a member’s survivor(s) facilitate a voluntary repossession, short sale or deed-in-lieu. The plan may include full or partial repayment of any deficiency balance. Come back next month for part two of this article.

Read part two.

Connect with Constant to learn more.