Lending

Demand for Loan Modifications Continues

CUs are finding creative ways to adjust member debt payments during tough times.

November 24, 2010
/ PRINT / ShareShare / Text Size +

Loan modification options

When credit unions can perform loan modifications for members, the options include:

Temporary forbearance. This is often the first option granted to borrowers. During a limited time period, usually three to six months, the lender reduces the borrower’s payments to a realistic affordable amount, based on income and existing obligations. These payments might include principal and a reduced interest rate or interest only.

• Stretched loan. This means extending the term of the loan and the maturity date. For example, suppose a member has paid two years on a car loan and has three years’ balance left to pay. The credit union can extend the term of the loan back to five years and stretch the balance remaining out over five years to reduce the payment. In the case of a house, if the member has a 10-year mortgage with a high balance remaining, the credit union might extend the term to 30 years—again to reduce the monthly payment.

Reduced interest rate. Credit unions usually offer this option for no more than one to five years before mandatory review is required. This ensures the credit union won’t get locked into a low interest rate for an extended period of time in relation to market interest rates.

Mortgage conversion. This usually involves converting from an adjustable-rate mortgage to a fixed-rate mortgage.

Combined debt. The credit union combines the member’s secured and unsecured debt into one new loan with an affordable monthly payment, based on income and obligations. If a member has both a mortgage and an outstanding balance on a credit union credit card, for example, the credit union might take the card balance and add it to the house loan. In this way, the member pays a lower interest rate on secured debt.

Waived late fees.

Reduced or capitalized past due amounts, accrued interest, taxes, insurance, or fees.

Other, less commonly pursued options include:

Stepped payment plan. For example, the credit union might greatly reduce the rate and/or the monthly payment during the first year of the mortgage, increase it the second year, and then return it to the original rate/payment amount in the third year.

Principal forbearance. NCUA defines this as “a loan modification where the lender reduces the unpaid principal balance of a loan for amortization purposes. The borrower’s monthly loan payment is lower, based on amortizing the reduced amount of principal. But the borrower still owes the ‘postponed’ principal when the loan is paid in full or the property is sold or refinanced.”

Reduction or forgiveness of principal. The lender agrees to wipe a portion of the unpaid principal off the books. For instance, say the borrower took out a $300,000 mortgage, and paid $50,000 on the balance, including interest. The borrower wants the principal reduced to $150,000, the current fair market value of the house. If the credit union does this, it will take a hit both on the principle and the interest. In some instances, however, this might be preferable to foreclosing and possibly getting significantly less than the $250,000 owed.

Next: Compliance and accounting guidelines

Post a comment to this story

heroes

What's Popular

Popular Stories

Recent Discussion

Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

Your Say: Who should be Credit Union Magazine's 2014 CU Hero of the Year?

View Results Poll Archive