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Living on the edge

As insolvency rates in Canada rise, credit unions take a proactive approach to protecting at-risk members

living on the edge of debt

In 2012, household debt in Canada soared to new heights when the average debt load reached $103,000 per household – up by more than 80 per cent in real terms since 1990, says a new report from Vanier Institute of the Family, a national non-profit research organization. Over the same period, annual savings per household plummeted by two-thirds.

Canadians are walking a tightrope when it comes to debt, and many are in grave danger, observes Jeffrey Schwartz, executive director at Consolidated Credit Counseling Services of Canada. He’s been watching the situation unfold from the vantage point of a debt industry insider and, five years into the recession, he thinks Canadians are far from being on firmer footing. “We saw a huge influx in people inquiring [about credit counselling services] from the end of 2008 through 2009. It slowed down in 2010 and 2011, but our 2012 numbers were up 20 per cent over 2011.”

The Office of the Superintendent of Bankruptcy Canada, the number of insolvencies in Canada (bankruptcies and proposals) spiked by almost 50 per cent in 2009 over 2007 levels as Canadians succumbed to recession-induced financial stress

According to numbers released this year from the Office of the Superintendent of Bankruptcy Canada, the number of insolvencies in Canada (bankruptcies and proposals) spiked by almost 50 per cent in 2009 over 2007 levels as Canadians succumbed to recession-induced financial stress. By 2011, bankruptcy filings were roughly on par with 2007, but proposals had more than doubled.

Schwartz says that despite ardent warnings from the country’s leading financial experts over the past four years, Canadians have yet to get their financial houses in order. He cites a 2012 survey by the Canadian Payroll Association that found 47 per cent of Canadians are living paycheque to paycheque. “They have no buffer or savings. If they lost that paycheque, they’d run into trouble,” Schwartz says. “We want to make sure people have three to six months of savings to cover the unexpected and [if they’ve taken advantage of low interest rates] that they’re prepared for when interest rates go up.”

Identifying troubled members

True to form, credit unions are stepping up to protect their members’ best interests and the $5.7-billion First West Credit Union in B.C. is among those leading the change.

Starting in 2008, First West saw an increase in delinquencies and members who were in financial distress, says Paul von Saarn, senior VP of risk management and credit. In response, the credit union decided to implement a program to identify and assist members in trouble.

Branch staff and collection officers received training to spot the initial signs of financial stress, such as frequent late payments or requests for skipped payments, “because the quicker we get to these people, the more we can help,” says von Saarn. Initiating the conversation might be simply asking the reason why a member asks to skip a payment, or encouraging the member to come to the branch to discuss their situation.

“We equip [staff] with some verbiage to ask the member in a very respectful way how we can help them, and establish a level of trust so the member will give us the whole story,” explains von Saarn, citing job loss, divorce and temporary illness as the three most common causes of financial stress. “We find out how long-term a situation this is, then help them create a budget and perhaps come up with a financial rescue package that will see them through the hard times.”

And if that doesn’t work? “There are some situations where we clearly cannot help,” acknowledges von Saarn, but he believes that even in foreclosure there’s no reason the credit union has to be the bad guy. “Our collection staff has been trained first and foremost to treat members with the respect they deserve, and to explain the process and help them through it in the least painful fashion possible.”

In fact, First West’s approach has been so successful that, following one foreclosure case last year, the member sent flowers to the collection’s team in appreciation of their help.

Originally rolled out at Envision Financial, a division of First West, in 2009 to great success, the program was expanded to the Valley First division in 2010. At the end of 2012, von Saarn estimates that these efforts have helped save some 350 members from insolvency. “That’s about $79 million that we rescheduled. How much of that would be written off? Maybe a few million dollars, but that’s really not the primary purpose.”

While assisting members to stave off insolvency helps the credit union prevent its own losses and legal fees, von Saarn emphasizes that supporting its members is the number-one priority. “It shows who we are as a credit union and as a credit union system. And this is how we can demonstrate value to our members, as opposed to bank customers.” It also brings another big benefit: referrals. “First West was one of the fastest-growing credit unions in the province in 2012, and this is certainly an important part of our member acquisition exercise.”

Treading carefully

As important as it is to support members, assistance must always be given judiciously, warns Ross McGowan, a credit union adverser with national law firm Borden Ladner Gervais LLP. McGowan, who advises financial institutions on operational, regulatory and litigation matters, acknowledges the competing duties of a credit union.

“You must consider the long-term best interests of the creed union versus the short-term needs of the member. You have to make an educated prediction on whether the short-term situation is going to be a turnaround or just a side into insolvency. And you can’t always be right on that,” he says.

He adds that about 99.5 per cent of all loans will be paid on time as agreed, but a loan failure ratio much above that and the viability of the financial institution is at risk.

Mardig Noubarian, a financial planner with Desjardins Financial Services Firm Inc. in Quebec, a subsidiary of Desjardins Group, agrees. “Putting more money into a bad situation isn’t a solution.” He says Desjardins’ approach is to show a willingness to help, but also to be honest about the individual’s situation. “We don’t want to be the bearers of bad new, but if they’re on the route to insolvency, we have to say, ‘This is where you’re headed.’ We have to tell them the consequences.”

[“If they’re on the route to insolvency, we have to say, ‘This is where you’re headed.’ We have to tell them the consequences”

—Mardig Noubarian, financial planner, Desjardins Financial Services Firm Inc.

Overdue payments that remain unpaid over a period of weeks automatically prompt a call to the member. But even when members are repeatedly late on payments, a representative from the caisse popular will phone to find out why.

“Our approach is we try to be sympathetic – to understand what is going on,” says Noubarian. “We’ll ask, ‘Is everything OK? Is there anything we can do to help you?'” If Desjardins can connect with the member early enough, he says, small solutions – as simple as aching the amortization of a loan – are often enough to get the member back on track.

Other options include assistance in establishing a budget, consolidation loans and leveraging home equity to reduce the member’s debt-service ratio.

A helping hand

Dan Coldwell, VP of business development at PACE Savings and Credit Union in Ontario, says the $478-million credit union has also become proactive in reaching out to members with offers of help.

“We’ll look at our data system and find members who are making even-dollar payments to their credit car balances, because that tells us they’re not paying their credit cards off,” says Coldwell.

PACE will then send out a direct-mail to those members, with a follow-up phone call to encourage them to come into the brand to explore their options. “I like doing [follow-ups] when [Bank of Canada Governor] Mark Carney puts a warning out there that the Globe and Mail picks up, so we can follow that up and say, ‘This is what a really bright financial mind is saying, and we’re here to help.'”

With debt loads higher than every across the board, Coldwell sees middle-class embers between ages 45 and 60 as the most at-risk demographic. “We have a great number of members who have reasonably high income positions and they just manage these huge debt loads throughout their entire lives because they have pensions to rely on. [At that age,] they should be turning the corner on debt and they just don’t seem to be doing it.

PACE undertook its most recent campaign last fall, contacting some 6,000 members. Although Coldwell didn’t have concrete number to share, he says that it was one of the organization’s most successful initiatives yet.

Coldwell says PACE has also increased the thoroughness of its loan applications and encourages some members to convert lines of credit to term loans. “In theory, these flexible lines of credit should cost them less in the long run but because they’re not fiscally responsibly, they’re not making any progress building equity in their properties. So we’re trying to help them spot the opportunities to start terming that out and get it paid off.” ◊