How payoff quotes cause short payoffs and high losses
Loan payoff quotes are a high-volume member request, but the process to provide them whether online or offline is the root cause for short payoffs that plague nearly every credit union. Most credit unions provide the estimated payoff amount in online banking, but these estimates are a primary reason for thousands of dollars of short payoffs every month and losses that add up over time. A new digital banking add-on can put an end to this practice and plug the revenue leak.
Why loan payoffs are often short
Most credit unions require members to request an official payoff quote by phone or in writing. Rather than endure that hassle, members frequently pay the estimated amount listed in their online banking account, which is almost always lower than what’s owed. Here’s an example.
Imagine finding the perfect car online. You set an appointment to test drive the car on Saturday, and everything works out – the car, the options, and the price. However, your credit union can’t provide an accurate payoff quote on letterhead to the dealer until Monday even if you’ve already been pre-approved for the loan. You want the car and the dealer wants to close the deal. So what do you do?
The path of least resistance is to offer an unofficial payoff amount from your online banking account or your most recent statement which could be days or weeks old. This is just one of many examples that cause payoffs to be short. When members resort to these methods, the payoff is likely to be short by $25-100 by the time the payoff check makes it to the credit union.
The member experience goes from bad to worse
This simple workaround has negative downstream impacts for the member. First, the credit union can’t release the title or lien until the loan is paid in full which delays the trade-in process.
Second, the shortage may go unnoticed or unresolved if the credit union’s back office is resource-constrained. Members are often surprised when they receive a statement with a past due balance and a late fee. In extreme cases, credit unions report members to the credit bureau if the remaining balance becomes 30+ days past due.
A payoff shortage often leads to an uncomfortable conversation about the member’s need to pay it, leaving the member confused and frustrated. Seeking to make members happy, many credit unions opt to waive the shortage. These small shortages can add up to significant losses for a credit union. Just 200 short payoffs per month of only $25 is $60,000 per year - that’s someone’s salary.
Why the process is broken?
According to Forbes, 78% of Americans prefer to bank via mobile app or website. Why then do members have to request a payoff quote offline via a phone call, branch visit or snail mail? Despite the request process being old school, many loan servicing systems include an automation enabling a servicing rep to generate a 10-day payoff quote on letterhead. If generating a formal payoff quote can be automated in the back office, why do credit unions shy away from offering this service to their members in digital banking?
Even with back office tools available, some believe the calculation of the payoff itself requires human oversight. Others are focused on what the payoff represents – the loss of an asset and member. Many credit unions want to talk to the member to encourage them to keep the loan at the credit union or apply for a new loan.
From a technical perspective, a payoff display can be inaccurate for a variety of reasons. Some core systems don’t have a field integrated into online banking that is populated each day with the most current payoff, including principal, interest, fees and per diem. Secondly, some products, such as home equity loans, may or may not have.
What’s the Solution?
The good news is there are clear steps credit unions can take to reduce or eliminate short payoffs, retain members through a new loan offer and exceed member digital expectations:
1) Convert estimates to firm payoff amounts. Install an online banking add-on such as Constant which delivers an accurate payoff for members in their online banking account. The add-on asks why a member requested the payoff, and based on the member’s answer (selling/trading-in/refinancing) facilitates a new loan application, rate modification to keep the loan at the credit union, or other solution based on the credit union’s policy.
2) A better phone solution. For phone requests, consider providing an automated 10-day payoff through the IVR 24 hours a day if your phone system will support it. Bonus points if the IVR then asks the member if they’d like to be connected to a loan officer to talk about a new loan.
There was a time when financial institutions thought payments or loan origination was too complex to move online, but as technology advanced, so did internal policies and mindset. The same is true for payoff quotes and a range of other loan servicing efforts which today remain stubbornly offline. By turning to technology for loan servicing tasks humans have done for ages, members are happier, costs are lower (Gartner: live calls are $11, online resolution 10 cents), retention improves - and short payoffs are a thing of the past.