After the end of his marriage and losing his job as a locomotive engineer last year, former Vancouver resident Chris Parker moved to Alaska on the promise of construction work. He’s now living in a friend’s garage, waiting for a job offer that hasn’t come. That’s why he was shocked to learn he was being sued by his credit union over a delinquent loan on his GMC Yukon.
His lender, Columbia Credit Union, had already repossessed the vehicle and sold it. Then in February, the credit union filed a lawsuit in Clark County Superior Court to recover the remaining $11,000 debt.
“It was unjust,” Parker said. “Right now, I don’t have anything. I would send them something (if I had it).”
Parker is one of hundreds of Clark County borrowers sued in recent years by lenders over relatively small debts such as car loans, personal lines of credit and second mortgages. The area’s 10 largest banks and credit unions sued 298 people in Clark County Superior Court in 2009, up 122 percent from 2007, according to a Columbian analysis of court filings. This year through Sept. 30, these financial institutions have sued another 181 people.
Chase Bank, Wells Fargo and Columbia Credit Union stand out. While many other lenders have chosen to write down bad debts or hire collection agencies, these three — disproportionately — have taken their customers to court.
The payoff can be small for lenders, which sometimes spend more on legal fees than they ultimately recover. For their customers, litigation can be devastating. A lawsuit can result in bankruptcy, or worse, a judgement that affects their credit and future earning power for decades to come.
These people took bank and credit union money and agreed to pay it back. But lenders, in pursuit of profit, aggressively sought out these borrowers and accepted the risk of defaults.
In Clark County Superior Court since 2008:
• JP Morgan Chase has filed 229 lawsuits.
• Columbia Credit Union filed 207 cases.
• Wells Fargo filed 99.
• Bank of America filed 50.
Other Vancouver-based lenders — First Independent Bank, Riverview Community Bank and iQ Credit Union — filed a combined total of 29 lawsuits over the same period.
“Large banks have more customers than small banks, so we have more debtors,” said Wells Fargo spokesman Tom Unger in an e-mail.
The Columbian chose to examine Columbia Credit Union as the only local lender filing lawsuits at a rate on par with the national banks. The credit union ranked No. 3 among the county’s largest financial institutions in total deposits in 2009, according to the Federal Deposit Insurance Corp. and the National Credit Union Administration.
Clark County’s No. 1 car lender
If lenders such as First Independent and Riverview are not suing nearly as many customers, that’s largely because of strategic decisions they made years ago. Both have chosen to concentrate on business loans, rather than lending to individuals or families. They’ve faced their own problems with defaults but have used different tactics to pursue borrowers.
Credit unions are limited, by law, from loaning more than 12.25 percent of their assets to businesses. So Columbia Credit Union chose to turn to consumer loans to grow. It saw an opportunity in auto loans and arranged to provide vehicle financing at dozens of dealers in Vancouver, Portland, Seattle and Tacoma.
Columbia Credit Union is now the No. 1 lender for car loans and home equity lines of credit in Clark County, according to the credit union.
About half of the 25,104 current loans on its books as of June 30 had financed vehicle purchases, while 17 percent were for primary mortgages or home equity lines of credit.
When unemployment was low and home prices were high, the strategy worked well. Columbia Credit Union consistently posted profits through the fourth quarter of 2008.
But auto loan defaults began ticking up nationwide in 2007, according to the Standard & Poors/Experian index. From May 2008 through this March, more than one in 50 car loans was in default in the U.S.
Missed payments began to pose a problem for Columbia Credit Union’s bottom line.
The credit union has prevented 80 to 90 percent of struggling borrowers from defaulting by restructuring their loans — lowering interest rates or stretching smaller payments out over a longer time period, said CEO Steve Kenny. Columbia Credit Union has $11.5 million in renegotiated loans on the books, he said.
Another 217 loans, worth $17.5 million, are past due. Fifty-four of these delinquent accounts were mortgages or other real estate loans, and 163 were car loans and other loans.
These unpaid consumer loans underpin most of Columbia’s lawsuits. Typically, the credit union sues for a judgment against a borrower’s wages or personal property.
Choosing the courts
The credit union had to do something.
Columbia Credit Union suffered five consecutive quarters of loss, returning to profitability in the first quarter of 2010.
When more customers default on their loans, for-profit banks can bolster their balance sheets by selling ownership shares. Credit unions, which are member-owned nonprofits, don’t have that option. Like all financial institutions, however, regulators have been watching Columbia Credit Union’s capital levels.
“We’ve had to take action to limit our losses,” Kenny said. “We have a duty to our depositors to get that money back.”
When borrowers cannot — or will not — restructure their loans, the credit union takes them to court. By suing, the credit union can uncover a borrowers’ full financial resources, Kenny said. Not all debtors are honest when they say they’re broke, he said.
It’s not clear whether this tactic has paid off.
The credit union doesn’t know the total amount it’s recovered through litigation. Kenny said the cost of the lawsuits is low compared with what Columbia Credit Union could recover.
The company’s latest financial report shows it has written off $4.1 million in bad debt since January and collected $464,860 in recoveries.
As default rates have soared, every bank and credit union operating in Clark County has faced a similar dilemma: What is the best way to collect on debts?
Regulators want to see action, but they let each institution decide its own course of action.
“Given the large losses associated with some defaulted mortgages, it’s probably to be expected that banks will pursue these strategies (lawsuits) as a way to mitigate losses,” Brad Williamson, director of the Washington Department of Financial Institutions Bank Division, said in an e-mail.
But most local financial institutions have not embraced litigation as enthusiastically as Columbia Credit Union.
Vancouver-based Riverview Community Bank calls collection agents, not lawyers, when its consumer loans go bad.
“It’s not a matter of giving up on it; it’s a matter of evaluating what the cost is to pursue it,” said Dave Dahlstrom, executive vice president and chief credit officer at Riverview.
Riverview doesn’t issue many loans to consumers, however. If Riverview was bigger, it could become more cost-effective to hire its own team of lawyers and turn to the courts, Dahlstrom said.
When financial institutions seek repayment of delinquent mortgages or auto loans, their decisions affect more than their bottom lines. These decisions affect their customers as well. Collection agencies are persistent and can ding consumer credit. Court judgments are often more severe, and may have outsized consequences for customers already on the brink of financial ruin.
A judgment does more damage to a person’s credit history than filing bankruptcy, said Todd Trierweiler, a bankruptcy attorney in Portland and Vancouver. It makes it difficult to get future loans or even find a job.
Those who file bankruptcy also have their debts erased. When someone receives a court judgment, they keep old debts and pay them off through garnished wages.
And a judgment can last for 20 years, while a bankruptcy resolves in eight years, Trierweiler said.
“Quite often, Columbia (Credit Union), in particular, is pretty reasonable and they will work out payment arrangements,” Trierweiler said. But, he said, the credit union is also “definitely more aggressive than their counterparts” in filing lawsuits when a settlement can’t be reached.
Columbia Credit Union takes no pleasure in this, its CEO said.
“A lot of our members are affected by unemployment. The last thing we want to do is take clothes off their backs and food off the table,” Kenny said. “It’s not something I take lightly to pursue, but it’s something we have to do to maintain the viability of the organization.”
That’s small comfort for Chris Parker, a former credit union customer who now faces a court order to repay his car loan — plus interest and fees — out of any future paychecks he earns.
“I’m never going to bank again; they’re not fair,” Parker said. “One thing the manager told me is, ‘We’re in the business to make business. We’re not in the business for you; we’re in the business for us.’
“It was a hard lesson to learn,” he said, “but I got it.”