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Alternatives FCU Collection Policy and Procedures

September 23, 2004 Prepared for Alternatives Federal Credit Union by Mary Ziegler, Risk Manager

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Building community, creating opportunity

Table of Contents

.............................................................. 1 Section 1. Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2. Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 3. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 4. Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 5. Collection Staff Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 6. Collection Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 7. Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 7.1 Escrow Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 7.2 Share Draft Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 A. Late Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 B. Phone Calls, Letters, and Email . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 C. Over 30 days Delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 D. Payment Plans; Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 E. Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 F. Subsidiary Ledgers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 G. Right of Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 H. Canceling Credit Lines and Visa Cards . . . . . . . . . . . . . . . . . . . . . . 14 Section 8. Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 9. Charge Offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 10. Repossession and Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 11. Repossession Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 12. Referring for Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 13. Timeline for Collection Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . 20

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Section 1. Goals

To protect the funds entrusted to the Credit Union by its members. To collect any loan or overdraft with a minimum of delay, problem, or controversy. To mitigate collection and legal expenses when possible. To limit total delinquency to no more than 2.5% of outstanding loans. To limit annual loan losses to no more than 0.6% of outstanding loans. To reduce future losses and workload by preventing future delinquency. To offer members assistance in gaining control of their finances through non-abusive financial education and debt counseling. Section 2. Guidelines

The Credit Union philosophy of people helping people, and our mission of friendly and personal service that is fair, honest and responsible should be considered when collection is implemented. Collection staff should promise only what can be delivered, honor commitments, be professional at all times, and avoid abrupt or unannounced changes in collection. Every consideration should be given to retaining members when collecting loans. The Credit Union will always consider the well-being of the member as part of sound collection practices. Collection policies and procedures will apply equally to all members regardless of their professional or social standing. It is an objective of the Credit Union to be in compliance with applicable Federal and State regulations, to follow Board approved procedures and guidelines, to adequately train staff to perform their duties, and to properly document loan files. Credit Union staff, when outside the office, should use common sense in accepting payments for delinquent loans. If a decision is made to accept a payment, always provide a receipt for the borrower and get her/his signature verifying the dollar amount.

Section 3. Authority

The Board Of Directors has ultimate responsibility and authority for the affairs of the Credit Union. The Board will review and approve this policy and changes hereto.

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The Budget Committee of the Board of Directors has oversight of collection activities. A report of delinquent loans, foreclosures, repossessions, and all other significant collection activities will be made to the committee at its monthly meetings. The committee may make recommendations for the handling of unusual problems with specific loans or loan categories. The Credit Union's CEO is directly responsible for the collection staff and its activities. The CEO will approve collection objectives and practices. The CEO is authorized to approve loan write offs with notification to the Board at the next Board meeting. Write offs over $10,000 each, or totaling $10,000 in one month will be brought directly to Board for approval. The loans will be charged against the Regular Reserve for Loan Losses. The Risk Manager is authorized to make a decision, in the Credit Union's best interest, on payment plans for loans that are delinquent, and on the sale of Other Real Estate Owned, financing included if necessary and worthwhile. It will be the responsibility of the Risk Manager to authorize, engage, and monitor the activities of all third party collection agents: attorneys, collection agencies, repossession agents, skip tracing agencies, etc. The Risk Manager will also authorize payment of invoices from agents. Collection is made for the entire amount owed (principal, interest, late fees, and collection costs or overdraft, fees, and collection costs). If an offer to settle for less than the amount owed is made, a decision to accept or reject the offer is made by the Risk Manager with the following guidelines: - Generally for a loan, we may settle for the principal and collection costs, forgiving interest and late fees. - Generally for an overdraft, we may settle for the amount of the overdraft, forgiving fees. If an offer to settle for less than the amount the Risk Manager is authorized to approve is made, a decision to accept or reject the offer is made jointly by the CEO, or designee, and Risk Manager. The Risk Manager is required to report to the CEO when any staff member has an account delinquent more than 45 days. The Risk Manager is required to report to the Budget Committee when the CEO or any Board member or committee member has an account delinquent more than 45 days. If the delinquency continues, reporting will continue on a monthly basis. The Risk Manager is required to report directly to the Board when any staff, Board, or committee member has an account delinquent more than 60 days. Staff, Board, or committee members with delinquent loans will be notified of the reporting requirement before the account reaches the reporting stage of delinquency. Failure on the part of the Risk Manager to knowingly report delinquency under these provisions may be cause for dismissal. The Risk Manager, under the supervision of the CEO, will have overall staff responsibility for collection efforts. The Risk Manager directly supervises collection staff. Collection staff assist the Risk Manager with the day to day procedures of handling delinquent accounts.

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Section 4. Definitions

A loan will be considered delinquent when it is one day past due and payment has not been made, or when the Collections Department has been notified that the member will not be making a payment. A loan will be marked for closer attention, even if not delinquent, if there is reason to believe future payments may be in doubt (such as a "going out of business sale", accident, loss of job, etc). A loan will be considered in default when the terms of the loan agreement have been violated, or when specific events described in the loan agreement as constituting default have occurred. Section 5. Collection Staff Responsibilities

The Risk Manager updates policy and procedures, ensures staff is adequately trained, and reviews the delinquency report each month and makes decisions on the handling of delinquent loans. The Risk Manager will ensure that written, phone, or personal contacts with delinquent borrowers are made in a timely and efficient manner. The Risk Manager is responsible for developing an annual budget and striving to meet budgetary goals, and for noting trends and reporting to the CEO. Also for notifying the CEO of any loan documentation weaknesses. The Risk Manager will prepare, or supervise the preparation of, the monthly reports: Schedule Of Delinquent Loans with the Classification Of Delinquent Loans, Calculation Of Allowance For Loan Loss Adjustment, and Delinquent Mortgage Activity. See "Reports" section for details. The Risk Manager should be conservative in the classification of delinquent loans. Copies of some or all of the aforementioned reports will be distributed to the Credit Union CEO, Loan Department Supervisor, Loan Officers, Board Of Directors, Budget Committee members, and the NCUA Examiner. Each month the Risk Manager analyzes and determines the degree of risk posed to the credit union by delinquent loans and has the Allowance For Loan Losses (ALL) general ledger account balance adjusted to reflect as accurately as possible the required loan loss reserves for the current period. Each delinquent account is rated each month for probability of loss, taking into consideration such factors as the borrower's financial condition, value of collateral, and guarantors. The total adjustment to ALL will be based upon the loan loss adjustment obtained after preparation of the Allowance For Loan Loss report. Collection Clerk(s) prepare reports, contact members, work with outside collection agencies and attorneys as directed by the Risk Manager and Credit Union policy. Loan Officers, with the approval of their supervisor, may be asked to assist in collection efforts. Loan Officers should consult with the Risk Manager when dealing with delinquent, or

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impending delinquent, members. Any correspondence or phone contacts with or about delinquent members will be written up and filed in the member's loan file. This is especially important if payment plans are discussed or promises made regarding treatment of the loan. Please note, Loan Officers may refinance credit worthy loans that are current; only the Risk Manager has the authority to grant forbearance or refinance a delinquent loan. Loan Officers should stress to new borrowers the importance of timely loan payments and the serious consequences of delinquency. As mentioned earlier, friendly reminders should be issued when any staff person encounters a member with a past due loan. Other Credit Union Staff should refer members to collection staff to discuss past due loans. Payments or correspondence regarding delinquent loans should be copied to collection staff. Staff working as tellers should be alert to messages on accounts regarding treatment of delinquent accounts. Unless otherwise noted, cashing checks or withdrawals should not be allowed by members with loans delinquent over 45 days. If in doubt about a delinquent member's account status, the Collection Department should be contacted. Section 6. Collection Tools

The most effective tool is prompt, polite, considerate, flexible contact. Standard Late Notices can be generated by the computer on preprinted forms. Phone calls and personalized letters are made until it is determined that no response will be forthcoming. Payment Plans restructure a loan to encourage prompt repayment and avoid adversarial relations. Computer reports provide summaries of all delinquent loans. The Risk Manager provides monthly reports to the CEO and Board. The right of Setoff allows Collections staff to freeze funds in a member's account, and apply them to the delinquent loan after notice to the member. Credit lines and/or Visa cards may be canceled. Repossession Specialists are called on when repossessing collateral is necessary. A Collection Lawyer will always assist with real estate foreclosure and those borrowers that have declared bankruptcy, and may assist with overdrawn or severely delinquent accounts and those who indicate no willingness to pay. A Collection Agency may assist with overdrawn or severely delinquent accounts, those without a current address, and those who indicate no willingness to pay.

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Section 7. Procedures

The collection effort begins once a loan becomes 1 day past due, or when there is any reason to believe that a payment may not be made. Any staff, but especially telling staff, who encounter a member whose loan is past due should give the member a friendly reminder that a payment is past due. The member will also receive several loan late notices between the loan due date and the end of that month. All collection contact with borrowers will be noted. Such notes will be maintained in a neat, orderly manner and be available for review. Copies of correspondence to or from borrowers, or correspondence concerning borrowers, will be filed in the borrower's individual loan file. The best time to reduce future delinquency is as it begins to happen. Concentrate on 30 days DQ, which is often the largest number of delinquent loans. Communicate how seriously we take late payments, and how difficult it can be to catch up if payments get further behind. It will be the duty of the collection staff to periodically review the repayment plan and general status of each delinquent loan, and if substantial deviations or problems are detected, to actively follow up to determine the cause, and to develop a plan for correction with the borrower. Section 7.1 Escrow Accounts

The maximum overdraft on an escrow account is $100. Withdrawal requests exceeding $100 will require a loan application and, if approved, loan documentation. Section 7.2 Share Draft Accounts

In calculating the Overdraft amount for this policy, it is the negative amount after: - adding available funds on paid current LOCs. - including available funds in other suffixes that can and will be pledged. "Available" means funds not held by the Credit Union for other use (such as for a share secured loan) or subject to regulations that would prohibit the transfer (such as an IRA, trust account, corporate or organizational account, convenience only signer, etc.). - adding back overdraft fees charged in the past five days. Overdrafts over $500 will be honored if: - The account is a Credit Union corporate account. The Data Processor will notify the staff person in charge of the overdrawn account, for resolution within four business days. Overdrafts between $100 - $500 will be honored if:

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- the member has a regular direct deposit due THE NEXT business day that is sufficient to cover the overdraft (including fees). Overdrafts between $5 - $100 will be honored if: - the account has not been overdrawn more than twice in the past three months. - the account is more than six months old. - the member has a loan which is not delinquent over 30 days. - we have a current address for the account. Overdrafts below $5 will be honored because the amount of the check is less than the cost of returning it, usually $5. The maximum amount of all credit union overdrafts will not exceed $50,000 in one day, excluding Alternatives Credit Union corporate accounts. Staff overdrafts are always reported to the CEO or designee, regardless of amount. As the Employee Handbook says: "Each employee is expected to manage and maintain his or her personal finances in an exemplary manner. As a Credit Union employee, you should endeavor to handle your banking and credit accounts so as to avoid embarrassment to you and the Credit Union. Knowingly overdrawing your account or exceeding your credit limits is against both Credit Union policy and the state's Financial Code and constitutes grounds for possible termination of employment." Other Considerations: - If member calls to inform us of a possible overdraft and the steps they will take to correct it, a staff member may contact the data processor or leave a valid message on the member's account screen, and the contact is taken into consideration. This doesn't guarantee the draft won't be returned! - The Data Processor is not authorized to provide for leniency for anyone, especially staff family & friends accounts. Honoring such a draft when it would normally be returned is a conflict of interest and may result in termination. No staff, except the CEO, or designee, may authorize an overdraft be honored outside this policy. - A phone call will be made to the member if the overdrawn amount is more than $1000.00. Our aim is to recover the overdraft quickly. Inform members that: A check should never be written unless and until there is money in the account to cover it. Expect that any and all overdrafts will be returned. If an account becomes overdrawn a notice is sent to the member. If an account remains overdrawn for more than 5 days it is identified as NOW (Negative One Week), and letters are sent asking for payment. Letters and phone contacts continue until it is obvious no response is coming and then referral to our attorney or collection agency is made, usually within 45 business days of the overdraft. Any funds on deposit in any account for which the member is a signer will be applied to the overdraft, unless there are regulations that prohibit the transfer (such as IRA's, trust accounts, convenience only signers, organizational accounts). If funds are taken from an IDA account, notify the IDA Coordinator. The Credit Union will continue action to collect the amount owed.

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If acceptable arrangements to pay the negative amount are not made within 45 business days of the overdraft, the account will be closed. The member will be charged 9.0% Annual Percentage Rate for the overdraft from the day the account is closed. If the amount owed is paid in full, the savings account may be used immediately, and a "Fresh Start" checking account may be opened. Fresh Start status lasts for 6 months. During that period, deposits will be subject to "exception" holds under our check hold policy, and overdrafts will be returned on a stricter basis than normal. If the Fresh Start account overdraws during the first 6 months, it may be closed immediately or the exception hold period may be extended (by decision of the Risk Manager or CEO). If the Fresh Start account is closed due to overdrafts, the member may not have another checking account Any account having more than 25 non-sufficient funds overdrafts in a 3 month period will be closed. Any former NOW (Negative One Week) or Fresh Start account will be closed after any overdrafts. Exceptions may be made (for example, an account of the Credit Union's corporate lawyer) with the approval of the CEO or designee. Section 7.3 Loans

A. Late Notices

Standard Late Notices are sent three times each month to any loan that is less than 200 days delinquent. The notices are computer generated (Report 273, Delinquency Notices, on the CUSA computer system). There are separate runs for 365 day and 360 day amortization. This is the primary collection tool for loans under 30 days delinquent. Any account over 200 days delinquent is either referred to a lawyer or collection agency, or is in close contact with the Collections Department. Late notices should not be mailed to members who have filed bankruptcy, who are paying their loans through an agreement with Consumer Credit Counseling, or who have made, and are keeping, a payment agreement with Collection staff. Consumer and Business loans have 7 grace days before a payment is considered late. Mortgages have 15 grace days. The first wave of notices is sent on the 8th and does not go to mortgage accounts, unless they are over 30 days past due. The second wave of notices is sent on the 16th and goes to all past due loans. The third wave is sent a week after the second notice and goes to all past due loans. Grace Visa Card delinquent accounts receive a notice from the credit card processor when 30 days past due, and receive monthly statements with amount(s) due and past due. No other notices are sent by the credit card processor, so the Collection Staff must make regular contact with past due Grace Visa Card accounts.

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B. Phone Calls, Letters, and Email

The issue of late loan payments is a sensitive and confidential subject and collection calls should be made to the member's home phone rather than work phone whenever possible. Confidentiality also mandates that phone messages should not mention the reason for the call. The staff person should leave only their name, organization, and a return phone number. Letters to delinquent members are in 3 general categories. At times, more than one letter in each category may be sent (for instance, repeats of the first reminder). 1) A reminder that the loan is past due is generally used for loans 30 to 45 days past due. 2) An explanation of the serious consequences of delinquency is used for loans 46 to 70 days past due. 3) A "final demand" letter is used when other efforts have been exhausted and satisfactory payment has not resulted. Used for loans greater than 60 days past due, and/or those that have failed to respond to the first two letters. The letter states that unless payment is made by a specified date, the account will be referred for collection and/or legal action, or it describes the member's choices preceding repossession. Two copies of the final demand letter should be mailed: certified, return receipt service, and one copy regular mail as it is common for members in financial trouble to ignore certified mail. Email may be used when other efforts have failed, or when we have lost an address. Confidentiality also mandates that email should not mention the reason for the contact, only the staff person's name and organization, a request for contact, and return contact information. C. Over 30 days Delinquent

A loan that is 30 days or more past due will be listed on the monthly computer generated Delinquency Report. It is normally at this point that the collection staff will begin their collection letters and/or calls to the delinquent members. The first step is reviewing the loan file. There may be reason to address irregularities or documentation, accelerate collection efforts, or there may be a cosigner. Each month the Collections Department attempts to contact all members with accounts over 30 days past due (that have not been referred to a lawyer or collection agency, or declared bankruptcy) through phone calls and personalized letters, and/or by meeting directly with the member. If the contact is by phone or face to face, a follow up letter is mailed confirming any conversation that determines a payment plan. If the contact is by phone or face to face and a payment plan does not result, a follow up memo detailing any conversation is placed in the member's file. All correspondence to members should be copied to that member's loan file. Legal collection efforts against members who demonstrate no intention to repay their loans should be vigorously pursued. At the same time, the dignity and well being of the member in default should be considered. Consideration will be given to retaining members who show by their actions that they intend to repay their obligation to the Credit Union.

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When speaking to a member regarding their loan, staff must never use abusive or disrespectful language. The goal of the contact should be to remind the member of their obligation to make timely loan payments, to if necessary inform them of the negative consequences of late payments or a defaulted loan, and to obtain a commitment to make a payment by a specific date. A loan that is 60-90 days delinquent calls for more serious action. Letters must be specific as to dates, alternatives, and repercussions. If the loan is a mortgage, information on foreclosure and counseling must be provided to the member, and an appraisal must be ordered if the appraisal on file is over 3 years old. If the loan is a Line of Credit, further advances and any Alternatives Visa Card are canceled. If there is collateral, notify the member that we will initiate steps to repossess. If there are funds in any account the member has, exercise the right of setoff. Generally an account is referred to our attorney or a collection agency if it is 90 days delinquent and there has been no response to requests for payment. See the section on "Referring for Collection" for more information.

D. Payment Plans; Restructuring

The Risk Manager has the authority to approve payment plans, or restructuring, on delinquent loans. We are happy to accept payments from anyone, and especially regular payments from someone who has a commitment to paying their obligations. When a payment plan includes partial but consistent payments (such as once/week or once/month), the late fee will be waived while the payment schedule is adhered to. As long as the member has not caused the credit union a loss, they may continue to receive unrestricted benefits of membership. Our Board applauds and supports consumer credit counseling organizations, but feels that our rates, services, and focus as a low income credit union do not provide the income level for us to make contributions to each CCCS. Accordingly, we will accept the proposed payment from a recognized consumer counseling agency but will not contribute a portion of the payment to the CCCS. Late fees will be waived while payments are forthcoming, and we will send late notices if a payment is missed. Restructuring a loan may be done by refinancing, by a temporary change in payments, or by forbearance. - In any case where the borrower is experiencing difficulty with payments, securing additional collateral and suggesting canceling revolving credit accounts should be considered. - If the member is behind due to a one time incident, and is not more than 90 days delinquent, accept partial payments for up to 6 months with an approved workout plan. A workout plan would include an agreement on objectives and time limits, with the end result being the loan brought up to date. Late fees may be waived to encourage the member to achieve their goal.

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- If the member is behind because they are overextended in general, and is not more than 90 days delinquent, refinance the loan and add one to three years to the term. Revolving credit accounts should be canceled. - If there is no income and no collateral, review for probability of future income. Forbearance (no payments for up to 3 months, or a reduction of payments to a minimum of monthly interest due for up to 6 months) may be granted with a realistic workout plan and then proceed as above. Acceptable performance for delinquent accounts would be (1) continuing payments (2) payments sufficient to pay interest due and reduce the principal balance, or (3) adhering to a payment plan that provides for incremental payments so that the loan is paid off within a reasonable time. "Reasonable" varies, and is based on the borrower's situation with an aim to payoff the debt within normal loan approval guidelines. E. Reports

All reports that include a borrower's name are confidential and should be handled accordingly. Copies of reports presented to the Board of Directors should have the borrower's names deleted. Delinquency Report - a computer generated Crystal report of loans delinquent 30 days and greater, run with EOM information. Cross-referenced to computer generated reports of loans delinquent 30 days and greater, run at the end of each month (Report 271, Federal Delinquency Report, on the CUSA computer system). There are separate reports for 365 day and 360 day amortization. These reports contain the bulk of the delinquent loans and are the primary reports used in the preparation of other delinquency reports and decisions. Method B Delinquency Report - a computer generated report comparing an individual's actual loan balance(s) to the expected amortized loan balance(s). (Report 275, Method B, on the CUSA system). Visa Credit Card Account Status - generated by Alternatives' credit card processor. Lists member's month end balances and any past due payments or over credit limit amounts. Summary of total loans in portfolio - a Crystal report run at month end which provides total loan dollars by category. Collection staff will review the preceding reports and prepare the following monthly reports: 1. Schedule of Delinquent Loans - report of all loans delinquent 60 days and greater. Loans are grouped into 3 categories: 2 to less than 6 months; 6 to less than 12 months, and 12 months and over. The total amount of loans 60 days and greater delinquent, divided by the total amount of loans in Alternatives' loan portfolio gives the delinquency ratio for the month. 2. Schedule of Delinquent Loans - report of all loans delinquent 30 days and greater, grouped by loan type. 3. A form is used to determine the balance of the Allowance for Loan Losses (ALL) general ledger account for each month, pursuant to Board approved policy. 4. Summary of Delinquent Loans - used as a report to the Board.

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F. Subsidiary Ledgers

Subsidiary Ledgers are running totals/records of: Charge offs (or write offs) and recoveries. A monthly report is provided to the Credit Union CEO. This report shows amount charged off and amount recovered and should be balanced to the appropriate general ledger account (719.000). Collection, legal, and associated fees for individual accounts are recorded in individual loan files and noted on the computer loan account. Record of payments on each account. Changes to the Allowance for Loan Losses (general ledger 719.000) contains a yearly record of changes, summarized by month. There are 3 separate categories for each month: charge offs, recoveries, and provision for loan losses adjustment. The beginning balance plus or minus changes must equal the ending balance. G. Right of Set-Off

Credit Union loan documents give staff the "right of setoff". This is the right to pledge funds on deposit against delinquent loan balances. Any amount up to, but not exceeding, the past due loan balance is pledged. Whenever possible, staff should pledge funds in savings accounts rather than share draft accounts. If funds are only available in the share draft account, transfer the pledged funds into savings to avoid conflicts with clearing share drafts. A letter notifying the member of the set-off is be mailed out the same day that funds are pledged. The transfer of funds to the loan is done 5 days later and a receipt is sent to the member. Funds are setoff: - When a loan reaches 45 days past due - When 30 days past due with a history of late pays - When 30 days past due and information indicates member won't be able to pay.

H. Canceling Credit Lines and Visa Cards

Our computer system will automatically stop line of credit (LOC) advances for share drafts when a loan is greater than 40 days delinquent. Manual and Visa activated advances can still occur, so LOC's should be blocked from any type of advance at 40 days delinquent. Accounts that are seriously delinquent (greater than 90 days) should be closed. Visa Entry cards should be blocked once a greater than $100.00 overdraft exists. Visa Choice cards should be blocked if: a) the LOC is at its limit and a greater than $100.00 overdraft exists or b) the LOC payment is greater than 60 days past due. Visa Grace cards should be blocked if: a) payments are greater than 60 days past due (2 payments) or b) a greater than $50.00 over credit limit condition exists. To block the LOC, move the credit limit to $0.01, cancel the features connecting the credit line to the share draft account, and cancel the annual fee deduction. An adverse action notice must be sent to the borrower(s).

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To block a Visa card, provide documentation to the Visa Card Coordinator. An adverse action notice must be sent to the borrower(s) if the credit line is being canceled. Section 8. Bankruptcy

In cases of impending bankruptcy the Credit Union will encourage members to reaffirm their debt, and inform them of our policy towards members who have caused a loss, which is no services or credit extended unless the loss has been or is being repaid. Once a notice of bankruptcy filing is received, we are prohibited from contacting the person. Further credit and any services to the borrower must cease. Future services and credit are available only to people who have not caused the Credit Union to suffer a loss. Borrowers will be encouraged to reaffirm their loan whenever possible, keeping in mind the bankruptcy statutes covering contact. A member who reaffirms their loan before discharge remains a member in good standing and, as long as payments under the reaffirmation agreement are made, the bankruptcy is not a bar to further credit. When a person files bankruptcy, funds on deposit prior to the bankruptcy filing (pre-petition funds) technically belong to the Bankruptcy Trustee, and post-petition funds are technically available to the person. The account beginning balance on the filing date is considered pre-petition funds. Those funds, if the balance is over $100 and the member does not have a loan, are frozen by the Credit Union and are subject to certain restrictions. A balance under $100 is not considered material and can be made available to the member if there is no loan. If funds are frozen and the member has no loan we should not allow any withdrawals until we receive instructions from the Trustee. Notify the share draft processor to return all overdrafts. If we are not owed money by the borrower, we do not need to involve our attorney, as we are not liable for following the Trustee's directions. If appropriate, get our attorney's opinion whether we should get the Trustee's permission to let drafts clear at all. If the member wants to reaffirm the loan, our attorney should handle the reaffirmation papers. Send the attorney a copy of the loan documents and payoff amount as of the date of bankruptcy filing. If the loan is secured or being reaffirmed by the borrower, add attorney fees to the loan payoff amount. If the member has a Visa and/or LOC, and is not reaffirming, notify the appropriate staff to block the Visa and/or close the LOC. For loan accounts, the Credit Union must immediately cease all collection efforts, cease charging interest and fees, and notify our attorney. Notification includes sending a copy of the bankruptcy filing, the application, loan note and credit agreement, and the loan payoff amount as of the date of filing. In some Chapter 7 cases, and in all Chapter 13 cases, a Proof of Claim form will follow. Pass this to the attorney. For negative share draft accounts, the Credit Union must immediately cease all collection efforts for activity on and prior to the filing date. The day after the filing date fees may be applied for any overdrafts. Consult our attorney for collecting on overdrafts that occur the first 10 days after the bankruptcy filing.

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Immediately notify any joint owner (in the case of an overdraft) or cosigner (in the case of a loan) that the overdraft or loan is now their responsibility, unless the joint owner or cosigner is also filing for bankruptcy, or if the filing is a Chapter 13. As for the frozen funds, we have what is known as "right of set-off", which means the funds may be applied to the member's obligation at Alternatives. The funds held for set-off may only be used by the Credit Union with the Bankruptcy Court's permission, so also notify our attorney that we are holding funds. After receiving the court's permission, the funds are applied to the loan. Section 9. Charge Offs

Delinquent accounts are rated each month by the Risk Manager for probability of loss, taking into consideration such factors as the borrower's financial condition, value of collateral, and guarantors. The Risk Manager proposes accounts for charge off to the CEO. The CEO is authorized to approve loan write offs with notification to the Board at next Board meeting. Write offs over $10,000 each, or totaling $10,000 in one month will be brought directly to Board for approval. The loans will be charged against the Regular Reserve for Loan Losses. Loans that meet one of the following criteria will be charged off: - Mortgage loans will not be charged off as a loan loss unless a loan balance remains after the foreclosure and sale process is completed. - Loans to borrowers who have declared bankruptcy, unless the loan is reaffirmed. - Loans to deceased borrowers. Claim is to be made against the estate. - Loans that have been classified as a loss and have had no payment for 5 months. - Loans that are to borrowers with unknown addresses and have had no payment for 3 months will be charged off after 3 months with no address. - Loans that have been referred for collection will be charged off within 3 months of referral. - Loans six months or more past due without a payment of at least 75% of the regular monthly payment within the last 90 days. - Loans where the remaining balance is a deficiency balance after the sale of collateral and where the borrower has not made arrangements to pay within 3 months of sale. - Loans deemed uncollectible by the Risk Manager, regardless of the number of months delinquent. Transfers from shares and proceeds from the sale of collateral do not constitute "payment". If a loan balance is under $5 and the loan qualifies for charge off, the balance will be paid from interest income for the same loan type. If a loan balance is over $5 and the loan qualifies for charge off, the balance will be paid from the loan loss general ledger account 719.000. When a loan is charged off, the balance will be "frozen": - interest rate is set to 0.00% - interest and late fee through date of charge off are added to the loan balance. After payment of the loan balance, payments are applied to collection and legal fees.

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- collection and legal fees are tracked separately and noted on the account screen. After payment of the loan balance, which includes interest and late fee amounts through date of charge off, payments are applied to collection and legal fees. If a share account has been negative for over one month, the account is charged off. When a negative balance is charged off: - overdraft fees are reversed, using GL 130.300, but recorded and tracked separately for collection purposes. - any remaining negative balance is paid from general ledger account 371.100. - collection and legal fees are tracked separately and noted on the account screen. After payment of the balance owed, which includes fee amounts through date of charge off, payments are applied to collection and legal fees. Any member who has caused the credit union a loss may no longer use credit union services except a basic savings account. Direct deposit, automatic transfers, bank checks, check cashing, etc are considered additional and non-essential services and will not be available to any member who has caused the credit union a loss. A letter will be sent to the member stating the policy with regard to future services, to wit, that they may maintain a savings account and make over the counter deposits and cash withdrawals only. If a member has caused us a loss, once the loss has been fully repaid the member shall be eligible for services and credit in accordance with our other loan policies and standards. If the member is repaying the loss in installments and applies for new credit before payment of the final installment, the application will be reviewed in light of all relevant factors, including but not limited to the amount of the unpaid loss, the number and regularity of the installments made, the amount of credit and the purpose thereof, whether the credit requested is to be secured by collateral or comakers, and whether the application is received before the bankruptcy is discharged. If the bankruptcy has not been discharged, the member will be required to sign an enforceable reaffirmation before being eligible for credit.

Section 10. Repossession and Foreclosure

Collateral will normally be repossessed if payment is not made for three months without good cause. If the borrower is making payments and there is some likelihood of satisfactory payments, repossession may be delayed. Usually an evaluation and location of the collateral is the first step. The condition and estimated value of the property should be weighed against the loan balance, collection time and costs, and chances of resale. If the collateral value is not sufficient to justify the costs of repossession a decision against repossession may be made by the Risk Manager. Mortgage foreclosures are always referred to Alternatives' collection attorney. Repossession of collateral or foreclosure is initiated by collection staff, generally after the deadline on the final demand letter has passed, but before the loan reaches 90 days delinquent. - If the loan is 90 days dq and the borrower is making payments and working on a plan to bring the loan current, repossession may be delayed. - Repossession may occur earlier under certain conditions:

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- At any time that we have information that the borrower does not intend to pay. - 60 to 90 days dq and the member has broken promises to pay. Repossessed goods will be sold after the debtor is notified. A notice of sale may be posted on the Alternatives CU bulletin board or in a local newspaper. Bids may be presented in writing or in person. The Credit Union reserves the right to bid and protect its interest. No warranty or guaranty will be given. Property is sold as is.

Section 11. Repossession Procedure

Be sure the member is in default and give him/her a chance to cure the default before repossession proceedings are started. Check your security interest. Verify that the credit union has proper documentation securing your interest in the vehicle, manufactured home or boat. As required by the Title Law, the Department of Motor Vehicles issues a Certificate of Title for 1973 or newer model vehicles; 1995 or newer manufactured homes that are at least 8 feet wide or 40 feet long when transported or 320 square feet when erected on a site; and 1987 or newer model boats that are 14 feet in length or longer, when an Application for Registration and Title or Application for Title is filed with the necessary documents and fees. Although a perfected lien is not necessary to repossess (only properly executed security agreements) it is less challenging with a perfected lien. 1. A letter of authorization/indemnification should be faxed to the person repossessing. Include information on the borrowers home and work addresses, as well as a copy of the vehicle's title (showing the credit union as lien holder). 2. Within 24 hours of the repossession, complete Form MV-327 in duplicate and deliver both copies, either in person or by certified mail, with the registration, plates and sticker if applicable, to the Department of Motor Vehicles District Office serving the county in which the vehicle, manufactured home or boat owner resides. Also immediately following the repossession, personally appear at the police agency in the locality where the repossession occurred and notify them of the repossession. 3. The vehicle should be photographed, the odometer reading recorded and photographed, and the contents inventoried as soon as the vehicle is delivered to the storage yard. The inventory list should be verified by 2 people. If the person repossessing does not provide this service, collection staff should do this function. A. Within 24 hours an Affidavit of Repossession must be provided to the borrower in person or by certified mail. B. Within 72 hours a copy of the inventory and a Notice of Right to Cure Default and Redeem Repossessed Property must be provided to the borrower by certified letter. The borrower must be allowed 30 days to redeem their personal possessions from the vehicle. 4. The credit union must store the vehicle, manufactured home or boat in a safe manner. Usually it will be held in the lot of the repossessor. If the vehicle, manufactured home or boat is kept on credit union property, we have insurance in case of theft or damage. To safely transport the vehicle, the credit union must purchase a set of transporter plates from the DMV, renewable yearly. If an arrangement is made with the borrower to redeem the vehicle,

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notify the person repossessing to meet the borrower at the yard AFTER the agreed upon payment is made by the borrower; include the costs associated with the repossession and storage. 5. If the vehicle will not be redeemed by the borrower, arrangements to sell the vehicle should be made immediately. The borrower may sign the vehicle title over to us and we can get a new title. If the borrower refuses, or if we expect to sell the car quickly, form MV-950 will serve as our title for sale. Sale can be accomplished by having a member automobile dealer sell the vehicle on consignment, or collection staff can place an ad in the paper and show and sell the vehicle. The highest price possible should be obtained. Credit Union staff or relatives must not be given preferential treatment in the sale. The credit union can sell the vehicle, manufactured home or boat either through public or private sale, or by offering it through a retail establishment. The member must be given reasonable notice of the time and place of public sale of the vehicle, manufactured home or boat or, reasonable notice of the time after which any private sale is to take place. Regardless of the type of sale chosen, sell the vehicle, manufactured home or boat, in a commercially reasonable manner and inform prospective owners that the vehicle, manufactured home or boat is sold "as is". There is no obligation to advertise the sale, but the objective is to get the highest sale price possible. Therefore, it is in the best interest of the credit union to notify as many interested individuals (including members) as possible about the pending sale. A. A Public Sale is held on a specific date and time and at a designated place. Notice must be provided to the borrower and interested parties. If the sale date, time and place is canceled, a new notice must be sent out before a new, later sale can be held. The credit union may purchase the vehicle, manufactured home or boat at a public sale. B. A private sale has no set time or place. At least two, preferably three, sealed bids should be taken and sale should be to the highest bidder. Keep a record of all bids, their amounts and the bidders. The credit union may close bidding after a reasonable period, regardless of the number of bids, and sell to the highest bidder. C. Retail Resellers will generally ask for a commission and may ask for storage costs. 6. When the vehicle is sold, form MV-950 (Affirmation of Repossession and Bill of Sale) should be completed. The purchaser should be given the original MV-950, Form MV-901, form MV-103 Odometer and Damage Disclosure Statement, and DTF-802 Statement of Transaction (showing the purchase price and that no sales tax has been paid). These forms, along with a bill of sale on Alternatives FCU letterhead, will allow the purchaser to obtain a new title and clear the credit union's lien. If there are any other open perfected liens on the vehicle, and a lien release is not obtained, there is an obligation to advise the purchaser of the outstanding lien(s) on the vehicle. These liens will be carried forward on the purchaser's title at the time of issuance. 7. Sale proceeds are applied first to the loan balance and then to expenses. If there is any money left over, it belongs to the borrower. If there is not enough money to pay off the loan, the member is still responsible for the debt. Notify the borrower of the sale and the remaining loan balance. If the borrower does not pay the deficiency balance or make payment arrangements, standard collection procedures should be instituted.

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Section 12. Referring for Collection

An account is referred to collection if it is 90 days delinquent and there has been no response to requests for payment. - If a borrower continues to make payments, no referral will be made. - If amount owed is under $1000, refer to collection agency. Use a local agency if member is in Tompkins County and other agency if borrower is no longer local. - If amount is over $1000, or if bankruptcy is declared, refer account to collection attorney. - Accounts may be referred earlier under certain conditions: - 30 days delinquent and we have no address. Skip tracing is an art of its own. We do not have the experience or resources for effective skip tracing and the sooner it starts, the better. - 60 days dq and we have information the borrower won't be able to pay. - 60 to 90 days dq and the member has broken promises to pay. Section 13. Timeline for Collection Contacts

For Loans: 8 days delinquent - late notice to all past due loans except mortgages due for current month. 16 days delinquent - late notice to all past due loans. 23 days delinquent - late notice to all past due loans. The late notices will be in addition to other contacts if delinquency continues and will continue at the rate of 3 notices/month until loan is written off, sent to collection or attorney. 30 days - Phone contact. If no answer or no response to message within 5 days, letter. 30 days - Notify comaker of delinquency. 45 days - If no answer or no response to phone calls and letters, set off any available funds. 60 days - again notify comaker. 90 days - Phone and letter. Repossession, foreclosure, or attorney/agency referral may commence. For Overdrawn Accounts: After at least 4 days (to allow time for overdraft notice to reach member), but no longer than 10 days overdrawn - Phone contact. If no answer or no response to message within 2 days, letter. 1 week after letter - Phone contact. If no answer or no response to message within 2 days, send second letter with a 10 day deadline to pay.

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12 days after second letter - Phone contact, close account and send final letter. 2 days after deadline in final letter - Attorney/agency referral commences. Propose account for Charge Off.

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