By Steven Ellsworth
Credit union loan delinquency management is becoming a critical competency as commercial lending conditions enter a challenging phase in 2026. Rising interest rates, refinancing pressure, and shifting property fundamentals, particularly in the office sector, increases the likelihood that credit unions will encounter troubled CRE loans and distressed assets in their portfolios.
According to Trepp data, credit mortgage-backed securities (CMBS) delinquency rates reached 7.3% in December 2025, with office properties exceeding 12% delinquency as remote work continues to reshape demand. While credit unions typically maintain stronger underwriting discipline and lower delinquency rates than the broader market, these trends highlight an important reality: Problem loans are an inevitable part of commercial lending.
The institutions that consistently protect their portfolios are not those that avoid risk entirely, but those that develop disciplined strategies for identifying and managing loan distress early. For credit unions with current portfolios, or those expanding into commercial real estate lending, a structured delinquency management framework is essential to protecting both capital and member interests.
Reviewing the Loan File: The First Step in Troubled Asset Management
When a loan becomes troubled, the first step is often the most overlooked; returning to the fundamentals of the original credit file. Before determining the appropriate recovery strategy, lenders should fully understand the loan’s original structure. This includes reviewing the loan’s purpose, repayment sources, collateral position, and guarantor strength. Updated borrower financials and tax returns should be obtained as early as possible and compared against the original underwriting assumptions.
This review frequently reveals whether the issue is a short-term liquidity challenge or a more structural credit problem. It also helps lenders understand the legal rights available under the loan agreement, particularly the “events of default” provisions that govern enforcement options. A thorough documentation review provides the foundation for every recovery strategy that follows.
Why Early Intervention Is Most Effective
One of the most consistent lessons in commercial lending is that time works against the lender once a borrower stops making payments. Effective lenders respond immediately when a payment is missed. A practical response timeline typically includes borrower contact within the first 10 days of delinquency, followed by continued outreach and documentation requests within the first two weeks.
By the time a loan approaches 30 days past due, the lender should be prepared to escalate the situation formally. This may include sending a notice of default and beginning preparations for legal enforcement if the issue is not resolved. Many borrowers initially respond with assurances that payments will resume soon. While some situations do resolve quickly, lenders must avoid becoming trapped in a cycle of promises without progress.
Maintaining momentum and clearly communicating timelines ensures that borrowers understand the seriousness of the situation. Delinquent loans should immediately become a priority management issue, rather than being allowed to sit unresolved while the lender waits for conditions to improve.
Borrower Communication Best Practices for Distressed CRE Loans
Handling borrower communication during a distressed loan requires balance. Borrowers are often under financial pressure, and conversations can become emotional or confrontational. Successful lenders maintain a consistent approach that is firm but professional.
Clear expectations should be communicated verbally and confirmed in writing. Every conversation should be documented, and formal notices should be issued when required under the loan agreement. In cases where borrowers engage legal counsel, communication should shift through the lender’s attorney to ensure all discussions remain legally sound.
Borrowers should also be reminded of the financial consequences associated with delinquency, including default interest rates, collection costs, and legal expenses that may be recoverable under the loan documents. These provisions often create additional incentives for borrowers to resolve the delinquency quickly.
At the same time, lenders should verify the condition of the collateral securing the loan. Third-party property inspections can provide valuable insight into whether the asset is being maintained properly and help inform recovery planning if liquidation becomes necessary.
When to Involve Legal Counsel
Many lenders view legal action as a last resort once negotiations with a borrower have failed. In practice, legal strategy should begin much earlier. Experienced lenders often initiate legal preparation once a loan becomes 31–45 days delinquent, even if the borrower ultimately cures the default. Establishing this timeline communicates clearly that the lender takes delinquency seriously and intends to protect its position.
Early involvement from legal counsel also helps lenders understand the practical realities of enforcement in the jurisdiction where the property is located. Foreclosure timelines, receivership procedures, and bankruptcy risks vary significantly from state to state.
Importantly, legal strategy does not always mean immediate litigation. In many cases, strong legal positioning helps facilitate productive negotiations with borrowers who recognize the lender’s readiness to act. Legal expertise can therefore serve as both a defensive tool and a negotiation advantage.
Choosing the Right CRE Loan Recovery Strategy
Every distressed loan requires a customized recovery approach. Several factors typically determine the best path forward. The first is the value and condition of the collateral. Understanding both the current market value and the property’s ability to attract buyers is critical when evaluating liquidation options.
The second factor is borrower sophistication. Some borrowers are genuinely facing financial hardship, while others have experience navigating legal systems and may use delay tactics strategically. The third factor is guarantor strength. Personal guarantees often provide the lender with additional leverage if the guarantor has meaningful liquidity or assets.
Finally, lenders must consider the legal environment in the jurisdiction where the collateral is located. Court timelines, receivership availability, and foreclosure processes can significantly influence recovery outcomes. In certain situations, lenders may determine that selling the loan to a third-party investor produces a higher net recovery than pursuing a lengthy legal process. Strategic note sales can transfer litigation risk to buyers who specialize in distressed assets.
The ultimate objective is always the same: maximize recovery while minimizing unnecessary legal costs and delays.
Why Credit Unions Benefit from Specialized Asset Management Partners
Many credit unions operate with highly skilled lending teams that focus primarily on originating and servicing performing loans. Managing troubled CRE assets and conducting commercial loan workouts, however, requires a different type of expertise, one that most credit unions are not staffed to handle in-house.
Special asset management professionals focus specifically on borrower negotiation strategies, foreclosure and legal coordination, collateral valuation, liquidation planning, and recovery optimization.
For credit unions with lean teams, partnering with an experienced CUSO or special asset management provider can allow internal staff to remain focused on member service and loan growth while ensuring that troubled assets are handled effectively. In many cases, this partnership approach leads to faster resolutions, stronger recovery outcomes, and reduced regulatory risk.
Preparing Your Portfolio for the Next Credit Cycle
Credit cycles are a natural part of commercial lending. Even the strongest portfolios will eventually experience borrower distress. The institutions that consistently protect their balance sheets recognize early warning signs and respond with discipline.
By focusing on early intervention, structured communication, and strategic legal planning, credit unions can manage delinquent loans in a way that protects member capital while preserving long-term lending relationships.
In today’s evolving lending environment, proactive troubled asset management is no longer optional, it is an essential component of responsible commercial lending for credit unions of every size.
Steven Ellsworth is SVP Portfolio Management with AVANA Companies. AVANA CUSO provides credit unions with end-to-end portfolio management and special asset management services designed to protect member capital and maximize recovery on distressed CRE loans.
