The Psychology of Delinquency:
Winning the Mind Game against Borrowers

In addition to putting members first, credit unions promote financial well-being by offering flexibility, commitment, and support. However, when a member’s loan starts to show signs of stress, credit unions respond in different ways – responses that may lead to recovery or result in loss.

Credit union leaders like you should remember that resolving problem loans is as much a psychological chess match as it is a legal process. You can convert a loss into a recovery only by understanding the borrower’s psychology. A clear understanding will help you win the psychological chess game by applying pressure and empathy at once.

In this blog, we explore the psychology of delinquency through a volleyball analogy, based on insights shared by Steven Ellsworth, SVP of Portfolio Management at AVANA Companies.

The Volleyball Analogy

When playing volleyball, you cannot make mistakes when the ball is on the other side of the net. So your winning strategy must be this: keep the ball on their side of the net. The strategy will enable you to maintain control despite not scoring points by spiking every time.

Think of working with a troubled borrower like playing volleyball — sometimes it’s better to let them make the next move. By giving them space to explain their side, you can more easily spot gaps or inconsistencies in their story. As they try to justify their actions or provide information, it becomes clearer where the real issues lie — helping you manage the situation more effectively.

Leverage Points

When interacting with a borrower, you must look for pieces of information that can help you win both the legal and psychological battles. Here are some leverage points you should use as robust psychological tools to put pressure on the borrower, rooted in their past behavior.

Diversion of Proceeds

You offer a cash-out refinance or extend a business line to a borrower, presuming that the funds will be earmarked for productive purposes. However, borrowers often default after spending funds on unrelated events like personal indulgences and gambling. You must leverage the misuse of proceeds as an opportunity to reframe their relationship with the borrower.  You can put pressure on them by pulling out quotes from the loan application or the original credit memo. Likewise, you must ask the borrower to produce evidence that proves the cash-out was used for the agreed purpose.

Secondary and Tertiary Sources of Repayment

Stressed asset management is about pursuing the borrower as well as circling back to the full credit package. Often, guarantors get loans approved by overstating their financial strength. But they pretend those statements do not exist once the borrower defaults. At AVANA CUSO, we put pressure on guarantors by making them worry about the exposure. This tactic helps you win the mind game in two ways. Firstly, it will put them on the defensive. Secondly, we detect fraud or misrepresentation when the original data is false.

Financial Statements and Changing Liquidity

The financial statements of a borrower give us crucial behavioral clues. They help us assess borrower behavior based on events like a drop in liquidity, reclassification of assets, or changes in the income line. Before negotiating with a borrower, you must ask them to submit updated financial statements. When you scrutinize the statement deeply, you will discover discrepancies like undisclosed deteriorations, undisclosed fund transfers to family or affiliates, and pre-default assets shielded earlier. The newly-discovered data will help pressure the borrower through legal demands and actions.

When to Turn Up the Heat – And When to Offer a Concession

When negotiating with a defaulting borrower, credit unions must know when to press and when to pivot. They should remember that every borrower does not deserve immediate legal action. But they must not reward the silence of the borrower with leniency. However, they must escalate with documents instead of emotions. The balance is essential to gain economic and psychological leverage.

When to Press

Before starting the negotiation, you must set a red line. You should apply pressure on borrowers when they cross the red line and do not show intent to self-correct. It is always important to deliver the pressure in the following instances.

• Missed payments without meaningful communication.
• Repeated refusal to provide updated financial statements.
• Missed payments with no meaningful communication.
• Covenant breaches without acknowledgment or a plan.
• Discovery of misleading statements or misuse of proceeds.

When to Offer a Concession

There are many instances when strategic concessions impact the borrower more strongly than legal actions. One must use temporary concessions as bait to influence the borrower without sacrificing control. It is always important to play cooperatively in the following instances.

• If you need updated financial statements to assess options.
• If the borrower has liquidity but needs time to bring it forward.
• If there’s internal disagreement among co-borrowers or guarantors.
• If you suspect delay tactics and want to test sincerity.

Using Default Interest Clauses as Pressure Points

During negotiation, default interest shifts from a pricing tool to a source of leverage. You introduce urgency as soon as you declare the default and increase the interest rate. Therefore, use this pressure point strategically in the following ways.

Announce it with precision: “The default interest rate now applies from this date under section [X] of your loan agreement.”

Use it as a negotiation carrot: “We’ll waive the accrued default interest if you sign a workout agreement this week.”

Use it to shape expectations: “You have to pay more if there is a delay in signing the workout agreement.”

Using the Loan Documents as a Weapon

Loan documents are the most powerful weapon in your arsenal when negotiating with a defaulting borrower. You can gain both legal and psychological leverage by turning paper into pressure. You should remember that most borrowers claim to understand the loan document clearly. But they don’t.

Hence, you can win workouts by complementing legal demands with solid information. Once you master the loan documents, it becomes easier to influence the borrower and control the negotiation. Loan document analysis helps you discover crucial details like the event of default, representations and warranties, use of proceeds, and financial reporting requirements.

You can also negotiate more confidently with the borrower and their attorney by citing exact sections/clauses, attaching supporting documents, and delivering a legal brief.  The informed negotiation will make the borrower change the tone after realizing that you have understood the loan documents more clearly than their attorney.

Conclusion

Winning a workout isn’t just about being the sharpest person in the room—it’s about timing, insight, and thoughtful engagement. Like in volleyball, true success lies in keeping the ball in play on the borrower’s side, encouraging clarity, accountability, and opportunity. By combining strategic pressure with moments of pause, credit union leaders can guide borrowers toward resolution while protecting their institution’s interests.

At AVANA CUSO, we understand that every borrower situation is unique. That’s why we don’t just offer solutions—we offer strategy, support, and a deep understanding of the psychology behind every negotiation. Our experienced team partners with credit unions across the country to navigate borrower challenges, strengthen portfolios, and unlock long-term value.

Let’s work together to turn borrower stress into borrower success—strategically, empathetically, and effectively. Reach out to AVANA CUSO today to explore how we can support your special asset management goals.

About AVANA CUSO

Established in 1998, AVANA CUSO is one of the most seasoned credit union service organizations (CUSO) with a focus on commercial real estate lending. Driving excellence through end-to-end customer service and our investments in technology, AVANA CUSO supports credit unions, including connecting them with commercial real estate entrepreneurs, brokers, and small business owners through participation lending.

Our mission is to help credit unions diversify their lending portfolios by expanding their lending programs beyond local communities, mitigating concentration risk while enhancing loan-to-share ratios.

Part of the AVANA Family of Companies, AVANA CUSO strives to improve communities by funding socially responsible projects that boost economic growth and foster job creation. AVANA CUSO is headquartered in Glendale, Arizona.