Over the last 20 years, the pressure of competition has increased significantly for credit unions. Many non-depository institutions have entered the lending and transaction account spaces historically reserved for financial institutions. The fast pace of innovation in technology and financial products and services have brought new consumer expectations along with legal, operational, and financial risks. These trends have combined to create significant challenges for credit unions.
Below are five particular areas where competition has required credit union balance sheets and strategies to evolve.
The prevalence of financing at dealerships increased competition for new auto loans. Credit unions continue to adapt by focusing on used auto lending, which has driven most auto loan growth over the last 10 years. In addition, credit unions have increasingly developed indirect lending programs through relationships with auto dealers. These programs offer opportunities to provide loans to both current and new members.
However, these relationships also pose additional risks. From a safety and soundness perspective, credit unions need to conduct due diligence on all third parties with whom they do business, and institute proper policies, controls, and monitoring for these lending programs.
Additionally, credit unions should verify that dealerships are providing the necessary consumer disclosures when completing transactions for their members. In all cases, credit unions must do their own due diligence on each and every loan.
Real Estate Lending
When loan growth slowed due to increased competition in auto lending, credit unions increasingly focused on real estate lending. Rapid real estate portfolio growth and exposure to devalued housing markets during the economic downturn resulted in increased balance sheet risk for those credit unions with large concentrations of real estate loans. Real estate loans now comprise over half of all credit union loans.
NCUA has issued several Letters to Credit Unions providing guidance related to managing the corresponding concentration and interest rate risk. Most recently, NCUA finalized a revised interest rate risk rule to further ensure credit unions with more complex balance sheets are appropriately measuring, monitoring, and controlling interest rate risk. Sound policies and controls are vital to managing real estate loan portfolios and the associated balance sheet risk.
Credit Card Lending
Credit cards have always been a valuable segment of credit union loan portfolios. Yet in recent years, some credit unions have been selling off their credit card portfolios. Although this option generates short-term liquidity and earnings, credit unions should always consider the future income they will forego by selling card portfolios, as well as the impact on relationships with members.
Credit cards also can be more susceptible to fraud or loss of confidential member information. Credit unions should have strong data processing, internal controls, and third party risk management practices in place to mitigate these risks and safeguard member information.
Credit unions, likewise, need to keep in mind the important consumer compliance regulations specific to credit cards.
Building relationships with underserved consumers through community outreach, financial literacy programs, and products that meet their unique financial service needs is fundamental to attracting and retaining new members in the increasingly diverse U.S. population.
To assist in serving the underserved, the NCUA board revised Part 701 of NCUA rules and regulations in 2010 to permit credit unions to offer short-term small loans as a viable alternative to predatory payday lending. In addition to establishing limits on the dollar amount and structure of payday loan alternatives, Part 701 also outlines best practices for increasing the success of these loan programs through a savings component and financial education.
Offering products and services such as payday loan alternatives in a safe and sound manner combined with financial education helps credit unions establish strong ties with underserved communities, and can be a valuable source of member growth.
Many smaller to mid-size credit unions face increasing service demands from their membership. Credit unions are thus increasingly using vendors and credit union service organizations to provide a fuller range of services while achieving economies of scale and the necessary expertise.
CUSOs bring tremendous value to the credit union industry by acting as a collaborative means to share risk, manage costs, and market services to credit union members. However, CUSOs have the potential to present risks throughout the credit union industry.
Relationships with CUSOs and vendors are healthy and effective when properly managed. This involves sound due diligence and controls, including credit union staff with sufficient understanding of each service outsourced to a third party. In addition, the credit union must continually monitor the third party to ensure that their policies are consistent with the credit union’s policies.
Promoting Healthy Competition
While competition creates challenges, it is also an opportunity for credit unions to leverage their strengths.
The NCUA has an obligation to establish a solid framework of supervision and effective regulations to manage risk to the Share Insurance Fund. In doing so, NCUA strives to minimize burdens.
That is why I am hosting a series of Listening Sessions in every region of the country. We want to hear from credit union officials and volunteers about how we can improve our exam process and reduce or streamline our regulations.
Together, we can help ensure credit unions continue to remain strong competitors and serve their existing and potential members well into the future.
Debbie Matz is chairman of the NCUA.
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