Riding Wave of Record Loan Growth, Credit Unions Prep for 2013
- Since 2007, credit unions have originated $1.5 trillion in loans to consumers and small businesses.
- Experts suggest expanding risk, mimicking successful programs to grow loan portfolios.
- Offer a myriad of options to low income members as alternatives to high interest rate loans.
Amuch anticipated gift arrived during the holidays when third quarter data showed credit unions posted their strongest loan performance in history.
Through the first three quarters of 2012, the industry posted 4.2% loan growth with credit unions in nearly every state experiencing upticks in lending, according to Callahan & Associates.
Loan originations hit the $88 million mark as of the third quarter, which was a 31% increase over the same period in 2011. Overall, credit unions held nearly $600 million in loans as of Sept. 30.
Callahan said credit unions have originated more than 105 million loans totaling $1.5 trillion to small businesses and consumers since 2007 or around the start of the Great Recession.
So how can the industry keep the momentum going in 2013? Credit Union Times asked several experts to offer a few strategies on how credit unions can continue to grow their loan portfolios this year.
Autoland Inc., an auto buying CUSO
Credit unions are in an interesting position on growing their auto loan portfolio. Most have a challenging time building portfolio, especially on loans secured by new vehicles due to competitive pressure from the manufacturers’ captive finance arms. As such, many find their auto lending serving the used car niche. Delinquency challenges during the recession swung the pendulum towards a focus on well-qualified borrowers, or prime A and some high B paper.
I was listening to a presentation recently by John Humphrey, senior vice president, Global Automotive Operations, J.D. Power and Associates, on the current auto industry trends emerging. Interestingly, in 2012 the highest growth we saw was is in the C and D paper lending tranche, with retail sales to C FICO scores increasing 24% and to D FICO scores increasing 29% nationally year over year.
This year offers promise for credit unions interested in expanding auto lending. As the seasonally adjusted annual rate, which depicts the selling rate of vehicles for a particular month, for automotive sales is projected to increase to 15 million, which translates into more opportunity. I am also enthused that many credit unions today have strong balance sheets and declines in delinquency and repossession rates. This positions them to adopt the following strategies.
Expand Risk. I believe that credit unions can use their expertise and the lessons learned during the recent downturn to create an expanded risk profile, appropriately priced to increase volume substantially as a larger part of their risk strategy. This could impact not only volume but also increase their competitive success and the number of new car loans funded. I especially like this as a part of a direct loan strategy. Closing these loans at the credit union with a personal touch has, from my past experience, strengthened ownership of expectation for the member about paying habits.
Finally, because of the depth and breadth of the recession, bad things happened to good people. These members previously had strong credit but were perhaps negatively impacted by forces outside of their control. Their character did not change; only their finances did due to job loss etc. By helping them in their time of need, the credit union can now create long term brand advocates in addition to expanding their loan portfolio.
Adopt Best Practices. Following an established path to success will quickly enhance results, whether through a direct loan strategy, which is the value we bring to partners, or through an indirect strategy managed internally or provided through a third party. Reach out to your vendor or another credit union to determine what their best practices are for success.
There are certain fundamental strategies for each channel that a credit union should define, plan and execute. I believe it all starts with setting an individual goal for each channel. Most vendors should have a best practices roadmap or recommendations for success that has been tested and proven over time. Once you have those practices defined, execute them, meet on them regularly and pivot if necessary to achieve maximum results.
American Credit Union Mortgage Association
Have a Positive Reply. One of the many results of the housing bubble has been more focus on the home finance and payments required to purchase or sustain a home. During that discussion, borrowers have become much more familiar with the process and details that ever before.
Beyond rates and fees, the financial institution that satisfies their need gains much more than a transaction – hopefully a relationship.
Any institution that answers a member’s inquiry with “we do not offer that type of loan,” should likely transfer that call directly to Wells Fargo. With an industry high of nearly 40% market share, they know how to cultivate the transaction and relationship. You may get one chance to convert that member to your credit union, please don’t waste it.
Have the Right People. That may sound like a cliché but it is very true. The news is touting mortgage loans being available at Walmart or Costco. While that may sound appealing to some consumers, it is the customer service experience that may create consumer dissatisfaction in the process. In the front office, having talented loan originators to compete with the big banks is essential. Homebuyers seeking loans will quickly distinguish a loan originator that is sharp and truly looking to place the borrower’s interest first. This sounds like a page from the credit union handbook.
In the back office, with the anticipated complex set of regulations in both origination and loan servicing coming, you need skilled staff to get the loan completed properly, both for the short term benefit of the borrower and long term security for the credit union. This is and may be one of the last great opportunities to obtain the members your organization needs for the next several generations.
Cooperative Center Federal Credit Union
The credit union is the 2012 recipient of the Excellence in Lending award in the consumer lending – assets less than $250 million category from the CUNA Lending Council and CUNA Mutual Group.
Consider Indirect Lending. The indirect system was focused on dealerships submitting applications to our loan department. We had heard the horror stories about credit unions that were engaged in indirect lending. We also studied some of the success stories. We made it a point to have a strict underwriting process to ensure the quality of the loans we were making prior to funding. We also made the decision to employ a part-time dealer representative to visit local dealerships and build relationships in lieu of developing business for the credit union.
Offer Alternatives. We offered our members an unsecured debt consolidation for the purpose of helping our members who had found themselves in high interest rate credit card or payday loans. The amounts of the loans were for up to $25,000. The member had to be willing to receive credit counseling and they agreed not to take on additional debt until the consolidation loan was paid off. They agreed to allow us to pull their credit report once every six months to monitor their progress. We funded 127 of these loans for a total dollar volume of more than $866,000.
Refund Express. Since we offer free tax preparation during tax season for low income members we developed a small dollar loan product for members to received their tax refund quickly rather than having to wait. We implemented it for the first time in 2011 but usage was low. However, we feel this product has a lot of potential to server our low income members in the future.
Private Student Loans. Part of our membership base is the students, faculty and staff members of the University of California in Berkeley. With the changing environment of student lending we made the decision to add to our lending portfolio a private student loan product to offer our students. We are in the third year of offering this product and our balance is more than $1.79 million.
Member Business Lending. We also identified that our local community small businesses were being turned down for the smaller business loans and that there was a potential market for us to help the community. We developed and launched a small business lending program. We received our SBA certification and identified a local state guarantee program that will guarantee up to 80% of the loan amount.
Marketing. Create innovative approaches to target members, expand channels, and creatively execute marketing strategies.
CU Business Group, a business lending and services CUSO
Going into 2013, it is critical to build loans but at the same time not get too desperate and put loans on the books just for yield. Credit quality is the no. 1 long term success factor in business lending Given that, I believe credit unions can grow their loan portfolios through either or both of the following ways.
Make Traditional Loans. Whether that’s to the coffee shop down the block or the landscaper on the other side of town. Credit unions are becoming more known in the marketplace as an alternative for business loans, and banks continue to have tight and inconsistent credit standards. Businesses need lines of credit and loans for equipment and operations, and there is a niche for credit unions making smaller loans in the range of $50,000 to $100,000 to these businesses.
The other niche with existing members is in smaller multi-family and commercial real estate properties where credit unions can lend in the range of $500,000 to $5 million. The competition heats up as the dollars get larger though, so be prepared for tough negotiation on interest rates and loan terms.
Buy Quality Participations. Buy from reputable sources. This increases the credit union’s business loan portfolio and lessens the load on in-house staff resources as you are relying on the lead lender. But at the same time, you really need to understand the lead lender you are partnering with. Granting a commercial real estate loan is a long term endeavor and having a quality lead lender in place is critical. My recommendation is to underwrite the lead lender in a similar manner as you will underwrite the loan.