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The U.S. economic expansion hit a record-breaking 10 years and one month at the end of June 2019, and consumer sentiment hit a 15-year high in May.
For credit unions, the lending machine is going strong. Loan balances in the first quarter increased $77.6 billion year-over-year. Loan growth, however, slowed from 9.7% in the first quarter of 2018 to 7.9% in the same three months this year.
Total auto loans increased 7.8% annually to reach $370.3 billion as of March 31. With year-over-year growth of 11.2%, indirect lending played a significant role in the auto loan portfolio. Those loans closed the first quarter at $225.4 billion and comprised 60.9% of total auto loans versus 59.0% one year ago.
Despite such growth, the economics of indirect lending have changed. Whereas, historically, financial institutions set auto rates off the 2-Year Treasury, that hasn’t been the case in recent years, especially at credit unions, says Travis Goodman, advisory services principal at ALM First, a financial services provider for banks and credit unions.
“Credit unions in particular are slow to raise rates because they’re not moving with the market,” he told CreditUnions.com in November. “They’re trying to compete against the guy across the street, and that puts downward pressure on rates.”
Some credit unions approach indirect lending as an “investment” alternative — if they can’t find direct loans or higher-yielding investments, then indirect lending is one way to earn money for their membership. But with margins tightening, many credit unions have reported efforts to wean themselves off indirect lending and instead deploy more of those loan dollars toward helping members in need.
Are Your Lending Strategies Working?
Loan balances increased $77.6 billion year-over-year in the first quarter. How does your credit union compare? Go beyond regional averages and dive deeper into the data using Callahan Analytics.
Here are six ways credit unions across the country have uncovered hidden potential in their loan portfolios and built a diverse, direct lending program that better serves members in the process.
No. 1: Start Small
Credit unions have always made a difference for the communities they serve through deposit offerings, loan programs, branching options, and more. Today, some are pushing beyond traditional loan products to fulfill the unmet or evolving needs of members.
The credit unions profiled in this piece have developed small-dollar and niche loan products that have an impact on members’ lives that far exceed the dollar amount of credit extended. From helping members become citizens to helping members become families, these cooperatives found ways to serve a distinct need in their membership. Read about them all in “5 Small Loans That Make A Big Difference.”
These are niche needs, but many members face hurdles tackling unforeseen expenses, such as car repairs, clothes for back to school, or a general household crisis, according to Dave Prosser, senior vice president of community development at Freedom First Credit Union ($636.4M, Roanoke, VA).
To help those members, the credit union offers a twist on the payday-style loan, one that has a built-in, behaviorally driven savings component. Read about the credit union’s Borrow and Save program, which has an average loan size of slightly more than $2,000, in “A Strategy To Borrow Responsibly And Save Sensibly.”
But Freedom First isn’t the only credit union that ties savings with short-term lending. Just down the road, State Employees' Credit Union ($40.3B, Raleigh, NC) has offered a salary advance loan program since 2001. During the past 18 years, the credit union has automated processes to make it easier for members to access funds — up to $500 at a time — and added a savings component to help members break out of the payday loan cycle. SECU estimates it saves members who use the program $830 annually and delivers $80 million a year in value to its total membership. Read about that in “A Savings Solution To Break The Cycle Of Payday Lending.”
No. 2: Be There For Businesses
Prior to 2013, business lending was never an area of strategic emphasis for Innovations Federal Credit Union ($272.5M, Panama City, FL). But when market conditions changed for the Bay County cooperative, many community banks closed their doors and the community lost its only source of business loans.
“The big banks didn’t want to offer loans and other services to the small business owners in our market,” says chief operations officer Scott Gladden. “And the community banks that traditionally served these populations were gone.”
So, in the fall of 2013, Innovations waded into business services and today offers a full suite of loans, fee-free accounts, and cards. The credit union’s member business and commercial lending portfolios have grown well, with the potential to grow larger as the community rebuilds in the aftermath of Hurricane Michael, the Category 5 hurricane that ravaged the Florida Panhandle in October 2018. Read more about Innovations’ efforts to serve its community businesses in “How To Build Businesses And Re-Build Fences.”
Still unsure about the opportunity here? A dip into the data shows loans by credit unions accounted for approximately 10% of the 60,000-plus loans approved by the SBA in FY2018. Callahan & Associates data shows that 355 credit unions hold SBA loans, with an average loan balance of $340,858. Read about the experiences and insights of four credit unions with deep experience in SBA lending as they weigh in on how to build an effective program that frees up capital and minimizes risk in “Tips For Growing Small Business Loans ― And Managing The Risk.”
No. 3: Join In On Job Training
As the only Community Development Financial Institution (CDFI) on the 120-mile stretch of Lake Erie shoreline from Toledo to Cleveland, Commodore Perry Federal Credit Union ($45.3M, Oak Harbor, OH) feels a particular tug toward addressing the economic barriers faced by its rural and small-town membership.
That’s one inspiration behind the unique offering the cooperative just rolled out: a mix-and-match package of four loans aimed at enabling Ottawa County residents to pay for the training and certifications they need to get good-paying jobs.
The package comprises a debt consolidation loan, an auto refinancing loan, a technical skills education loan, and perhaps the most notable offering, a wage replacement loan. The credit union will disburse that loan as a paycheck and defer payments while the borrower is enrolled in a training program. The package, backed by a CDFI grant, aims to provide a leg up to both the borrower and the community in the cyclical, tourism-based local economy. Read about it in “Funding Job Training With A Twist.”
No. 4: Dig Into USDA
In December 2017, a credit union based in Louisiana became the lead lender in a $112.6 million loan supporting the construction of a biorefinery in Storey County, NV. The loan, made by a consortium of credit unions and guaranteed through the Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance Program, was the largest ever made through the highly specialized USDA program.
“There are a lot of good projects out there, but there’s never really been a decent structure to finance them,” says Jeremy Gilpin, the executive vice president of Greater Commercial Lending, the wholly owned CUSO of Greater Nevada Credit Union that is servicing the loan as part of the lending consortium.
Small groups of credit unions and CUSOs have now started to collaborate on new loan structures to finance these projects, and as of March 2018, such collaborations had funded 25 loans in six states and created more than 1,500 jobs and $72 million in wages. Read more in “Credit Unions Are Leading The Way In USDA Lending."
No. 5: Take A Chance On “C”
Rising prices at the auto dealership are fueling longer loan terms and pushing a growing number of borrowers to go underwater on their loans or move to leasing contracts they can ill afford.
To provide relief from crushing debt, Opportunities Credit Union ($40.3M, Winooski, VT) began offering its WOW Auto Loan in mid-2017. Under the program, Opportunities members can borrow up to $30,000 for a 2010 or newer vehicle, with only 70% of the loan secured by the value of the vehicle. Opportunities will pay off the member’s old loan or lease residual, settle collections or other high-cost debt, including credit cards, and place up to $1,000 in a reserve account for unexpected repairs.
“Some people have described this as a life-changing product,” says Cheryl Fatnassi, CEO of Opportunities
The program has generated more than $3.4 million in loans in two years and only $5,700 in write-offs. Read more in “How Opportunities Credit Union Throws A Lifeline To Underwater Borrowers.”
Opportunities sees the opportunity in serving borrowers in lower credit tiers. So do Azalea City Credit Union ($27.2M, Mobile, AL) and Southern Chautauqua Federal Credit Union ($85.0M, Lakewood, NY), two cooperatives that don’t share much geography but do lend from the same playbook.
Both work extensively with the types of borrowers who often turn to pay-here lots or payday lenders; they both charge higher-than-market rates for loans; and they both end up with more bad loans than most credit unions their size. But, it turns out, credit unions can serve riskier borrowers and still keep the lights on, which is an important balance.
“A-paper auto loans can sustain the credit union,” says John Felton, president and CEO of Southern Chautauqua. “But, C-D-E-paper borrowers need us the most.”
Learn how these credit unions manage risk and build relationships in “How High-Risk Lending Reaps Rewards.”
No. 6: Make It Easy
Suncoast Credit Union ($9.9B, Tampa. FL) has proactively raised members’ credit card limits using advanced modeling techniques that allay the credit union’s concern about ability-to-repay.
The credit union conducted an automatic increase campaign in mid-2017, assessing a member’s propensity for spend and utilization as well as debt-to-income and other underwriting criteria and providing credit line increases totaling approximately $99 million to about 48,000 accounts. Using a slightly different methodology, the credit union conducted a second campaign just before the holidays and provided credit line increases totaling approximately $65 million to about 28,000 accounts.
The effect has been dramatic. Suncoast’s credit card portfolio rose 20.7% in 18 months, from $564.6 million in the second quarter of 2017 to $681.2 million in the fourth quarter of 2018.
“That tells us that many of our members were wanting a higher credit limit but maybe didn’t know they could ask for it,” says Lisa Johnson, vice president of loan administration and compliance at Suncoast.
Dig deeper in the details of these automatic, opt-out credit limit increases in “A Strategy To Achieve Double-Digit Credit Card Growth.”
And halfway across the continent, Truity Federal Credit Union ($838.6M, Bartlesville, OK) has been turning on and off an automated credit card pre-approval program that generates new card accounts when needed and limits card growth when priorities change.
The Oklahoma credit union pulls credit reports every other month and assigns non-card members to tiers based on a combination of credit score, bankruptcy indicators, and Reg Z ability to repay criteria. It then typically emails members in the top tiers with an offer to open a credit card account.
Members who click “yes” visit a “congratulations” page where they verify basic information, such as their address, and indicate whether they want a cash advance.
There’s little friction in that user experience, and members have taken note.
“One of our members, who works for a credit union league, told me it was the easiest acceptance he’s ever seen,” says Amy Grose, Truity’s vice president for marketing.
Learn more in “Truity Takes The Pain Out Of Pre-Approvals.”
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