A Tougher Lending Environment Ahead

Credit unions need to aggressively focus on member needs in an environment of slowing consumer debt growth and rising interest rates.


The cold, hard fact is that Americans are spending more than they earn on a regular basis in recent years. Due to the consumer-friendly lending environment, we have been purchasing houses and cars at record rates. Because of this, the national savings rate has been negative since the second quarter of 2005 and at its’ lowest level in 73 years.

In the Commerce Department’s release for year-end 2006, the savings rate stood at negative 1.0%. Only twice before has the savings rate been negative: 1932 and 1933, during the Great Depression. From this data, it is clear that as a nation more is being spent than earned through wages. Because of this extended trend, are Americans reaching their maximum capacity for debt? How may this affect the lending portfolio in 2007, and how should credit unions react?

A Leveraged Country
Consumers are more leveraged than they have ever been in history. The household debt-to-disposable income ratio stands at 136% as of the third quarter of 2006. The majority of this growth has occurred in the post-September 11 era of very low and attractive interest rates. A plethora of new loan products such as various types of mortgages, payday loans, and exciting credit card offers have also been attractive to consumers, causing them to borrow more. With the combination of these factors, it is easy to see why household debt is at this high level.

Is Savings in the Future?
But will this be a continuing trend or will consumers get back to their saving ways? According to the growth of household debt, the latter may be coming to fruition. The year-over-year growth of household debt has been decreasing since the end of 2005 as Americans have possibly maxed out their borrowing capacity. So the trend that began at the onset of the 1990’s may finally be slowing. Especially as the baby boomers begin retirement, many may realize the time to begin saving is now or else their retirement may not be as comfortable as they imagined.

The strongest effect of this will be felt in the lending markets of the nation’s financial institutions, including credit unions. According to preliminary fourth quarter data from Callahan’s First Look program, loan growth for the 450 participating credit unions stands at 11.9% year-over-year for the fourth quarter of 2006. This compares to 12.4% growth as of September 2006, and 15.1% growth as of December 2005.

With this sample of the credit union industry, which represents 29.3% of industry assets, it is evident that loan growth is slowing. The recent strength of the lending portfolio is decreasing, so credit unions must be proactive rather than reactive. Because of this, credit unions must either gain greater wallet share from their existing members by recapturing loans or gain the patronage of the customers of other financial institutions for their lending needs.

To compare your credit union’s performance before fourth quarter data is released, try our First Look program.




Feb. 12, 2007


  • Today people follow the same saving or spending path until something touches them personally and forces a change. Until then "financial education" is just lip service.
  • At the heart of this trend is financial education . . . or rather the lack there of. Being maxxed out isn't a trend anymore. It's a way of life. We cannot wait for the public to shift gears in order to reverse the negative savings rate . . . we're going to have to do more to show them the way.