Credit union’s improving total loan delinquency rate in the first half of the year was due in part by changing reporting rules for troubled debt restructuring. Credit unions’ delinquency rate decreased 40 basis points from the end of 2011 to 1.21%. The National Credit Union Administration (NCUA) changed its guidance on the reporting of troubled debt restructurings (TDRs) between the first quarter and second quarter of 2012.
Now, TDRs are no longer required to be reported as delinquent when the loan is restructured, a rule that puts NCUA’s guidance in-line with GAAP and other financial institution regulators. Improving delinquency was not due to credit unions charging off more loans, as the net charge-off ratio fell 15 basis points from the end of 2011, down to 76 basis points.
Many credit unions like Scott Credit Union ($875.8M, Collinsville, IL), which reported a 4.8% decline in total delinquent loans in the second quarter, attribute their healthier delinquency rates to their willingness to work with members to find solutions for difficult situations.
“Our underwriting has been extremely conservative, so we have not seen the huge amount of foreclosures,” says Marna Asbury, Scott Credit Union’s vice president of mortgage lending. “You’re always going to have those individuals who have lost their job or have something that’s happened, but we’re very proactive in seeing what we can do for them. We do make those outreach calls. Can we make a modification? Can we do something to work with them?”
Like other financial institutions, credit unions’ asset quality was affected by the recession. But sounder lending practices have led to credit unions delinquency rates remaining more stable than their FDIC-insured counterparts. Over the past four years, the unemployment rate increased by 1.46 times, from 5.6% in June 2008 to 8.2% in June 2012. During that same time, the overall reportable delinquency rate at FDIC-insured institutions increased by 1.86 times, while credit unions reported delinquency rate increasing by 1.25 times.
This slower rate of increase in delinquency is even more impressive when considering that credit unions report delinquencies differently than banks. FDIC-insured institutions are required to report a loan delinquent after 90 days past due, while credit unions must report a loan as delinquent after only 60 days past due.
Credit unions reported decreased delinquency in very major category of loans in the second quarter from the previous June. Real estate delinquencies, which benefitted the most from the change in the reporting of TDRs, were one of the main drivers of the overall improvement. First mortgage delinquency improved 60 basis points annually and other real estate delinquency improved 17 basis points over the same time.
Additionally, credit card loans, member business loans, and other consumer loans (excluding credit cards) all posted annual declines in delinquency. They declined 28 basis points to 0.91%, 94 basis points to 2.74%, and 31 basis points to 0.76%, respectively. Credit unions’ delinquency rates for specific products also continue to be stronger than their for-profit peers, with the biggest differences being seen in first mortgages and home equity loans.
Credit unions across the country posted strong annual declines in their delinquency rates. Arizona credit unions led the way, with a three-percentage-point decline in delinquency to 1.11%. North Carolina credit unions had the second largest decline, a decrease of 1.8 percentage points to 1.66%. Credit unions in Nevada, which similar to Arizona were hit hard by the housing crisis, posted a solid annual decline of 1.39 percentage points for an overall delinquency rate of 2.91%.
Credit unions and their members will likely have tough choices ahead of them as economic uncertainly continues in the U.S. and Europe. Unemployment and other key economic indicators continue to struggle to recover to pre-recession levels. However, credit unions weathered the financial crisis and recession better than many of their peers, leaving them poised to continue to serve members better than other financial institutions. If credit unions can continue to keep delinquency rates down through prudent lending and working with members through restructuring loans, they can ease some of the uncertainty that lies ahead.