This is an excerpt from an article that originally appeared in the Spring 2009 issue of CUDL's Merge magazine.
As the new administration grapples with the most serious financial crisis since the 1930s, fear and uncertainty remain the order of the day for many consumers. A lot of bankers, too, seem to be cringing in their vaults – the lucky ones clutching bailout money as a security blanket – while the stock market is buffeted about like a dandelion in a strong wind.
What, then, can a credit union do in these unstable times to keep loan volume up?
It turns out that most credit unions have money to lend, and many see increased opportunity, as their local competition continues to back away from doing business. Current economic conditions have forced many lending institutions to pull back, if not out, from the auto lending marketplace, and as a result, credit unions have the opportunity to take advantage of the increasingly vital role they're playing in the auto-lending arena. As dealers continue to look for new financing sources, credit unions have both the liquidity and the competitive rates to position themselves as a primary resource.
At the same time, the current recession demands that credit unions develop and stick to a precise lending strategy.
"Several lenders have left the market in our area and it's worked to our benefit," says John McCloy, Chief Lending Officer at Denver-based Westerra Credit Union. "We're in the enviable position of managing our growth at present. We're being careful how we go about it, of course, because it all depends on unemployment. If unemployment keeps going up, everyone will be affected."
Today's economic climate changes are coming fast, so the key for many credit unions is a combination of vigilance and agility – vigilance in identifying changes in the marketplace as early as possible, and agility in making the necessary adjustments to protect their members and shore up assets.
As many credit unions are finding, these qualities also breed success when applied to efforts at keeping loan volume up.
"We're looking into everything, all the time," says Pete VanGraffeiland, Manager, Loan Retailing and Servicing for Coastal Federal Credit Union of Raleigh, North Carolina. "Advances, for example, are one thing we can control right off the bat. One thing we've always liked to be with our indirect lending is consistent, but these are very fluid times. We've got money to lend, so we’re always reviewing our portfolio."
First Things First
The first changes that many credit unions have taken came as a result of the souring economy's negative effect on the automobile market.
"One of the changes we've instituted is on our advance policy on trucks," notes Mike Varian, Consumer Lending Manager of Hudson Valley Credit Union. "We've scaled back loan advances on large trucks and SUVs because the market has collapsed on those vehicles. A number of players in our market did the same, but we were at the forefront of that move."
"We've always been risk-averse here, so we're trying to generate as much loan business as we can without sacrificing asset quality," continues Mike. "One thing that means is that we have to sift through many more applications for each loan made. We have also significantly expanded our base of dealers in order to further compensate."
Maintaining asset quality, while keeping loan volume consistent, is the high-wire balancing act at which every credit union is becoming more adept. The times demand it. And sifting through more applications is just the beginning.
"We've really worked hard to better understand and more actively manage loan-to-value (LTV) with our collateralized loans, and how that LTV impacts performance and, ultimately, the net credit yield of those products," says John Sahagian, Vice President, Collections of Baxter Credit Union based in Vernon Hills, Illinois.
"To do this, we're breaking down our portfolios by credit score and LTV, among other things, in order to consider the yield after credit-related costs and losses," adds John. "This then drives decisions affecting pricing and underwriting, as well as our credit policies. This is all fundamental portfolio risk management, of course, but we’ve been more diligent about it in the last couple of years."
Back to the Basics
Pete VanGraafeiland echoes John's sentiments about paying more attention to the basics of the business.
"We're even taking a closer look at our business partners," he says. "We've always looked at dealers at the portfolio level, but over the past year we've done more research on individual dealers. Through that, we've found that we've got some very good dealers and some others who are not quite as good."
"We've tightened up our debt-service ratios," adds Mike Varian. "And we're requiring verification of income on more applications than we did previously. We're even tracking local employers for signs of layoff activity. One big employer in our region, for example, is IBM, and the company recently announced a large round of layoffs."
Beyond sales, delinquency and repossession procedures are drawing attention, as well, because, as everyone knows, when the economy goes down, delinquencies more than likely go up.
"In the October-November period, the 60+ delinquency rate was higher than it's ever been," states Pete VanGraafeiland. "We also noticed that delinquencies are up in the prime credit band, which we didn't expect."
John McCloy says, "At Westerra, we've noticed that our delinquency rate has risen, so we're keeping our quality standards high. We're also zeroing in earlier in the delinquency period to see how we can help our customers who may be going through a rough period, and that's resulted in a year-to-year reduction in 60-day delinquencies."
"We instituted a new collection system in October '06 because we were already seeing more delinquencies, so the timing couldn't have been better," says John Sahagian. "It was mainly put in place to improve efficiency in our processes, and it enables more flexibility to make changes to what we’re doing."
"In terms of collections, we've instituted several things," continues John. "Very early in the delinquency cycle we now have an automated messaging service that delivers a friendly reminder. The next step is a payment reminder service. This involves a still-friendly call from a real person (subcontracted to an outside company) who can arrange payment over the phone. These two services have worked very well for us, and it allows us to reserve our higher-cost collection agents for accounts that are further along in the delinquency cycle."
In the end, it seems, personal service and attention to detail continue to provide the foundation for a credit union's success.