Increasing Lending

The present economic conditions have led some credit unions into a situation of excess liquidity. There are various reasons for this, among them is that in anticipation of Y2K, CU's wanted their liquidity to be high. The best thing to do with excess liquidity is to make loans, because loans create the highest returns. How do you increase your loan portfolio?


This Article first appeared in the August 2001 issue of the Callahan Report

The present economic conditions have led some credit unions, including ours, into a situation of excess liquidity. There were various reasons for this, among them that in anticipation of Y2K we wanted our liquidity to be high. Not long before Y2K our loan-to-share ratio was around 80 percent. Not long after, it was around 65 percent.

The best thing to do with member savings in general, and excess liquidity in particular, is to make loans, because loans create the highest returns. Accordingly, we made an effort to increase our loan portfolio. We undertook to do this in a number of ways.

Getting the Word Out

We began by merely making our position known to persons and institutions we had dealt with in the past. When we had eased off on our participation lending in 1999, relationships went slack. So this year an immediate and easy means of increasing our lending was just getting the word back to them that we had money we wanted to lend. ''We're back,'' was the message. Slowly but surely the phone began to ring again.

In retrospect, we were in a pretty good position in that the loan portfolio we were carrying is strong. One offshoot of cutting back on lending before Y2K was taking only the best borrowers. We dramatically raised our credit standards; in fact, our decline ratio rose from 23 to 41 percent. We looked for really high-quality assets. We did that by offering great rates. We also restricted our new account business established through the indirect auto loan channel.

So when we did go back into the participation loan market with our message that we had money to lend, we had a good track record with people, strong relationships and a good crop of loans on our books.

Faith-Based Participation Loans

Something we worked on post-Y2K was participation loans. This has been especially successful with faith-based organizations and credit unions. Churches or similar faith-based groups go to their credit unions (often faith-based themselves in name or spirit) and ask for loans. When these credit unions cannot meet the amounts requested by their members they offer us a portion.

We have a good many of these loans, and they have been excellent for us. In seven years of having this kind of loan collateral on our books, no faith-based loan has ever been delinquent or sold at a discount. The loan purpose is not always to build sanctuaries or parish halls. The loans more likely cover the cost of buying homes or other property near the church that the church will later convert to parking areas. Many are for buying commercial properties used for cash flow and investment. Others are for education facilities for church-operated schools or day care facilities.

Most have a loan-to-value ratio of 30 to 50 percent. About 85 percent of them are fixed-rate, 5-year balloons. Ten percent are 7-year balloons.
The originating credit union administers the loans. Only very rarely have we intervened in any way, and this has normally taken the course of meeting the persons in charge. Of course, we practice our normal due diligence before participating in any loan.

Commercial Real Estate and Taxi Lending

In a like manner we engage in participation loans with other credit unions which bring us commercial real estate loans. These are generally for light industrial projects, apartment buildings and business parks. Generally they are 30-year amortization, 5-year balloons. Most have loan-to-value ratios of 50 to 60 percent; none are higher than 70 percent.

We also deal in New York City and Boston taxi medallion lending. The value of taxi medallions has declined slightly in recent years, but none of our loans in this field has suffered delinquency or loss.

Internet Approvals and Auto Lending

We are very happy with our mortgage lending channel at our Website, which has been extremely active, in fact, ''on fire.'' Most of the mortgages granted are jumbos, here in California, over $275,000. Members connect to our Website, and the mortgage link takes their application out via Prime Alliance to Fannie Mae, which pre-approves them online and gives them an APR. Days are saved for the applicant, and all this leaves very little work for our staff to do. The close rate is higher than with walk-ins.

Our auto lending has been strong, also. We work with CUDL (Credit Union Direct Lending) for indirect auto loan business. We also promote off-site used car sale events with local dealers. But we stress the ease with which members can get loans. They can be approved at a car dealership and get the car right away with no aggravation. We let them know: No waiting, No surprises, No last-minute changes ever. They respond well.

Only in credit card lending have we experienced no-growth. People have been paying off credit card debt, and we don't argue with that. We present a great card, but offer no teaser rates and as a result may not snare as much new business as the for-profit companies do.

Software Efficiencies

One last note on lending. We switched from our core data processor's loan application system and use our in-house ''Loan Hunter'' software for Internet applications as well as at our employees' desktops. Now when members log in they are getting the same evaluation as those who telephone or walk in. It's saved needless steps for members and duplications for us.

All of the above have helped us send money out to the people who need it and serve all our members by creating good returns back to the credit union, creating for us good cash flow and a strong balance sheet.




Sept. 10, 2001



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