Credit unions must balance helping members with managing institutional risk.
Just as a rising tide raises all boats, a low tide can bring many a ship, even the most sturdy and steadfast, to ground. In many ways, the COVID-19 pandemic has been a financial and economic low tide that has affected businesses and individuals alike across the globe. In this low-tide environment, credit unions have taken on the role of captain, helping their members navigate through current conditions to more stable waters while also charting a course for organizational stability and viability.
One of the largest challenges being faced is loss of income during state-mandated stay-at-home orders and voluntary quarantines that have caused some businesses to shutter—some for the short term and others permanently. Although we really can’t predict much with certainty yet because so many variables are unknown, experts at Goldman Sachs think the U.S. will experience a peak unemployment rate of 25% before recovery begins. Unemployment rates, of course, have a direct correlation to financial institution performance in the form of loan delinquencies, non-payments, and portfolio charge-offs.
Maintaining an Even Keel
Credit unions have the challenge of balancing their care and compassion for individual member circumstances on one hand with organizational management, business prosperity and the financial well-being of their collective membership on the other. The method to accomplish this is two-fold, requiring in-depth customer analysis and service combined with effective and comprehensive institutional risk mitigation programs.
On a micro level, credit unions will continue to assess each individual member’s situation and specific circumstances, making decisions based on such factors as account and repayment history and length and quality of the relationship with the credit union. Another consideration is whether any loss of income is likely to be short term (with employment likely resuming once stay-at-home orders expire and the economy begins to recover) or a more lengthy or permanent issue.
For short-term loss of income, solutions like skip-a-pay, payment deferral, or term extension can be a strong lifeline to help members stay afloat. Alternately, if reemployment appears less likely to happen in the near term, a loan modification will not lead to repayment and a charge-off may be inevitable.
Because it appears clear that there will be substantial numbers of borrowers who fall into the latter category as today’s economic headwinds continue, all financial institutions must be sure they have safeguards in place to protect against excessive loss and to sufficiently transfer risk to a third party.
For example, one in eight drivers in the U.S. is uninsured—a number that will likely grow as members face increasing financial hardships. Given that, as well as many unanswered questions about what will happen with the U.S. and world economy, making sure your credit union’s auto and mortgage collateral is properly insured is an essential part of protecting both your institution and your membership, both now and in the future. This is just one of the many areas where credit unions will need to run a tight ship to remain viable.
A Credit Union’s Compass
The question is: What is the fairest, most efficient way to protect your institution while also best caring for your members and creating the best possible member experience? In answering that question, it’s imperative to consider how any particular strategy or program will affect not just individual members but your membership as a whole.
Our philosophy—one we feel best fits the value system credit unions stand for—is that serving the greatest good means taking care of your membership as a whole and keeping costs as low as possible for the majority while still providing adequate protection for all, rather than increasing costs for members who aren’t responsible for the increased losses.
This philosophy is reflected in many areas of a credit union. One example is charging an account maintenance fee only for draft share accounts that dip below a minimum balance rather than a monthly fee across all accounts. In the insurance industry “sea” our company sails in, it means a well-run, well-managed collateral protection insurance program that assigns any additional financial outlay to those who are increasing the risk, rather than a blanket policy that impacts members who are current and compliant.
Any area where there is a choice that involves passing increased costs from losses to all members rather than to those who generate them has the potential for causing a credit union to drift off course from its mission of being a lifeline for its entire membership in the fairest, most equitable way possible.
Trimming Your Sails as Conditions Change
While there are federal policies and decisions that apply regardless of location, the economic waves can crash ashore very differently depending on where a credit union is located. Pre-pandemic, some states and cities were stronger economically and may have an easier time recovering, while others were operating closer to the margins to begin with. Some regions are reopening with gusto as soon as they can, while others are taking a more cautious approach.
Because of these differing variables, there are few one-size-fits-all statements to make about specific risk transference strategies that would apply across the board. What applies universally, though, is that successfully mitigating risk in a credit union’s portfolio is critical to weathering this storm as well as maintaining smooth sailing when today’s turbulence has passed.
Loren Shelton is VP/insurance solutions of CUESolutions Bronze provider State National Companies, Bedford, Texas, a division of Markel Corporation. He manages the underwriting, claims and new business implementations for a portfolio of more than 6 million loans. With more than 15 years of experience, Shelton has an extensive knowledge of SNC’s collateral protection products.