These tumultuous times uncover troubled loans, delivery gaps and growth opportunities.
Even amid all the uncertainties with the ongoing course of COVID-19 and the related recession, lending leaders should be seeking out ways to build business and improve the loan experience their credit unions offer.
Though challenges abound, with a downturn in credit quality and uneasy outlook for new loan demand and repayment of balances already on the books, this unparalleled upheaval has uncovered gaps in service delivery that can be corrected and potentially profitable market segments that may be tapped. Navigating this new territory will require lending executives to figure out when to maintain a judicious watchfulness and when to take action.
To Each Its Own
Each CU and its members will face a unique pace of economic lapse and eventual recovery. While some industries maintained full employment in the spring and summer, others were harder hit by job loss and saw a slower return to work. CUs with community charters supported members through starts and stops in local and regional reopenings.
Each CU must ready its own response to credit quality trends, the need to rework loans to stave off delinquencies and evolving loan demand across product lines. Most lending leaders are watching and observing, ready to make any needed short-term shifts. Few are making big changes to loan rates, terms and underwriting standards just yet.
The member lending experience may take a turn for the worse short term, as underwriters are required to review more applications manually in response to deteriorating credit quality. Much of this deterioration stems from reduced income and declines in deposit balances, requiring more careful scrutiny and slowing the process across the board.
Remote Access as the Standard
Advocates of digital delivery have been sounding the call for years that CUs unwilling and/or unable to invest in technology could be left behind. Now that even former technophobes have discovered the ease and convenience of remote banking, CUs will find borrowers unlikely to line up at loan officers’ desks even when branch offices fully reopen.
If there is one thing the pandemic has made clear, it’s that the quality of digital access is setting the bar for service for both consumer and business members. Many CUs have recognized and responded to the need to invest in remote access to consumer accounts before and during the pandemic—which may have made the gap in similar automated services for business members even more glaring.
Now more than ever before, owners of small businesses have little time to stop by a branch (even when the “open” sign is back in the window). While some still appreciate and benefit from more traditional interactions with loan officers, others would value remote access. As a result, small-business owners are forced to look at alternative business financing sources, such as large banks like Chase or fintechs like Kabbage that provide this convenience.
Open for Business Members
Even as the member business lending team takes a hard look at how the CU needs to ramp up to offer a truly digital experience for business borrowers, leading lenders are recognizing the potential to expand their reach to this member group. Applying for Paycheck Protection Program loans at national and big regional banks was an eye-opening experience for many small-business owners about the value—or lack thereof—those institutions place on their business.
All those unanswered phone calls are an opening for CUs to expand to selectively step into that market. For a change, CUs could serve as the disruptors by welcoming business owners with a better experience. This opportunity increases the potential return on investing in digital improvements in MBL delivery.
Going into the previous recession, some financial institutions were unprepared for the impact on their micro- and small-business loan portfolios, and they responded to the resulting double-digit charge-offs by pulling back on lending and applying much more stringent underwriting standards.
Many of the businesses that survived the 2008 recession and went on to perform well went looking for alternatives and ended up moving their accounts to institutions willing to provide the needed financing and demonstrate that they valued their business.
The same progression could unfold now—for the benefit of CUs able to accurately assess the impact of the COVID-19 crisis on prospective business borrowers. These CUs need to be able to distinguish between businesses that can recover and move back into positive territory as the impact of the pandemic wanes and those that might have been in trouble even before the economy turned. Of course, MBL departments with the benefit of that expertise will also weather the current storm and emerge better positioned to serve existing and new business members.
That’s not to say that current economic conditions don’t merit a more conservative approach to business loan underwriting, especially in certain segments (hospitality comes to mind). But this caution need not extend to rewriting policies to require business and consumer members to have six months of emergency savings on hand to ride out the next pandemic. That is both unrealistic and extremely detrimental to positioning lending programs for growth.
A New Normal for Lending Operations
Beyond increased reliance on digital channels, lending executives will be working through several other big-picture questions about the future of their operations. The early phase of the pandemic provided a solid test of the viability of working remotely, and the verdict is that massive operation centers are not required for a successful loan department. It seems likely that remote staffing will persist.
In addition, investments in technology and security to support a distributed contact center will become a priority for both consumer and business lending. The contact center has increasingly become the service hub for consumer loan applications and other credit needs; the pandemic has nudged business lending in that direction.
A traditional resistance to doing business lending at least partially out of call centers may have come to CUs when they hired lenders from banks to launch their member business lending operations.
In support of their increasing reliance on remote channels to serve business borrowers, business lending leaders will be working more closely with IT teams charged with developing and maintaining network security and working to protect members’ personal and business data. Business lenders will need to develop their understanding of and adherence to cybersecurity measures.
Curves Ahead in Loan Demand
Especially in consumer lending, executives should be on high alert in the coming months for changing trends in loan demand. While all financial institutions have experienced tremendous growth in mortgage refinancing as homeowners take advantage of extremely low fixed rates, other unique situations will be presented. A CLO shared an example that emerged this spring: While the volume of indirect auto loans had tapered off significantly, his CU saw an unexpected increase in demand for RV and boat loans. Members who weren’t eager to fly and stay in hotels for summer vacations decided instead to cruise the waterways nearer to home or take road trips.
What other shifts might occur, and how should lenders and marketers prepare for them? Think about members who were stuck at home all spring, mentally renovating and expanding their already refinanced homes to include office nooks, basement rec rooms and backyard paradises. Those daydreams suggest home equity loans as a popular product line.
As an adjunct to small-business lending, CUs might look into facilitating business members’ capabilities to accept online payments for remote orders. And, to take full advantage of new habits, CUs should remind members to put the lower-rate credit cards issued by their CUs at the top of their online shopping wallets.
Emerging Data Will Tell a Tale
The coming weeks should offer a clearer view of the state of the financial services industry.
The impact of the 90-day payment deferrals that lenders granted this spring had not been in reporting as of June 30. We’ll see the first signs of the impact of those deferrals across the sector by looking back on what was happening in July and August. Those financial metrics will fill in a broad view of the credit positions that banks and CUs took—how aggressive they have been with new originations and how they are approaching workout scenarios.
At some point, lenders will have to make judgment calls on delinquencies to assess how to re-stabilize their portfolios. For some members who are continuing to struggle financially, long-term workout solutions may be the best option. On the member business lending side, the smaller the business, the more likely it is to just disappear, with no revenue to collect for loan repayment. Those former business owners will be forced to become job hunters, looking for paychecks to replace their business income.
Lending in this era may resemble the Dickens novel, A Tale of Two Cities. One “city” of members will struggle with debt and lost income and require intensive support from lending and collections. The other will emerge largely unscathed financially, though more reliant on their CU’s digital capabilities. Those members will find it even easier to manage their personal finances, especially if their CUs step up investment in improving communications via these remote channels and in honing the digital lending experience. At both ends and across that continuum, the CU will need to adapt continually to meet members where they are in serving their lending needs. cues icon
Joel Pruis is a senior director with CUES Supplier member and strategic provider Cornerstone Advisors, Scottsdale, Arizona.