It’s a perfect time to commit to the basic tenets of your credit union’s programs, stay tuned in to market trends and perfect your operational processes.
Being a leader in lending over the last two years has made me curse the old Chinese proverb, “May you live in interesting times.” The last two years have been way too interesting for me, including COVID-19 financial assistance for our members, runaway mortgage volume, declining auto loan volume, not to mention the pace of change in member demand for digital lending.
A new year is a perfect time to start with lending resolutions as well as those for personal purposes—except that unlike our personal resolutions which often fall by the wayside by mid-February, these resolutions should keep us busy all 365 days this year.
Work the Model
When I say model, I really mean your credit union’s lending business model. Often, lending is just trying to keep its head above water. Either you have more loans than you can handle (like mortgages since COVID-19 hit) or you’re scrambling to find more business. Don’t fall into the trap of finding the easy path to more loans, since the easy path often includes relaxing credit standards and giving away loans through rate.
Fundamentally, credit unions are successful lenders when they focus on:
- Their delivery systems. In today’s race towards digital lending, it’s hard to play catch up. If you’re just now starting, it may be now or never. Beyond the digital aspects of lending, it’s critical that processes are as efficient as possible.
- Their product management. All too often, leadership is falsely convinced that loans are commodities and that product differentiation is difficult and ineffective. To that, I say “not so fast.” There are plenty of examples from fintechs to credit unions that are finding innovative ways to offer loans that are sufficiently different from many of their competitors.
- Their sales culture. As the adage goes, “Nothing happens until someone sells something.” Credit unions have an amazing product to offer members, yet I’m a big fan of the theory in physics than a body at rest (think about your member) tends to remain at rest unless acted on by an outside force (one of your employees that makes a sale—preferably the right product at the right time). Your employees must make things happen on the sales side for your model to work.
Stay Open to Opportunities
After 38 years in lending, I tend to be a stubborn guy. I know what works and what doesn’t when it comes to building portfolios and managing risk. Yet today’s economic issues have opened opportunities to take on some slices of credit risk that historically might not have been prudent.
For example, consider the state of the auto market. Here’s a great article that spells out the challenges for lending and, perhaps more to the point, for our members when they’re buying used cars.
Based on the market today, it appears we may have a window of opportunity over the next two to three years to make more older used car loans. Historically in our loan portfolio, the older the car, the greater the chance for loss (number of repossessions per 1,000 loans) and the higher the magnitude of loss (the loss as a percentage of the balance at repossession). Yet for many creditworthy consumers, older cars will be their only affordable option in the foreseeable future. The good news for lenders is that values should remain high for several years while unemployment remains low, which translates into the need for most people to own a car to get to work.
Going back to the opportunity to finance more older cars, beware of market corrections. Even if the chip problem resolves itself faster than anticipated and automakers hold the line with inventory by carefully watching production, things can happen quickly. While the automakers and dealers are making more money than ever by keeping inventory low and pushing consumers to order their new car months in advance, all it takes is one company to pounce on the opportunity to sell to consumers who need a car today. If consumers can’t walk onto a lot on Saturday and find the new car they want, Hyundai may decide to step out of line and crank up production. It won’t be long before the other automakers follow suit. Once inventory reaches historical norms, discounting will resume, which will negatively impact used car values as well.
This is not the time, if you decide to be nimble and take advantage of the economic displacement we’re experiencing, to “set it and forget it” on auto loans. The same applies to the housing market. There may be an opportunity to take on more risk in mortgages and home equity loans, yet the opportunity may wind up being short lived. Home values are exploding at potentially dangerous levels; being an armchair economist, I’m always worried when home prices go up faster than incomes. Yes, home prices have been boosted by historically low rates, but when inflation is heating up higher, mortgage rates are right around the corner. Remember, if mortgage rates go up 1%, the resulting mortgage payment will increase 10%; that will likely have some downward pressure on prices. Risk-taking will have to be taken with a very liberal dose of diligence.
Not Fire, Ready, Aim
Being successful in lending is a lot like shooting a gun. It really doesn’t pay to do so hastily. It’s easy to miss the target at best and can be quite dangerous in the worst-case scenario. There has to be a lot of time spent on getting ready and aiming before firing at a well-defined target.
It sure looks like credit unions and their members will be living in those proverbial “interesting times” for a good while longer. I hope delivering on these resolutions will help your find success with your lending programs in 2022.
CUES member Bill Vogeney is chief revenue officer and self-professed lending geek at $8.7 billion Ent Credit Union, Colorado Springs.