How credit unions can prepare for a slowing economy
April 18, 2019 10:59 AM
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Day 2 of NCUCA
The National Credit Union Collections Alliance hosted the second and final day of its fifth annual conference on Wednesday with a detailed look at bankruptcy and an update from the Consumer Financial Protection Bureau. The day also included 16 concurrent roundtables led by subject matter experts. Attendees could choose to attend up to three of the 30-minute sessions.
Here are some of the highlights from Wednesday at the NCUCA conference.
Here are some of the highlights from Wednesday at the NCUCA conference.
Auto lending strategies to survive a recession
Auto lending has been strong in recent years, but many economists are predicting a possible recession sometime in the next 12 to 36 months that could affect these credits.
Two representatives from Open Lending, which provides automated lending services to financial institutions, hosted a session on strategies for car loans to survive a recession. Courtney Collier, regional account manager, and Shirley McFarlane, vice president of sales, led the discussion.
For credit unions, delinquencies on auto loans are 0.69%, the same level as just before the 2008 recession, Collier said. He said credit unions need to start preparing for the next downturn when lending is strong.
“We believe it will not be as bad at the last recession, but there are threats and challenges out there,” Collier said.
One of the biggest threats is rising interest rates, which means CUs need to adjust pricing to be in line with cost of funds. A second is increased collateral depreciation spreads as more consumers are leasing and manufacturers are producing a large number of new vehicles.
Finally, Open Lending highlighted the upcoming accounting standard Current Expected Credit Losses as a concern. CECL, as it is commonly known, will force credit unions to increase their reserves by 20% to up to 50%.
“CECL will have a big impact,” Collier declared. “Diversification of portfolios is going to be key going forward.” He then offered CUs five tips.
To help address these challenges, Collier provided some tips.
First too many credit unions are making lending decisions based on “gut feel,” Collier said. He said data collection and analysis should be used to improve pricing, risk management, fraud detection and decision rules.
“If it is on the application, collect it and score it,” he said.
Having a targeted collections practice is also a must. That includes rescoring borrowers annually and focusing on those that are riskier, Collier said.
Detecting fraud early should be a priority. If a loan officer and a dealer are approving loans, and a significant number of those loans are defaulting, then the credit union needs to look at those two individuals, Collier said.
Finally, credit unions should have “cross-functional” teams of people from several different departments work together and increase communication. Collier said this will allow CUs to “dig deeper” into their data.
Two representatives from Open Lending, which provides automated lending services to financial institutions, hosted a session on strategies for car loans to survive a recession. Courtney Collier, regional account manager, and Shirley McFarlane, vice president of sales, led the discussion.
For credit unions, delinquencies on auto loans are 0.69%, the same level as just before the 2008 recession, Collier said. He said credit unions need to start preparing for the next downturn when lending is strong.
“We believe it will not be as bad at the last recession, but there are threats and challenges out there,” Collier said.
One of the biggest threats is rising interest rates, which means CUs need to adjust pricing to be in line with cost of funds. A second is increased collateral depreciation spreads as more consumers are leasing and manufacturers are producing a large number of new vehicles.
Finally, Open Lending highlighted the upcoming accounting standard Current Expected Credit Losses as a concern. CECL, as it is commonly known, will force credit unions to increase their reserves by 20% to up to 50%.
“CECL will have a big impact,” Collier declared. “Diversification of portfolios is going to be key going forward.” He then offered CUs five tips.
To help address these challenges, Collier provided some tips.
First too many credit unions are making lending decisions based on “gut feel,” Collier said. He said data collection and analysis should be used to improve pricing, risk management, fraud detection and decision rules.
“If it is on the application, collect it and score it,” he said.
Having a targeted collections practice is also a must. That includes rescoring borrowers annually and focusing on those that are riskier, Collier said.
Detecting fraud early should be a priority. If a loan officer and a dealer are approving loans, and a significant number of those loans are defaulting, then the credit union needs to look at those two individuals, Collier said.
Finally, credit unions should have “cross-functional” teams of people from several different departments work together and increase communication. Collier said this will allow CUs to “dig deeper” into their data.
Regional impact of an economic slowdown on loan performance
Much has changed since the Great Recession a decade ago. That will dampen of the effects of an economic slowdown, said Sohini Chowdhury.
Chowdhury, director of economic research for Moody’s Analytics, told attendees at a roundtable discussion that regulations enacted after the last recession have forced financial institutions to alter their underwriting. Also, consumer behavior has changed.
“Moody’s anticipates a slowdown of growth, not necessarily a contraction,” she explained.
Whatever form the recession takes, Chowdhury said there will be regional differences. For example, if the slowdown is caused by a trade war between the U.S. and other countries, then it is likely the farm states in the Midwest will be impacted more heavily. If energy prices fall – as they often do in a recession – then energy-producing states will feel the pinch.
“People are scarred after the last recession, and this will create self-fulfilling prophecies,” she said. “If things start to slow down, then people will not want to buy a house.”
One area Moody’s projections indicate the potential for danger is in credit cards. Chowdhury said this lending product almost always has the highest default rates during a slowdown because the debt is unsecured. She suggested CUs perform granular underwriting checks to spot trouble as early as possible.
Another underwriting threat is what Chowdhury referred to as credit score “inflation.” She warned a 700 credit score today is riskier than a 700 score five years ago. In the current strong economy with near full employment, “everyone is paying off debt and improving their scores. But when the recession hits, some people will lose their jobs.”
Chowdhury, director of economic research for Moody’s Analytics, told attendees at a roundtable discussion that regulations enacted after the last recession have forced financial institutions to alter their underwriting. Also, consumer behavior has changed.
“Moody’s anticipates a slowdown of growth, not necessarily a contraction,” she explained.
Whatever form the recession takes, Chowdhury said there will be regional differences. For example, if the slowdown is caused by a trade war between the U.S. and other countries, then it is likely the farm states in the Midwest will be impacted more heavily. If energy prices fall – as they often do in a recession – then energy-producing states will feel the pinch.
“People are scarred after the last recession, and this will create self-fulfilling prophecies,” she said. “If things start to slow down, then people will not want to buy a house.”
One area Moody’s projections indicate the potential for danger is in credit cards. Chowdhury said this lending product almost always has the highest default rates during a slowdown because the debt is unsecured. She suggested CUs perform granular underwriting checks to spot trouble as early as possible.
Another underwriting threat is what Chowdhury referred to as credit score “inflation.” She warned a 700 credit score today is riskier than a 700 score five years ago. In the current strong economy with near full employment, “everyone is paying off debt and improving their scores. But when the recession hits, some people will lose their jobs.”
Pros and cons of energy loans
With Americans increasingly looking to “go green,” more credit unions could make energy loans , including ones for solar panel installation.
However, these loans have different considerations in underwriting than traditional home improvement loans, and have a different method of perfecting a security interest, Alana Anaya, attorney and owner of the Anaya Law Group in Westlake Village, Calif., told attendees of her roundtable discussion.
For starters, she said, CUs need to beware of cases in which one spouse signs up to install solar without getting the blessing of the other. Avoid this by pulling the title and making sure everyone who is on title also is on the contract for the new addition.
“Due diligence also includes contractors,” she advised. “This means checking to be sure any contractors have all the necessary licenses, they are bonded and they have references. If something goes wrong, the credit union needs to have recourse.”
Fraud happens in the solar space, Anaya warned. Credit unions need to obtain the plan in advance that specifies the number of panels and their placement. After the job is done, she recommended having someone drive to the site and visually confirm solar panels were installed on the property.
While some credit unions simply give the loan proceeds to the borrower and allow that person to pay the contractor, Anaya said she prefers two-party checks, which must be authorized in the contract.
However, these loans have different considerations in underwriting than traditional home improvement loans, and have a different method of perfecting a security interest, Alana Anaya, attorney and owner of the Anaya Law Group in Westlake Village, Calif., told attendees of her roundtable discussion.
For starters, she said, CUs need to beware of cases in which one spouse signs up to install solar without getting the blessing of the other. Avoid this by pulling the title and making sure everyone who is on title also is on the contract for the new addition.
“Due diligence also includes contractors,” she advised. “This means checking to be sure any contractors have all the necessary licenses, they are bonded and they have references. If something goes wrong, the credit union needs to have recourse.”
Fraud happens in the solar space, Anaya warned. Credit unions need to obtain the plan in advance that specifies the number of panels and their placement. After the job is done, she recommended having someone drive to the site and visually confirm solar panels were installed on the property.
While some credit unions simply give the loan proceeds to the borrower and allow that person to pay the contractor, Anaya said she prefers two-party checks, which must be authorized in the contract.
CFPB trying to curb bad actors in collections space
The Consumer Financial Protection Bureau is trying to curb abusive practices by some collections companies, according to an agency official.
John McNamara, assistant director with the CFPB, said levels of consumer debt and delinquency rates, defined as 90 days or more past due, are rising. Employment in debt collection has declined each year from 2014 to 2018 due to market consolidation and labor efficiencies.
“On debt collection, the CFPB is looking to establish clear rules and definitions based on a cost-benefit analysis,” he explained. “The bureau wants to establish clear guidance on the use of digital communication and more context in complaint data analysis and reporting. The goal is less regulation by enforcement.”
In 2018, the CFPB received approximately 81,500 consumer complaints about debt collection. The most common complaint – 40% of those that were lodged – were attempts to collect debt not owed. Of CFPB website pages on debt collection, the most frequently viewed page was, “How to negotiate a settlement with a debt collector?”
According to McNamara, some of the worst practices by collections companies include false representations of the impact on credit score by full payment versus settlement; deceptively implying authorized users are responsible for a debt; communicating with consumers at a time known to be inconvenient; and debt collectors forwarding consumers’ debt validation requests to original creditors, who in turn communicated directly with those consumers.
“We are desperately trying to get the word out about practices that are problematic,” he said.
Debt collection rulemaking is “evolving,” McNamara continued. After considering feedback, he said the CFPB determined “right consumer, right amount” issues would be best pursued via rulemaking that included requirements for creditors and third-party collectors.
“The bureau is moving forward with rulemaking covering third-party debt collectors that will address having correct and accurate information on debts. We really encourage feedback from everyone.”
John McNamara, assistant director with the CFPB, said levels of consumer debt and delinquency rates, defined as 90 days or more past due, are rising. Employment in debt collection has declined each year from 2014 to 2018 due to market consolidation and labor efficiencies.
“On debt collection, the CFPB is looking to establish clear rules and definitions based on a cost-benefit analysis,” he explained. “The bureau wants to establish clear guidance on the use of digital communication and more context in complaint data analysis and reporting. The goal is less regulation by enforcement.”
In 2018, the CFPB received approximately 81,500 consumer complaints about debt collection. The most common complaint – 40% of those that were lodged – were attempts to collect debt not owed. Of CFPB website pages on debt collection, the most frequently viewed page was, “How to negotiate a settlement with a debt collector?”
According to McNamara, some of the worst practices by collections companies include false representations of the impact on credit score by full payment versus settlement; deceptively implying authorized users are responsible for a debt; communicating with consumers at a time known to be inconvenient; and debt collectors forwarding consumers’ debt validation requests to original creditors, who in turn communicated directly with those consumers.
“We are desperately trying to get the word out about practices that are problematic,” he said.
“The bureau is moving forward with rulemaking covering third-party debt collectors that will address having correct and accurate information on debts. We really encourage feedback from everyone.”
Eric North, an attorney with Moore, Brewer, Wolfe, Jones, Tyler & North
Credit unions need to stay on top of the ever changing regulations pertaining to bankruptcy and collections.
Eric North, an attorney with the La Jolla, Calif.-based law firm of Moore, Brewer, Wolfe, Jones, Tyler & North, reviewed some of these changes and ran through several hypothetical scenarios to illustrate what is allowed under bankruptcy law during a session at the conference.
The first scenario involved “Bob,” who has a credit card with his credit union. He pays it off, then declares bankruptcy. One year later, he puts $1,000 on the card, then misses a payment. In this case, because it is a post-petition debt, the CU is allowed to call Bob and can attempt to collect.
Scenario two: A credit union repossesses Bob’s car on Monday. Bob then files bankruptcy on Tuesday. Does the CU have to return the car?
According to North, Bob can object based on the CU exercising “control” over what still is his property.
“Most courts have ruled the car must be returned, although in some states the credit union can wait until a court orders the return of the car,” he explained. “Some circuit courts have ruled a creditor holding the car and refuses to return it is simply refusing to act, so there is some gray area – by circuit and by state.”
In collections, the debtor can “redeem” a repossessed car by paying the balance. The debtor can do so at any time before the sale of the vehicle by the credit union, he added.
North also emphasized the importance of understanding the rules related to automatic stay. Under bankruptcy law, the automatic stay means a creditor cannot enforce a lien. Also, creditors cannot start or continue any judicial action that they could have brought prior to the debtor filing for bankruptcy protection.
“You cannot enforce any prejudgment, and you cannot do any act to obtain possession or exercise control over property of the estate,” North explained.
A recent case from New Jersey has added a potential wrinkle to bankruptcy law, North said. He said in most cases the automatic stay ends at different times, most relating to the meeting of creditors.
One area thought to be clear relates to a debtor’s statement to reaffirm or redeem, followed by performance. Some courts have ruled the violation by the debtor of failure to file the statement or failure to perform means the automatic stay ends. However, a circuit court in New Jersey said the debtor must violate both to trigger the end of the automatic stay.
Another legal change North said CUs need to be aware of pertains to the statute of limitations for debt. The statute varies from state to state, and varies by type of debt. If the pertinent statute of limitations expires during a period of stay due to bankruptcy, the statute is tolled and extended until 30 days after the automatic stay ends.
Traditionally, the statute of limitations has been treated as a defense, North continued. He said if a creditor attempts to collect on a debt for which the statute of limitations has expired – the debtor has been required to raise the statute as a defense. In recent years, however, an attempt to collect a debt after the statute of limitations has expired has been found to be “deceptive.”
“When trying to collect older debt, be cognizant,” he said.
North said credit unions need to make themselves aware of the ramifications of the Military Lending Act on auto lending. In some cases, he noted, CUs have loans on their books and are trying to collect, but the loans are void.
“There are loans credit unions thought the Military Lending Act did not apply to, but now we find out the law does apply,” he said. “All of you need to check your loans, see if they are made to military or those dependent on military members, and talk to your attorney.”
Eric North, an attorney with the La Jolla, Calif.-based law firm of Moore, Brewer, Wolfe, Jones, Tyler & North, reviewed some of these changes and ran through several hypothetical scenarios to illustrate what is allowed under bankruptcy law during a session at the conference.
The first scenario involved “Bob,” who has a credit card with his credit union. He pays it off, then declares bankruptcy. One year later, he puts $1,000 on the card, then misses a payment. In this case, because it is a post-petition debt, the CU is allowed to call Bob and can attempt to collect.
Scenario two: A credit union repossesses Bob’s car on Monday. Bob then files bankruptcy on Tuesday. Does the CU have to return the car?
According to North, Bob can object based on the CU exercising “control” over what still is his property.
“Most courts have ruled the car must be returned, although in some states the credit union can wait until a court orders the return of the car,” he explained. “Some circuit courts have ruled a creditor holding the car and refuses to return it is simply refusing to act, so there is some gray area – by circuit and by state.”
In collections, the debtor can “redeem” a repossessed car by paying the balance. The debtor can do so at any time before the sale of the vehicle by the credit union, he added.
North also emphasized the importance of understanding the rules related to automatic stay. Under bankruptcy law, the automatic stay means a creditor cannot enforce a lien. Also, creditors cannot start or continue any judicial action that they could have brought prior to the debtor filing for bankruptcy protection.
“You cannot enforce any prejudgment, and you cannot do any act to obtain possession or exercise control over property of the estate,” North explained.
A recent case from New Jersey has added a potential wrinkle to bankruptcy law, North said. He said in most cases the automatic stay ends at different times, most relating to the meeting of creditors.
One area thought to be clear relates to a debtor’s statement to reaffirm or redeem, followed by performance. Some courts have ruled the violation by the debtor of failure to file the statement or failure to perform means the automatic stay ends. However, a circuit court in New Jersey said the debtor must violate both to trigger the end of the automatic stay.
Another legal change North said CUs need to be aware of pertains to the statute of limitations for debt. The statute varies from state to state, and varies by type of debt. If the pertinent statute of limitations expires during a period of stay due to bankruptcy, the statute is tolled and extended until 30 days after the automatic stay ends.
Traditionally, the statute of limitations has been treated as a defense, North continued. He said if a creditor attempts to collect on a debt for which the statute of limitations has expired – the debtor has been required to raise the statute as a defense. In recent years, however, an attempt to collect a debt after the statute of limitations has expired has been found to be “deceptive.”
“When trying to collect older debt, be cognizant,” he said.
North said credit unions need to make themselves aware of the ramifications of the Military Lending Act on auto lending. In some cases, he noted, CUs have loans on their books and are trying to collect, but the loans are void.
“There are loans credit unions thought the Military Lending Act did not apply to, but now we find out the law does apply,” he said. “All of you need to check your loans, see if they are made to military or those dependent on military members, and talk to your attorney.”
