1. Don't Let Software Turn a Loan Application Down
By Lisa Freeman, Associate Editor
ELGIN, Ill.-If "improve lending" isn't among the top five things on the credit union's "things to do" list in 2005, it should be, according to one expert, who suggested CUs put the "direct" back into lending.
"If a credit union wants to make more loans and wants to reach more members, put a policy in place that a member cannot be turned down for a loan unless the person turning them down is the person talking to the member," urged Rex Johnson, the former credit union CEO who founded Lending Solutions, Inc. and the University of Lending. "Today we have what I call data collectors-app-takers who gather the member's data but have no ownership in the decision because everything's been automated. Too many times we have members being turned down for loans simply because the decision maker doesn't have to talk to the member being turned down. We need to empower more employees to make decisions, and no one is turned down without someone contacting them and actually talking with them."
While automated decisioning tools have their place at a credit union, they are supposed to be just that, Johnson said-tools.
At the Lending Solutions Call Center, for example, credit unions can set up whatever loan decisioning models they want the call center to use, but what Johnson suggests credit unions do is set up the parameters such that when the decision model recommends against approving a loan, the loan is automatically kicked back to a real, live, human underwriter for a closer look.
It doesn't mean that every loan is approved, he noted, but it does mean that every loan that isn't approved is reviewed by a human being before a final decision is made.
"This is becoming a real problem with credit unions, and it's almost epidemic," he said. "Credit scores are an important part of the loan decision process, but they're just part of the process. We need to at least talk to the member before we turn them down."
A big part of the problem is a lack of good checks and balances to ensure loans made via indirect programs are up to snuff with loans made directly, he explained.
"We're taking more risk with people we've never even seen-and these are one-and-done people who only want that car loan and aren't interested in anything else from the credit union-than we are with the people who are actually coming through the door and choosing to do business with us," Johnson observed. "What we need to do is take more risk on the people we can actually talk to than the ones we can't. That's why you should have a policy that no member gets turned down for a loan without us actually talking with them."
2. Tell Everyone What a Credit Union Is-and Tell Again
By Lisa Freeman, Associate Editor
WASHINGTON-If banks have resolved to do anything in 2005, it's ratchet up attacks upon credit unions, which is a big reason why credit unions should resove to tell people-members, non-members, lawmakers, media-what a credit union is.
"Over the last six to nine months, bankers have been working hard with business journals across the country placing stories about what they think credit unions are, and then the reporters call us and say, 'I understand that credit unions can serve anybody just like the banks but aren't taxed like banks,' or 'I understand that credit unions got all these new powers when Congress passed a law in 1998.' And then I've got to take them through a whole tutorial on what credit unions are and on HR 1151," noted CUNA's Pat Keefe. "There are many who know what credit unions are, but there are also many who don't, and because they don't, they buy it when the banks give their version of what we are."
Educating the general public as well as the media and legislators is the key to ensuring that people don't simply buy the banking line about credit unions, added NAFCU's Jay Morris. "If you really knew and understood what a credit union is, that it's not-for-profit and democratically run and owned by all its members, then when you read the banker letter's the editor or you hear the bankers' argument, you can say, 'wait a minute, that's not right, that's not how my credit union is run,'" Morris suggested. "Getting the word out about the credit union difference has to be a top priority."
While telling the credit union story isn't going to stop bankers from attempting to distort that story, Keefe noted, it's worth trying to set the record straight. "Be straightforward about it. Don't be oblique," he advised. "Everybody wants people to understand that credit unions are not-for-profit institutions that offer financial products and services. That's hard to do in five words or less. You have to get that message out without trying to be too cute. Credit unions are the best deal you can get for your banking dollars. There's no shorthand for that."
And it's not just about fending off bank attacks-it's also about creating loyalty, which is in short supply in the current market place.
"There are some real benefits to having credit union members know more about this institution they belong to," Morris offered. "People who know the credit union is not-for-profit and do things differently from for-profit institutions are more likely to volunteer, and credit unions always need volunteers for committees and such. They're more likely to get involved in a grassroots way if that's what's needed. And from a bottomline standpoint, members are more likely to use the credit union more if they understand what a credit union is."
3. Did They Love You-then Leave You? Find Out Why
By Lisa Freeman, Associate Editor
CALABASAS PARK, Calif.-While everyone at the start of a new year is busy looking forward, one of the most important things a credit union can do in 2005 is to take a look backward first, according to one research consultant.
"When credit unions think of growing, they think in terms of bringing on new members. Think of your credit union as a cruise ship. It is significantly more important to ask passengers who are leaving, as well as your current passengers, if the ship is seaworthy, before bringing on new passengers," said Neal Goldman, president of Member Research. "Or to use another analogy, trying to grow your membership by adding new members without first learning why your existing members are leaving is like putting beads on a string to make a necklace and not tying the end."
That's why checking in with members who have closed accounts is one of the top five things credit unions should do in 2005.
There are lots of different reasons someone might close an account with a credit union, so the key is to determine which reasons present actionable opportunities, Goldman suggested.
"It's like a tire that's losing air. Is it losing air because it's over inflated or because the tire has a puncture," Goldman noted. "Some examples of 'over inflation' would be those accounts that were closed because the member moved or died or maybe consolidated accounts. In other words, there wasn't necessarily anything wrong, nothing that could have been done to retain that member and nothing that should be changed as a result. But if it's not over inflated, it's because of a puncture, something that is wrong at the credit union that can be fixed."
Some tips for getting useful information when contacting closed accounts: Don't wait too long. "The longer you wait, the less likely you're going to be able to find these people," Goldman offered. "People should be contacted within a week to two weeks of closing their accounts."
You can afford to be choosy. "I'm not sure you have to do this with everybody that closes an account," he suggested. "For example, in some cases credit unions have built in fee structures that are designed to cause a certain amount of attrition, so you may not need to ask about every closed account. The same goes for accounts that were closed following bankruptcy or delinquency."
Make it part of the process. "You can have a screen where when someone goes to close out an account, the account cannot be closed until a field that asks 'why are you closing this account' is populated," Goldman advised. "The trick is, you have to make sure that the field isn't just always being populated with 'miscellaneous' or something like that-it's got to be meaningful."
Train your people. If this is going to become part of the credit union's process, then staff has to be trained to do it properly.
Avoid "It's Not You, It's Me" syndrome. "One red flag to look for is lots of non-answers or defensive answers," he explained. "This could be a sign that the person who is asking the question may well be part of the problem. People have to feel free to give an honest response."
Consider hiring a third party. "This is the best way to ensure you're getting honest answers," Goldman suggested. "At the very least, if you're going to do it in house, make sure that the people doing the calling are at arm's length, like a call center or even a research division at the credit union. You don't want a loan officer asking people why they closed out a loan early when it's possible the loan officer is the reason in the first place."
4. Don't Be So Cautious As Rates Rise
By Michael Bartlett, Reporter
SAN DIMAS, Calif.-Credit unions are prepared to deal with a rising rate environment in the months to come because most have more than enough liquidity, according to three WesCorp executives.
In fact, some are entering the new year too well prepared, according to WesCorp's Ron Araujo, managing principle for WesCorp Investment Services, Bob Burrell, executive vice president and chief investment officer, and Dwight Johnston, VP- economic and market research, who told The Credit Union Journal some CUs are hurting their bottom lines by being too cautious.
"As rates start to increase, we will see a general increase in interest rate risk in the credit union industry," said Araujo. "By and large, however, the industry is in good shape when it comes to managing interest rate risk. If anything, there is room to take more interest rate risk. Having a large percentage of investments in cash costs them money."
According to WesCorp, 6% to 12% of credit unions' total assets should be in investments that will mature in the next 12 months. In some cases, said Araujo, CUs have half of their investments in liquid form.
"Rates would have to go up pretty quickly before overnight investments are better than long-term investments," he said.
Added Burrell, "Interest rate risk is not a major issue at 90% of credit unions."
Johnston said many credit unions tend to be "ultra-conservative" when it comes to interest rate risk. "They feel they have risk, but they don't."
Johnston pointed out credit unions already have lived with a rising rate environment for the past six months. He said WesCorp expects rates to continue to rise in the first half of 2005.
"In the second half, rates might flatten if the bond market senses the Fed is through tightening," he predicted.
Burrell noted that "Interest rates can change quickly. At the moment, the market is fairly complacent. If something happens, like an inflation report, things can change quickly."
Burrell said the interest rate rise in the latter half of 2004 helped CUs because the return on funds was higher than the cost of funds. He said in 2000, the last time credit unions operated in a rising rate environment, the mistake credit unions made was to let their investments "decompose."
"They let everything go to liquidity. It is not a great strategy to leave everything in cash, relying on rates going up," he counseled. "We think rates are going up, but we might be wrong. The risk is: if a credit union lets its portfolio structure break down, it is hard to catch up."
October and November 2004 saw a lot of investment activity, but things died down in December, Burrell said. "We are really waiting to see what January and February will be like. It will be an interesting period in the next six to eight weeks. It will set the tone for 2005."
Araujo said many CUs are short-term in their investments - maybe more short-term than they should be. Just sitting on cash can be "punitive" because they get such a low rate of return. "Large portions of their portfolio should be in longer-term investments or loan participations," he said.
Repricing Strategies
Asked if credit uions are lagging in repricing as rates change, Johnston replied, "Yes, for the most part, but they are intentionally lagging."
Burrell said there is a dichotomy in pricing. Share drafts will remain low, and share accounts have lagged, he observed.
"We are seeing the same, surprisingly, with money market rates. They are in the low 1% range, only 25 to 50 basis points higher than the low point. Credit unions see a benefit from that lag."
Loan yields still are declining, Burrell continued, because higher rate loans are being paid off, and lower rate loans are replacing them. But long-term certificate rates generally have moved up with market rates.
He said WesCorp is hearing anecdotally that 2005 will bring more money into long-term certificates.
"There is no average credit union in 2004-they had very different strategies," he said. "There were very different levels of interest rate risk across the system. Averages and generalizations can get you into trouble."
Ask WesCorp
Johnston said WesCorp's member CUs want to know what is coming with interest rates, and how much rates will rise in 2005.
Burrell said credit unions want to know how to model share, share draft and money market accounts. "They want to know where the risk is. We know rates are going up, so they want to know how much room there is."
CUs spent much of the last four years worrying about the stock market's affect on deposits, said Araujo. While credit unions historically have treated deposits as having a two-year average life, some CUs are showing they believe new deposits are going to stick around
5. Are You Too Old School To Go To School? Think Again
By Lisa Freeman, Associate Editor
MADISON, Wis.-Think you've seen everything? Then maybe you need to go back to school.
"I meet credit union executives who say to me, 'Fred, I've been in this business for 30 years, and I've seen it all,' and I tell them, 'No, you haven't,'" said Fred Johnson, president of CUES. "The problem with success is that it lulls you a little bit. You can't sit back and relax a bit. If you meet someone who thinks they know all there is to know about credit unions or how to do their job, you should run scared. No one knows everything, because new things are happening all the time."
That's why continuing education for CU executives, directors and staff makes the list of top five things to do in 2005.
"If you stop learning, you stop growing. The only antidote to the 'seen-it-all' syndrome is professional education and development," Johnson advised. "Today there's so much information out there, and it's all coming at us at great speed. People get a little overwhelmed by all that information, so they just sort of drop it. They figure if it's important someone will tell them about it. Well, that's not good enough."
With changes in laws and regulations as well as the continuing evolution in technology, Johnson said it's critical for credit union people at every level to do something to keep up. One option is to hire people for their expertise in a given area-but again, no matter what area that is, it will be important to invest in that person's continuing education to keep up with change.
Reading trade publications as well as monitoring mainstream media is another way to do it. "When I was in graduate school, there was a course I had to take that was all about how to read The Wall Street Journal," Johnson related. "It sounds silly, but it's like any other tool-you have to know how to use it properly if you're going to use it effectively. "
Other options include attending conferences and seminars, something CUs aren't lacking.
"Everyone knows that the pay scale at credit union is less than at banks. But people in the credit union business are always looking form something unique because they know their members are unique," he observed. "The education opportunities in the credit union world are much more profound."
"I met the wife of a community banker who was attending [continuing education], and I asked her if he liked it," he continued. "She said, 'Yeah, he's really enjoying it, but he's really worried about his job.' With all of these bank mergers, bank employees are afraid that if they're out of the office for a week or two people will realize they can get along with them just fine and that he's not needed."
And that's just one more thing to add to the credit union difference. "It may be that our only sustainable competitive advantage we have is to learn faster than our competition," Johnson commented.
