Appropriate Risk & Pricing

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MADISON, Wis.-In 2011, credit unions will need to prudently take more lending risks and price that risk appropriately.

CUNA Mutual Group Chief Economist Dave Colby believes that strategy may be credit unions' biggest growth opportunity, especially with most lenders fighting for perfect paper, which is not providing any real yield spread.

"I know a number of credit unions that do an excellent job of taking lending risks," Colby told Credit Union Journal. "There are consumers who can clearly afford to pay but maybe have a few scars on their credit history and need the money. Credit unions need to work with them, charge them a fair rate that prices in that risk, and grow loans."

The approach takes more infrastructure, Colby said. "If any of these members are 30 minutes late, you give them a call. You don't let these loans get delinquent for more than a day. And costs for these efforts and infrastructure should be in the loan prices."

CUs, too, will need to be very diligent and nimble with deposit pricing, paying attention to market rates and shifts. Colby believes due to the fact consumers are now paying much closer attention to their own balance sheets, credit unions this year will not be able to rely on "lazy money"-such as members not paying attention to an extra $5,000 in a share draft account. Colby also noted that with the tendency for many CUs to cut rates to discourage deposits, it may lead to a lot of hot money exiting when rates improve. "There is a lot of money sitting on the sidelines. I think market pricing is critical."

Colby suggested that this year CUs should not invest in membership drives, and instead invest in offering existing members 10 BPs more on deposits if an extra service is taken.

If deposit pricing leads to a member compliant, MSRs should be prepared to cross-sell and steal a loan away from a competitor. "They should tell individuals that the credit union will use the same tough rate environment that is hurting deposits to reduce their loan rate, giving them more money back each month," Colby shared.

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