Considering A New Model For Consumer Loan Management
Now that we are deep into 2003, we can look back on the past year and assess what lessons should be learned.
Consumer reaction throughout the economic downturn of 2002 was significantly different than in past downturns, further eroding the notion that a single economic model can predict consumer behavior. Most economists would agree that 2002 economic indicators were contradictory to consumer behavior. Most contrary was that amid continued corporate layoffs and rising unemployment, consumer spending continued to keep the economy afloat.
Throughout most of 2002, consumers continued to take on additional credit card debt, purchase new autos and finance new homes. While loan growth rates were not equal to the double-digit growth rates of 2000, they held steady throughout the year. Only as we entered the fourth quarter of 2002 did we begin to see a slow down in consumer spending.
According to NCUA's annual report, federally insured credit unions increased their lending activity by 6.27% or $20.2 billion dollars for the full year. At the same time, seasonally adjusted Federal Reserve figures showed an increase in outstanding consumer credit of $58 billion from December 2001 through December 2002. Though growth has slowed, consumers are continuing to spend. In the second quarter, the Federal Reserve recorded a 3% annual increase in total consumer credit.
As the economy continues to sort itself out in 2003, credit union executives should consider a new business model for consumer loan management. The new model suggests that being prepared to operate in any economic environment is a better alternative than trying to predict the ebbs and flows of economic cycles. When credit unions are prepared for any economic environment, they can simply shift with the curve instead of reacting after the fact.
Getting Prepared...Examine Your Lending Mission
In the process of becoming prepared, credit unions may need to re-visit their lending mission. The two biggest questions to address in your lending mission include: who will you serve and how you will serve them.
As your lending mission changes, those changes should be reflected in the philosophy of the organization through policies, procedures and staff training. They should also be visible to members through up-to-date product and service delivery channels and through clear communication.
Current debt levels, use of credit, and recurring economic downcycles make it unrealistic to think that members will maintain a consistent credit quality throughout their lives. If credit unions want to be their members' "lifetime" financial institution, then lending programs as well as policies and procedures should take into consideration member credit shifts.
Create a Lending Profile
Your lending profile is the ideal picture of your lending mission. Your profile will determine what programs you will offer and how they will be delivered. Once this profile is clear, you can begin to evaluate internal and external resources that will help you to make this profile a reality.
Determining Your Loan Portfolio Mix and Keeping it Flexible
This function is most likely part of your Asset Liability Management (ALM) process. However, as you review and adjust your lending mission, you will also need to adjust your lending mix. You can establish your lending mix for the short-term, but be sure your lending programs allow you to remain flexible so that you are ready and able to adjust the mix as necessary. Your lending mix should address percentages for specific products, taking into consideration prime and non-prime as well as delivery channels.
This amount of detail and focus on your lending mix will also assist your marketing efforts. With this information, the marketing department can establish targeted messages for different markets and promote the desired delivery channels.
Since we can't accurately predict the future economic environment, our best course of action is to be prepared. In the process of preparation, we might find better tools that support a broader mission and better meet the borrowing needs of our members for a lifetime.
Robert E. Sutton is the Chairman and CEO of Centrix Financial, Englewood, Colo. Mr. Sutton can be contacted at (303) 224-9001.