The phenomenal increase in LOAN growth at credit unions appears to be great news—on paper.
Indeed, loans issued by federally insured credit unions climbed handsomely in volume across the board in all categories—reaching an aggregate $787 billion in the fourth quarter of 2015. That's a 10.5% spike from the previous year, according to NCUA.
And in a recent economic forecast, CUNA projected another 9% growth in credit union loan balances in 2016.
But could there be a dark side to such unprecedented growth?
Higher loan volumes can lead to even higher compliance costs for some CUs that are already beleaguered by a host of regulations. Other pressures include the need to hire additional employees and the installation of pricey technology to handle the increased volumes, among other things.
"Lending is probably the most paper-intensive of all credit union processes, soaking up precious staff resources, duplicating tasks and wasting money on managing and storing paper," said Alissa Fry-Harris, the director of marketing at Bluepoint Solutions. "Credit unions are definitely at a competitive disadvantage when the entire process creates delays and extra effort for their members."
Keith Troup, EVP and COO at Y-12 FCU, a $930 million institution based in Oak Ridge, Tenn., and a member of the CUNA Council executive committee, cautions that growth for growth's sake alone is not good.
"Growth needs to be planned and thought through and is usually part of a larger overall strategy," Troup advised. "Growth needs to be done in a manner that benefits the member-owners and the cooperative. This means having good people, processes and technology in place throughout the entire experience."
Fry-Harris said CUs are well-placed to capitalize on this surge in loan volume if they can tame the costs of origination. "In general, they have made great improvements in their operational efficiency," she noted
But for many CUs, lending remains mired in fragmented workflows, manual steps, and technology that's not well-integrated.
One CU industry insider, however, said he sees no downside to high loan volumes.
"Complaining about too much loan growth is like complaining about losing the remote control and having to stand up to change the channel," said Bob Child, COO of loan CUSO CU Direct. "There are no real drawbacks of having 'too much loan growth,' but there is an ongoing need to improve efficiency to better handle [that] growth. And if a credit union hits a comfortable loan-to- share ratio, there are plenty of borrowing/participation/sale options. This is a good 'problem' to have."
Chris Oldag, chief lending officer and VP at $1.1 billion Pacific Service CU, Concord, Calif., and a member of the CUNA Lending Council executive committee, points out CUs that have more demand than their capacity to process loan requests have several options available to them to handle the overflow.
For example, he said, they can outsource credit support to one of the "24x7" lending centers that provide after-hours support.
"The ability to capture and serve member borrowing needs is critical and most credit unions with heavy demand simply re-allocate resources internally to handle the spike in activity," he said.
Bandwidth Blues
More loans would also means more underwriting—which could impose more pressure on bandwidth to process such underwriting quickly, accurately and efficiently.
Fry-Harris generally agrees with the assessment, but cautions that the bigger issue is "moving the loan along smoothly and efficiently" from application to close.
"There's technology to review most of the elements of a loan applicant's qualifications, but what's less common is using technology to automate the entire workflow," she explained. "So that each step, for example, automatically queues up the next step in the review process. That's the kind of automation that will remove delays for members, optimize staff efficiency, and even free the individual steps from being tied to specific locations and times of day."
Oldag counters that though more loans could place extra demands on bandwidth, that's never an excuse for loan officers to make rushed credit decisions.
"In almost every case, the members understand a reasonable response that we have a backlog and will get back to you by today/tomorrow," he said. "In the relatively few dramatic emergencies we can rush anything that has to get done [as soon as possible], but they are few and far in between."
Oldag reiterated that many CUs can also outsource such decisions to back-up service providers that will approve the obviously strong loan applications, thereby ensuring great service.
But with advances in technology, Troup counters, it is possible to automate many low-risk loan decisions, freeing up staff time to review loan applications.
"Some credit unions choose to also use the technology to 'auto-deny' loan applications that do not meet their risk criteria in significant ways," he said. "This leaves less applications for a human being to make a loan decision on."
More Money, More Troubles
Another potential downside to rising loan volumes is the possibility of higher delinquency rates and ensuing collection issues.
Oldag said that a "well-implemented growth strategy" with concentration limits by both loan type and limits by credit tier for every asset type means there shouldn't be any real issues or surprises.
"More volume means there is a greater effort needed to ensure your policies are being followed and [that] you have effective measurement of the risk profile you are creating in place to measure credit score migration, [and] growth by each sector in your portfolio," he said. "[Also, you must ensure that you] have effective collection and loan servicing controls in place to take early action when any sign of deterioration becomes evident."
Initially, Oldag noted, growth in the loan portfolio can hide issues like delinquencies when just viewing them as a percentage—but credit unions will easily be able to detect if there is something "off course" very early and take corrective measures.
Troup conceded that without proper planning and monitoring "bad outcomes" are possible in all areas. "Planning for the growth is key to successful short/long term growth," he said. "As a credit union, you need to decide what level of risk you are willing to take. A credit union must constantly be monitoring all aspects of its loan portfolio/programs to make sure that the goals are being achieved."
Fry-Harris noted that automating parts of the loan process doesn't necessarily result in overall improvement, and can even create new bottlenecks. For example, she cited, online loan applications are convenient for members and speed up the initial stage of a loan, but they don't remove paper from the institution if the application still has to be printed, signed, transported or scanned and sent to the next review step, and a duplicate stored "just in case." "The most successfully integrated systems begin with extremely thorough up-front analysis of the existing loan work-flow, and include regular assessments and adaptations," she said, adding that a "certain amount of refocusing" of strategic priorities is needed, which requires top-level commitment to change.
CUs are generally conservative and have solid controls in place for collections and delinquencies, according to Child. "The greater concern when it comes to collections in a growth environment is under-staffing," he said. "If you make more loans, you'll likely need more collectors, just like you'll need more loan officers, processors, etc. This can be easy to overlook though, because collections won't feel the pain for 12 to18 months."
Trouble-Shooting
There are a number of steps a credit union can take to alleviate any problems that may arise from "too much" loan volume growth.
Oldag suggests CUs impose "effective staff training" about the essential fundamentals of lending—and these protocols should be reviewed regularly, while maintaining thorough policies and procedures, also ensuring that effective line of business reporting is available for board and management which outline all areas of risk—well beyond just delinquency rates and charge-off levels.
Loan products should also be priced effectively, Oldag cautioned, to be certain the CU is being paid for the amount of risk being taken. Plus, they should make certain to establish concentration limits by asset type and credit tier for each major category measured as a percentage of assets and capital.
"In addition, be certain to update the portfolio risk with a thorough analysis to reveal credit score migration and collateral values," he advised. "Credit unions learned through the last economic downturn that loose credit controls on top of falling collateral values and a weak job market can wound even a strong credit union."
Fry-Harris said she believes loan processing comprises the "next frontier" in automation. "For credit unions that haven't begun to replace their legacy systems and outdated processes, the need is urgent," she warned.
Child warned of the need to better leverage existing technology. "For example, speed to decision is not a technology issue," he said. "Decision engines are amazingly robust nowadays, and can, for the most part, mimic a human decision…but at a far lower cost."
