Credit unions providing assistance to members may feel the economic strain from what has become the second-longest government closure in U.S. history.
Since the partial government shutdown started on Dec. 22, credit unions nationwide have jumped at the chance to
But these programs may not be sustainable if the shutdown drags on, and credit unions could see delinquencies tick up.
“We’ve had several furloughs over the years and so, at this point we meet as a management team along with our CEO and we try to gauge what the media coverage is, and what will be the effects to our members as far as timeline, financial impact, and any relationships and any other financial obligations,” said Chad Evans, senior vice president of lending at Associated Credit Union in Norcross, Ga.
Navy Federal Credit Union in Vienna, Va., is one of the institutions offering help, including a no-interest loan and payroll assistance. The $95-billion asset institution has over 100,000 members impacted by the government shutdown who are eligible for payroll coverage, a service that advances the member a loan to cover their salary. The member later reimburses the credit union once the government re-opens and they start getting paid again.
To opt in, members must show proof that they were furloughed and also have a direct deposit account with the credit union. So far Navy Federal hasn’t advanced anyone money through this program because the first missed paycheck for government workers will be Friday, but 4,000 members have already enrolled. This the highest response rate that the institution has seen for this program.
“As the shutdown extends, we’re seeing more and more members who are eligible enrolling in our program,” said Tynika Wilson, senior vice president of debit card and funds services at Navy Federal. “We had thousands of people enrolled in this program and […] we are anticipating to see that enrollment increase because the next pay period will be impacted [for those] that are being furloughed.”
But there’s a cost to these types of programs, said Diego Zuluaga, a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives.
“Credit unions are not necessarily charging people for the entire risk of borrowing over a period of time, but it’s a question of keeping the business of [members],” Zuluaga explained.
Offering shutdown services is relatively low risk for credit unions since government workers are some of the strongest borrowers given that they're less vulnerable to economic cycles, Zuluaga continued. After all, the U.S. government won't collapse during a recession like a normal employer could.
As the shutdown continues with no end in sight, concerns about the potential long-term impact are becoming more pronounced. President Trump has threatened that the federal government could remain partially closed for "months or even years" if he does not receive $5.7 billion in funding to build a wall across the southern border of the U.S. Trump met with top congressional Democrats on Wednesday but called the effort "a total waste of time" on Twitter.
Now bleeding into its third week, the government shutdown has passed the 2013 closure to become the second longest ever. The longest shutdown spanned 21 days from December 1995 to January 1996.
The current shutdown is an economic burden, for one. Last week, the White House issued a statement claiming that for every two weeks that the government remains partially closed, gross domestic product declines by 0.1 percent.
Even though this metric may seem relatively marginal, its effects can proliferate when compounded across several months, said Jordan van Rijn, senior economist at the Credit Union National Association. But the 0.1 percent marker could also be within the margin of error.
Federal workers going without their salaries could also affect loans being repaid. CUNA identified 36 credit unions across Virginia, Maryland and the District of Columbia that served a total of 721,781 members in December 2013, which was the last big shutdown. The trade group noted that the delinquency rate for loans was 0.86 percent during the fourth quarter in 2013 for those institutions, lower than that of other credit unions analyzed.
But CUNA calculated that the 2013 shutdown led to a 0.13 percent rise in delinquencies for those institutions, relative to other credit unions, compared with other time frames with no closures. CUNA concluded that about 15 percent of delinquencies during 2013’s government closure were a result of the shutdown.
Other factors could have impacted these metrics. For one, credit unions were still recovering from the financial crisis and thus, delinquency rates were falling. Still, van Rijn notes that the trade group ran a statistical model that controls for trends and differences between credit unions, including asset size and technology.
The model also spanned a six-month period from October 2013 to March 2014 rather than just a quarter given that credit union loans become delinquent 60 days past their due date.
“Credit unions couldn’t [provide furlough assistance] indefinitely as the percentage of members taking out those products is particularly large,” van Rijn said. “I can imagine that credit unions could allow members to defer one or two payments, and could do these zero percent loans for a few months, but once it starts getting past that it will affect the credit union as well.”
