MADISON, Wis. — Credit unions can expect reasonably good lending conditions as the financial crisis gets a little further in the rear-view mirror during the second half of this year, but they will continue to be challenged by regulatory pressure.
Dave Colby, chief economist at CUNA Mutual Group, predicted vehicle lending will "continue to be excellent," although he cautioned auto loans no longer will see an accelerating growth rate because at some point the growth rate will peak.
"Credit unions will continue to be competitive with their short-term lending rates because rates will be low," Colby said. "Manufacturers are continuing to taper on subsidizing financing, which will help."
First mortgages are "really dominating" growth for CUs, he added, noting total first mortgages are up to 25% of credit union assets, while fixed-rate first mortgages now are 18% of assets.
"NCUA is concerned about risk from mortgages, but credit unions are making good income. I do not see a substantial change in interest rates in the second half, short or long," he said. "I do not see spread compression until the middle of 2015, when short-term rates will start to climb rapidly."
If credit unions can be as good at purchase mortgages as they have been with refis, Colby said they should do well. He said booking a 4% mortgage with a 25 basis point cost of funds is a better return than any current investment.
"Credit unions are in the business of managing risk, not avoiding it," he said. "A very important factor is retention strategy — how long to hold the mortgage before selling it to the secondary market.
"Credit unions should be sleeping with one eye open on rates," he added.
According to Colby, asset growth will be "very controlled" as credit unions continue to keep down deposit pricing. As long as loan-to-asset ratio remains low, he said there is "no need" to bring more dollars in the door — which also helps the capital ratio.
Although economists and regulators have been warning of rising interest rates coming soon for at least two years, Colby said these fears are overstated. He said the reported national unemployment rate is a "bogus number," and insisted the Fed is not looking solely at that rate as a trigger point.
"In talking with some of the [Fed] members and listening to their speeches, they are looking at a broader spread of employment data," said Colby. "I just do not see interest rates going up soon, because the rest of the world is even weaker than we are."
PSCU: Borrowing Will Rise
Chris Joy, director of credit consulting for PSCU's Advisors Plus, St. Petersburg, Fla., said the overall economic outlook is "positive" and consumers have "stopped deleveraging," which he predicted will translate into more spending or borrowing.
"The GDP forecasts are approximately 2.5% to 3%, which is stronger growth than we have been seeing," he said. "The credit bureaus are already seeing marked increases in auto lending and credit cards in the first quarter, even taking into account the harsh winter. Measures of credit quality have been very strong.
"We see this as a good climate for credit unions," he said. "It is not as good as we would like, but compared to the last six years it is a very positive outlook."
With the stronger economy and expected stronger borrowing, Joy said he thinks a "slow slide" to higher interest rates will start before the end of the year.
Dr. Brandi Stankovic, partner at Las Vegas-based credit union consultancy Mitchell, Stankovic & Associates, expects CUs to move down a tier in lending in the second half of the year. Because of all the regulatory pressure, she noted credit unions have been seeking only A and A+ paper.
"This excludes a lot of people because not that many have that type of credit," she said. "There is more risk in expanding who the credit union lends to, but they can increase risk and add a financial counseling component for a rate reduction opportunity."
As an example of the latter, Stankovic said $119 million C.A.H.P. Credit Union in Sacramento, Calif., which serves the California Highway Patrol, has done an excellent job of combining debt consolidation with financial literacy.
"C.A.H.P. does auto loans as a primary growth driver," she said.
HMDA Rule Coming Soon
Brian Godwin, senior compliance officer for PolicyWorks, is keeping a close eye on all things regulatory in the latter half of 2014.
Some good news, he said, comes from rules regarding annual privacy notices. Godwin does not believe the new regulations will cause harm to credit unions because they no longer have to provide a notice in certain situations under a proposed CFPB rule.
"Credit unions can make notices available on their websites or consumers can call a toll-free number to obtain a copy, he said, adding, "It is nice to see something that actually reduces the burden on credit unions."
On the other hand, a new Home Mortgage Disclosure Act rule is expected to be released "any time," Godwin warned.
"Dodd-Frank said the CFPB had to expand the scope of information gathered under HMDA. The driving force is the CFPB wants to be able to use the information to examine fair lending processes," he explained.
Consumers will be able to see this information, along with NCUA and state regulators, Godwin continued. He said this is a "nice" development for examiners, who will be able to do more without coming on site, and it is going to help in identifying discriminatory practices.
"Credit unions should expect to have to report the age of an applicant, points and fees charged, credit score used to make credit decision, the property value of the collateral and information on the loan originator," he said. "The latter would help determine if one loan originator is pricing mortgages unfairly."
The risk-based capital rule proposed by the NCUA currently comes with an 18-month implementation period. If that holds, Godwin expects it would have a "really significant" impact on credit unions in a number of areas.
"Hopefully, that will be delayed, but this could end up being the biggest compliance challenge this year as credit unions scramble to meet the capital requirements — if it is finalized as proposed."
According to Godwin, one significant impact of the RBC rule would be reducing the resources CUs set aside for compliance.
RESPA/Truth In Lending combined disclosures are due August 2015. Godwin said CUs that do mortgages will be "ramping up" to meet the new requirements in the second half of this year.
"There will be a lot of needed software changes and staff training," he said.
Alternative Lending Options
Brian Scott, VP of sales with The Members Group, Des Moines, Iowa, said one trend TMG is following is increasing numbers of alternative lending and alternative approvals. He said there are more lifestyle loans and loans for life events, such as weddings.
"As credit unions move away from auto loans or other traditional loans, they are looking for how else they can help the members," he said.
Some CUs are looking for ways to approve someone who traditionally would have been declined. One example is how to approve a recent immigrant who has no credit file. According to Scott, CUs are realizing they do not have to be "quite as conservative" as they have been in the past, as long as they have good metrics and risk-based pricing.
CUs are doing a better a better job with data analytics and statistical analysis, Scott said, and in the second half he expects to see credit unions "actually acting" on that data.
"We are seeing our clients be very laser focused in their marketing efforts," he reported. "Because of the push to big data, they can target fewer offers that are more specific, that will result in higher uptake."
He offered the example of a 100,000-member credit union that targeted 480 people for a credit card campaign and had an 18% response rate. The total number of responses was only 70, but it only had to pay to market to 480, so it was a success, Scott said.
"It shows credit unions can be specific. It shows credit unions are waking up to the fact they do not know their members as well as they think they do, especially those that switched to a community charter."
Another trend to watch: three CUs that partnered on a CUSO just for the three of them. Scott said this shows collaborating can work.
"Many credit unions would like to grow their credit card portfolios, so three or four in the same area could do a campaign together. They could share the same marketing person. It is an idea that is ready to pop."
Lending Differentiation
Chuck Fagan, president and CEO of the Credit Union Executives Society, said CUs are doing "pretty well" in differentiating themselves on lending, and will continue to do so.
"They are cutting out paperwork and making the process more efficient by making it electronic," he said. "They are very creative with different types of loans, including one credit union in California that is working with a symphony and doing instrument loans."
On the professional development side, Fagan said CUES has set up a number of programs in the second half and they are all selling out.
"This tells me credit unions are taking development seriously and investing in their people," he declared. "When it comes to competing with banks the look and feel of a branch or the way a phone center works is essentially the same, so it comes down to talent. When it comes down to winning members, talent will determine whether we win or not."
Innovating does not always have to mean "new things," it can be "new ways," he added.
"Credit unions recognize differentiation is something that has to occur," said Fagan.
