MADISON, Wis. — Will 2014 be the year the rubber meets the road when it comes to mortgage rules and regulation?
Jon Bundy, regulatory compliance manager for CUNA Mutual Group, thinks so. He told Credit Union Journal any discussion of lending during the next 12 months has to start with the wide-ranging impact of the many new rules that have been laid down in the wake of the Dodd-Frank Act.
"How credit unions lend is very much affected by regulations, especially mortgages," he said. "A lot of credit unions will have to decide if they will do qualified mortgages, and if they will do mortgages that fall outside of QM."
Bundy was just one of several industry insiders and experts interviewed for CU Journal's Year Ahead Special Report on lending. The consensus: mortgages will be the most closely watched loan category, not only because of regulations but also due to significant changes in the market.
According to Rick Seehausen, CEO of Denver-based LenderLive Network, which provides outsourced lending services, "The big question that remains unanswered is, who will dominate the purchase market?"
For the first time since 2000, Seehausen noted, the U.S. mortgage market is entering a purchase market. The last time this happened, he said, mortgage brokers dominated the market-but most of them are gone.
"We think the purchase market demands a local presence, which we believe gives credit unions an advantage," Seehausen said. "But credit unions will have to retool. They usually use consumer direct, call center models, as opposed to feet-on-the-street loan officers. They will have to rethink their sales strategy to truly penetrate the purchase market."
Keith Troup, VP of lending and chief lending officer for $1.8 billion Washington State Employees CU, Olympia, Wash., and a member of the executive committee of the CUNA Lending Council, said with all the regulatory changes-many of which go into effect Jan. 10-there is a great deal of uncertainty.
"With longer-term rates inching up we will see increases in home equity lending and a decrease in refinancings, since those tend to move in an inverse manner," he said.
The home equity trend "looks better" as home prices have at least bottomed out if not come up a little, agreed CUNA Mutual Group's Bundy.
"It will be a market-by-market issue, and it also depends on the economy," Bundy said.
Penalties For Non-Compliance
LenderLive's Seehausen noted the penalties for non-compliance continue to rise.
With the CFPB rules coming into effect in January, he said institutions are "scrambling" because rule-making did not happen until recently.
"The cost of compliance also continues to rise," he said. "We have had to put 20 people in compliance and work with four law firms. Imagine being a small credit union, having to understand and manage all the regulations. Many may opt to get out of the business, or they will have to turn to outsourcing options such as our company. Service providers will be leaned on heavily to help with compliance."
Because of the pressures on mortgages, the consensus was many CUs will place a greater emphasis on auto lending.
Bob Child, chief of staff for CU Direct, Ontario, Calif., said the company is "very excited" that credit union lending is at "record levels" in 2013.
"Not only is it at pre-recession levels, we are seeing credit unions take market share from banks," he said.
CU Direct's message for 2014 is credit unions need to connect two concepts: consumers see auto buying and financing as one event.
"We see it over and over again in focus groups," he reported. "Consumers do not do research on lending, but they do a lot of research on particular cars. They do not separate lending and buying, they just want to pay $200 per month for the red Taurus."
What this means, Child explained, is that credit unions need to be available to help people with the shopping experience and get them pre-approved.
"They cannot wait until the back end, or they are completely at the mercy of the dealer," he said. "If the dealer is in a Wells Fargo mood that day, the most loyal member might be taking their loan to Wells Fargo."
CU Direct is seeing increased competition for auto loans, Child noted, as banks, credit unions and finance companies all are trying to fill a void left by mortgages. He said the biggest competition is in the prime and superprime segments.
"Credit unions are dropping their interest rates, and therefore shrinking their margins, to stay in the market," he said. "Credit unions are increasing their interest rates in the non-prime market and are taking on a little more risk. They remain extremely conservative, but they are making some loans they would not have made during the recession."
According to Child, credit unions can have great interest rates, and great relationships with their members, but they still need to have great relationships with dealers, because when consumers walk in, the dealer has a great influence on where the loan is placed.
"The new CFPB rules on loan mark-ups are a great concern to dealers," he said. "Because of this, credit unions are more favorably looked upon because, unlike banks, they do not play the big mark-up game. Banks have been pointing fingers at the dealers, which has made the dealers unhappy."
Not Just Cars
WSECU's Troup reported sales are up in autos, plus RVs, a category in which his credit union includes motorhomes, campers, boats and motorcycles. He said WSECU is an "active" lender in all of those areas.
"Many people want car loans, but in the other space there is not as much competition," he said.
Troup said CUs need to have competitive, flexible products, and timely funding of loans, if they want to compete.
"Let the dealers make money-set up a win-win for the dealer and the credit union," he advised. "We set rates and dealer flats that are competitive. We pay dealers a 2% flat fee on car loans and 1% on RV loans."
CUNA Mutual Group's Bundy said some CUs in Florida are seeing an increase in interest in boat loans-which he noted only happens when people feel good about the economy.
"The margins on those types of loans are a little bit better, so if credit unions are lucky enough to be in a market that has those types of loans they should go after them," he said.
The challenge of auto lending is "there is no silver bullet," Bundy continued. He said CUs need to compete on convenience and speed.
"In 2014 credit unions will look to electronic delivery, apps, remote signatures, anything that improves the experience and makes it seamless," he said. "There is not much room to give on interest rates."
Impact of Technology
In the automobile lending space there is a "necessity for technology," said WSECU's Troup. His credit union uses Auto Smart by CUDL in recognition that many consumers are using mobile devices to do their research.
WSECU plans to allow members to apply for an auto loan from a mobile device by the end of 2014, he said.
"In 2013 electronic signatures in the consumer loan process did well for us," he said. "For members that apply via remote channels, about 20% of our consumer loans are closed via electronic signatures."
In 2014, WSECU will be adding iPads in its branches to expand the use of electronic signatures even in face-to-face transactions, Troup continued. He said the CU's goal is by the end of the year for 90% to 95% of loans to close via electronic signatures.
"This will save paper and money, and we believe it will make closing a better experience that is faster and more convenient," he said. "We also think it will improve our funding ratio by getting documents to members faster and let them close by their own means."
Technology is "on a continuum," assessed CUNA Mutual Group's Bundy. He noted electronic signatures are not "new" any more, but he predicted there will be a lot more adoption of e-sig technology in 2014.
"Another big change is more credit unions are using auto-decisioning engines," he said. "Credit unions have to keep up with the technology that is available, otherwise they will have trouble. It affects member service and gives a competitive edge when a credit union is in hot competition on rates."
CU Direct's Child urged credit unions to have a mobile website so members can obtain pre-approval for a loan while they are out car shopping.
"Look for trigger events, such as a job change, adding a child to the family or when an existing car hits six years old, and start e-mailing people at that point," he said. "Have a payment calculator on the website. Make the interest rate accessible to the market. Link to auto sites that list cars. Link with dealers to make sales promotions on the credit union's website."
Unsecured Loans
Troup said one loan class that does not get much talk but has been very good for WSECU is unsecured lending. He said the CU have grown its unsecured portfolio 40% to 50% from 2012 to 2013 as demand increases for debt consolidation.
"We anticipate that demand will continue into 2014 and beyond," he said.
Another type of unsecured lending is Visa, Troup continued. While the Visa space is "very, very competitive right now," WSECU grew its product 4% to 5% in 2013.
Because of the level of competition, Troup said it had to become "more creative" to grow balances. The balance transfer hook now is 0% for 18 months, which he described as "tough to compete with."
"Most credit unions are apprehensive about entering the 0% space to acquire balances," he said. "The lowest rate we offered was 1.9% for approximately nine months."
Much of WSECU's loan growth has been driven by recapturing loans from other financial institutions. It works with a partner, TransUnion, and its marketing messages are "very customized" to the member, Troup reported.
"We do segmented, specific marketing rather than just a blast letting people know we have loans available. This is much more appealing to our members."
Asset Quality Improvement Will Flatten
At most CUs delinquencies and charge-offs have come down four years in a row. According to WSECU's Troup, the improvement will flatten out in 2014 and later possibly go back up a little.
"Certainly there will not be another significant decrease in delinquencies and charge-offs next year," he said. "Once things flatten out, there is not a lot of room to go but up. We have recovered from the recession but are approaching historic levels. Credit union delinquency and charge-off rates usually are half of other financial institutions."
