HARRISBURG, Penn.-With members paying down debt faster than expected and weak loan demand in the first four months of the year, Pennsylvania State Employees CU slashed auto and home equity rates-some in half-the result being loan volume has skyrocketed.
The $3.8-billion PSECU reversed a four-month skid in which loans had dropped by $39 million from the year-end total of $2.43 billion, and is now on pace now to exceed its 5% annual lending growth target. The credit union often originates 400 auto loans a day.
"If you look at the loan numbers before we made rate changes in mid-May, we had been averaging about 2,050 loans each week," said CEO Greg Smith. "The dollar total processed was roughly $40 million per week. Once we changed rates, loan volumes immediately started spiking. By June we were up to 2,800 to 2,900 loans per week with dollar totals in the $60-million range. That's nearly a 50% increase in dollars of loans processed."
In July, PSECU originated 7,300 auto loans, about one-third via indirect channels. In the first 12 days of August, the CU's net loan volume was already up $25 million over all of July. "In July we were up over June $30 million net for the month," Smith said. "It was like we threw a switch and the loans started coming in."
PSECU doesn't differentiate between new and used autos and does not risk price. Terms up to 24 months used to be 3.99% APR and a new three-year product is now 1.49%; 25 to 60 months used to be 3.99% and now 37- to 60-month loans go for 2.99%; 73 to 84 months remained the same (5.99%); as did 85 to 120 months (7.99%). (All rates are for loans that do not exceed 100% loan to value.)
Smith said the new three-year term has been very popular with members, especially for used car loans around $10,000. PSECU does not do much mortgage lending, Smith explained. "Some credit unions do it on real estate and then they expose themselves to interest rate risk. We are more of a consumer lender, we do it on large numbers of fairly small loans, credit card and car loans."
HELOC Volume Spikes
Home equity business also spiked when rates were cut. Loans below 80% loan-to-value for terms up to 60 months were cut to 3.99% from 5.49%, and for loans above 80% LTV rates fell to 4.49% from 5.99%. For 61 to 120 months the price for less than 80% LTV dropped to 4.74% from 6.74%, and above 80% the rate was adjusted to 5.24% from 7.24%.
PSCEU also enhanced its Visa balance transfer program that allowed members to bring over balances at no charge and get a 3.9% fixed rate on the balance for two years, after which the rate reverts back to the CU's standard 9.9% fixed Visa rate.
"We had about $30 million transferred in the first four months of the year and in May the board said to lower the rate for those who brought over their balances to 2.9% for the remainder of the two years." Since the rate was lowered, members have moved another $20 million into the program.
Despite the huge increase in loan volume, PSECU has not had to increase staff. "Our credit services staff have been able to scale up their processing with little in the way of additional overtime and no additional staff," said Smith.
PSECU is virtually branchless and relies on online loan applications. "Over 60% of consumer loans are processed online and the remainder are processed by our credit services call center staff. Members get lending decisions in 30 seconds or less and most loan documents are mailed the same day as the application."
Smith acknowledged the rate cuts will impact strong ROA numbers the CU has shown through July (1.38% prior to assessments). But he does not believe it will have a significant effect due to the fact increased volume will make up for lower margins. The credit union's capital stands at 9.48%.
Even Smith admitted he's surprised by the lending turnaround, especially serving state workers as Pennsylvania faces severe budget problems. "When we lowered the rates I did not expect to see the reaction we got. I thought members might be a little skittish about borrowing now. But they were waiting for us and they have come through."
