Credit union lending has been on the rise for years, but data from a recent study shows that the strong pace for loan growth could come to a screeching halt.
According to the Filene Research Institute’s 2016 “Confidence in Borrowing” survey, a whopping 93% of adults say they don’t plan to borrow in the next six months. Of the more than 1,000 consumers Filene surveyed, more than 80% of respondents cited high levels of debt as one of the major factors holding them back from further borrowing.
According to Hope Jensen Schau, one of the authors of the study and a professor of marketing at the University of Arizona, consumers who are reluctant to borrow aren’t just bad news for credit unions – the trend could spell trouble for that national economy.
“Consumer borrowing is an important macro-economic measure because it parallels consumer spending and serves as an important measure of consumer confidence and health,” said Schau. “Loan growth is also an important driver of sustainability for credit unions that currently depend on consumer lending and mortgage lending for the majority of their earnings.”
Indeed, consumer debt has caused significant stress, the report points out, with spiraling costs related to health care, credit cards and student loans generating the most anxiety. Interestingly, debt related to mortgages, auto loans and entertainment were least likely to produce stress, the report noted.
And there is a ton of debt out there. According to data compiled by NerdWallet for the third quarter of 2016, personal credit card debt now totals $747, while auto loan debt has risen to $1.14 trillion, student loan debt to $1.28 trillion and mortgage debt to $8.35 trillion.
But with unemployment finally back down below 5% (4.8% as of January 2017), more consumers now have the funds to repay loans; so why is confidence so low?
According to Ignacio Luri, a doctoral candidate at U of A and a coauthor of the study with Schau, a variety of factors are in play, including regional differences in consumer confidence driven by unemployment and other economic indicators. Regardless, baseline confidence remains low nationwide, he said.
“Of course, macro-economic indicators are not as good at predicting confidence as personal variables, including accumulated savings or even the subjective perception of the economy,” he explained.
While Luri said it is “completely understandable” that many debt-burdened Americans would be unwilling to take one even more debt, he noted that one of the major surprises within the study was how strongly current debt-held figures correlated with unwillingness to borrow – much more so than other demographic or lifestyle variables.
“For example, less intuitive was our finding that higher-income people were less willing to take on more debt than lower income people,” he said. “The reason behind it seems to be that higher- income respondents had more debt accumulated, and that made them reject the idea of additional loans.”
An opening for CUs?
In spite of all this, the study’s authors contend that there could still be an opening for credit unions, provided they market their loan products more effectively.
“Very few people are completely closed to debt, and that is an opportunity for credit unions,” said Luri, using a phrase from the survey describing those who currently have no debt and are unwilling to consider taking out future debt.
“It is… true that attitudes towards debt were overall negative and… a majority of people would avoid incurring in debt if possible,” he said. “However, very few people are ‘closed’ to the idea [of borrowing money] when they feel it's necessary.”
But credit unions, Luri cautioned, should seek to “understand more about the reasons for when and how consumers feel confident, and try to make borrowing a less stressful topic for their members.”
Issa E. Stephan, president and CEO of Freehold, N.J.-based First Financial FCU, noted that American consumers tend to be “cash-flow driven,” meaning that “If the consumer is working a full-time job and earning a market-price wage, he or she is willing to take additional debt to replace an aging car,” he observed.
And this is exactly an opportunity for credit unions, Luri asserted.
“Credit unions are in a great position because they are much closer – in every sense – to their clients,” he stated. “They are well armed to address these concerns with customized services and personal services.”
Stephan suggested that credit unions should “target their members [who have] debt and offer them refinancing opportunities at lower rates and better terms.”
David Lucas, CEO at Stamford, Conn.-based Stamford FCU characterized the current personal debt levels as a “great concern,” adding that recent graduates saddled with large amounts of student debt are inhibited from borrowing from financial institutions - traditionally a key element of early adulthood once young consumers finish their education, enter the workforce and begin getting married and buying cars and houses.
Lucas believes that credit unions need to develop “creative products, market them aggressively and work to meet the real needs of their members.” The economic backdrop, he added, is fairly conducive to further growth.
“[Interest] rates are at near historic lows and are projected to increase again during 2017,” he stated. “If President Trump keeps his campaign promise to lower corporate tax rates to 15%, this will have a very positive effect on the economy and lead to higher interest rates. Tariffs on the other hand will have a negative effect on the economy.”
Punished twice?
But offering lower rates may not be the answer.
According to David Tuyo, senior EVP at Pembroke Pines, Fla.-based Power Financial CU, institutions that choose to offer lower rates, then their positioning of the balance sheet for rising rates will fail to be rewarded – resulting in being punished twice.
“Credit unions accept lower rates of return when positioning themselves on the shorter end of the yield curve,” he explained. “Credit unions have done this – as seen in industry net long term asset ratios – in anticipation of higher rates and margin expansion. If those higher rates are not realized, then margins will continue to stagnate or possibly compress further. That story doesn't end well without forcing elevated levels of fees on members in order to make up for the shortfall. Thus… credit unions should market themselves more aggressively, more creatively, and more purposefully.”
Of course, credit unions have already seen healthy growth in loan volumes in recent years. Indeed, for federally insured credit unions, loan volume outstanding have surged by 10.1% to $847.1 billion at the end of the third quarter of 2016.
So, could credit unions keep this pace up?
Stephan pointed out that loan growth at credit unions may have peaked.
“I think 2017 will be a healthy lending year with volume just a bit lower than 2016,” he said.
Lucas offered a distinction between bigger credit unions and their smaller peers.
“Very large credit unions are growing loans very quickly but the large majority of smaller credit unions have difficulty growing loans as they are not able to achieve economies of scale and therefore not be as aggressive with their loan pricing.” he cautioned.
And, added Luri, loan volume is only one indicator of consumer borrowing – but there is good news for CUs on that front.
“Our data also suggests that debt is often seen as unavoidable, and money borrowed does not tell the whole story about consumers' real attitudes towards financial instruments or institutions,” he said.
Consumer spending, Luri added, is of “crucial importance” for any economy, but the 2008 financial crisis proved the “dangers of overspending.”
