Looking for a Lending Rebound

Members are paying down debt at unprecedented rates, wreaking havoc on CU loan portfolios.

March 31, 2011

In September 2009, Ent Federal Credit Union in Colorado Springs entered the lending equivalent of the Bermuda Triangle: Members were paying down debt at unprecedented rates, few took out new loans, and automakers’ finance companies re-emerged with offers of below-market financing.

As a result, loan growth hit “rock bottom,” says Bill Vogeney, senior vice president/chief lending officer for the $3 billion asset credit union and vice chair of the CUNA Lending Council. “We were losing loan balances to the tune of 1% per month,” he says. “What we thought was a blip on the screen was a dramatic change in pricing and peoples’ borrowing behavior.”

Lending rebound


Take advantage of the few opportunities today’s economy offers, including low rates and refinancing opportunities.

•  Implementing a sales and service culture can help CUs cross-sell products and services, and increase market share among members.

•  Board focus: If your CU’s loan portfolio is shrinking, you’re not alone. Nationally, CU loans outstanding declined in 2010 for the first time in 30 years.

At its low point in February 2010, Ent Federal entered crisis mode, holding brainstorming sessions to figure out how to rebuild its shrinking loan portfolio, Vogeney says. “We told staff, ‘we need to pull out of this and make some loans. Consumers aren’t borrowing, so let’s come up with ideas that match the economic times and the fact that people are paying down debt, refinancing, and saving as much money as they can.’ That’s what we tried to capitalize on.”

Ent Federal’s lending challenges reflect those of the credit union movement as a whole. The Credit Union National Association (CUNA) reports credit union loans outstanding declined 1.2% in 2010—the first time that has happened since 1980.

Credit unions’ share of the consumer credit market was unchanged during 2010, indicating the total market is shrinking, notes Bill Hampel, CUNA’s senior vice president of research and policy analysis/chief economist. And total credit union savings have increased only 3.3% through August, suggesting that member households are devoting excess funds to paying off loans.

Most of Ent Federal’s loan decline came from the consumer side—home equity loans, including lines of credit, and direct and indirect used-auto loans. So the credit union focused on its lone bright spot: first mortgages.

Next: ‘Mortgage Freedom’

‘Mortgage Freedom’

Vogeney found inspiration from a session he attended during the CUNA Lending Council’s 2009 annual conference. The speaker, Filene Research Institute Scholar Bob Hoel, noted that although 2009 was “the mother of all refinancing booms,” it excluded a segment of the population: consumers with relatively short-term loans (10 to 15 years) and low balances ($100,000 to $125,000) remaining on their mortgages for whom the cost of refinancing is prohibitive.

Other than the standard 1% origination fee, closing costs—title insurance, appraisals, and processing fees—don’t vary much by loan size, Vogeney explains. “Those costs, when amortized over the length of the loan, make it a more difficult decision to refinance for shorter-term, smaller loans.”

Enter Ent Federal’s “mortgage freedom” loan—a fixed-rate, 10-year mortgage up to $125,000 used to refinance a conventional first mortgage. The credit union finances up to 75% of the home’s assessed value and charges no origination or appraisal fees, or other closing costs, and doesn’t require title insurance.

It was a huge success, Vogeney reports. “April through July were four of our best months ever. We turned a loan portfolio that was declining at a rate of 12% to 15% per year to one with 12% to 15% growth. It was so successful we had to turn off the advertising. We had more loans than we could handle.”

Due to high demand, it takes eight to 10 weeks to process conventional first mortgages. So the credit union often refers members to the home equity side.

“We can close a home equity loan, including the mortgage freedom loans, in two weeks,” Vogeney says. “Members pay a little higher rate—in most cases, a quarter or three-eighths of one percent—but there’s no origination or appraisal fee. We started directing shorter-term first mortgage requests to the home equity side and we’ve had strong results.”

Success, however, has its price. The continued high demand is taking its toll on mortgage staff. “They’re in month 24 of the refinance boom, and we’re struggling with employee morale,” Vogeney says. “These employees are beat up. They’ve worked extremely hard, and they’re now my main concern, even more so than member satisfaction.”

Ent Federal bolstered its harried mortgage staff with employees from its home equity department, which wasn’t busy after the initial rush of mortgage freedom loans in the spring and early summer.

Auto lending has improved, too, due to the credit union’s “used as new financing.” Members who refinance a used vehicle from another lender get Ent Federal’s new-car loan rate.

Most of these loans are at least 12 months old, Vogeney says, which reduces the loan-to-value and, therefore, risk. “Plus, there are some defaults on new- auto loans within the first 12 months because some people buy more car than they can afford. So we’re weeding out people who have problems right off the bat.”

Ent Federal focuses on used-auto loans because it can’t compete with captive auto lenders’ below-market financing.

Vogeney finds it doesn’t take a big reduction in payment to convince members to refinance their auto loans. “The good thing about a recession—and I say this only semi-jokingly—is that you typically have a low-rate environment. If people aren’t borrowing, they’ll certainly want to refinance and take advantage of today’s lower rates. If you can refinance an auto loan and lower the payment by $25 per month, you’ll have one happy member. That’s easy to do in this rate environment.”

Next: A work force revival

A work force revival

Another way to keep members happy—and reap the financial rewards of doing so—is to ferret out members’ needs and work to exceed them.

Creating a member-focused sales and service culture has helped 1st MidAmerica Credit Union, Bethalto, Ill., boost assets, loans, and deposits. Plus, the effort has prompted a work force revival as employees embrace a new way to work.

Creating this culture required employees to adapt to a new approach to member service. To guide the process, the $430 million asset credit union used organization-wide training and complementary materials that gave employees a common language and shared references.

Employees were introduced to the change process in January 2009 with training based on the book “Who Moved My Cheese?” by Spencer Johnson. The credit union also developed a product manual and a “Team Leader Coaching Guide” to provide a foundation for sales and service tools.

Managers began holding bi-weekly coaching meetings with employees to provide information about products and services, and tips for interacting with members.

Also playing an important role were new tools such as:
• Referral goals and incentives, which reward employees who reach goals with cash, paid time off, or gift cards;
• Cross-sell pop-ups, delivered via the core computer system, that remind employees of marketing promotions, suggest products and services to cross-sell, and offer scripts to initiate conversations; and
 A monthly newsletter with articles and success stories.

During the 12 months following the culture change, 1st MidAmerica grew membership from 38,970 to 41,343, increased products per household from 3.49 to 3.59, grew deposits 12.69% (vs. a goal of 9.84%), and increased loans 8.31% (exceeding its 7.38% goal).

The credit union won a 2010 CUNA Operations, Sales & Service Council Best Practices Award for its efforts.

Next: What to expect in 2011

What to expect in 2011

Vogeney admits he’s concerned about what 2011 will bring on the lending front. He doesn’t think there will be much more demand for mortgage refinancings, and predicts consumer loan growth will hover around 5% to 6%.

“The mortgage environment is as unpredictable as I’ve ever seen it,” Vogeney says. Ent Federal budgeted for a $150 million decline in its first mortgage portfolio and a 30 basis point reduction in its 2011 net interest margin.

“Instead of making and holding mortgages at 4.5%, we may have to sell them and reinvest the money at 1%,” he says. “We can’t make enough consumer loans to eat up that $150 million decline. That’s our big challenge.”

On the bright side, Vogeney believes there will be an uptick in new- and used-auto loans in 2011 due to pent-up consumer demand and a slowly improving job outlook.

And he sees “tremendous potential” for unsecured personal loans and credit cards due to large issuers’ recent losses and new Credit Card Accountability, Responsibility, and Disclosure (CARD) Act requirements.

“Credit card issuers will be more selective in their low-rate pricing offers,” he says. “There’s a tremendous opportunity for credit unions to get back in that business or offer a personal line of credit with reasonable rates, terms, and fees.”

Above all, credit unions must remember one thing: There’s no crying in lending.

“Don’t bemoan the fact that the economy isn’t good and people are paying off debt and not taking on new loans,” Vogeney advises. “Look at the bright side: We have historically low interest rates, and members are refinancing everything they can. If credit unions aren’t reaching out to members and trying to earn and keep that business, they’ll continue to have problems.”