A Lending Conundrum

CUs struggle to balance members’ lending needs with increasing compliance requirements.

March 1, 2011

Credit unions are trying to achieve a balance between lending and compliance. While many have plenty of capital on hand to lend, they must make sure they comply with lending regulations, while keeping member service the top priority.

Upgrade infrastructure

Dave Fleming confirms he’s seen increased compliance workload in recent years. “But serving members’ needs is always paramount; it’s our reason for being here. We haven’t let it fall.”

With compliance, you don’t have a choice, says the president/CEO of $237 million asset Partners 1st Federal Credit Union, Fort Wayne, Ind. “You have to roll up your sleeves and get it done. Mortgage regulations are the ones we’ve probably had to contend with the most, and the age and flexibility of our software has been a factor.”

NCUA notifies credit unions months in advance of proposed regulations, and industry experts issue white papers and offer training, so his credit union is usually prepared to implement new regulations on time. “For major changes, we create task forces, and our compliance officer ensures we follow our timelines,” says Fleming.

The credit union’s capital ratio has increas­ed as the economy has improv­ed—and with the low-rate environment. But it remains cautious about certain types of loans. “We’re selling our fixed-rate first mortgages—especially the 30-year ones—to Fannie Mae, and we aren’t putting many new ones on the books,” says Fleming. “If we put a loan on the books at 4% and rates go up in a few years, we’re stuck.”

Auto loans have always been biggest for the credit union, and used-vehicle loans are still strong. But its market share in new-car loans has decreased. “The Big Three auto makers are making financing part of their deals, and it’s hard to compete with truly 0% financing,” he says.

Partners 1st Federal is upgrading infrastructure to improve efficiency, attract more loans, and better serve members. “From better computer systems, to better software and home banking, to staff training—that’s where we’re seeing the biggest reward,” says Fleming. “It’s age-old stuff—recognizing opportunities and asking for the business, with the help of computerized suggestions of what products to target.”

Be quick and nimble

University of Illinois Employees Credit Union, Champaign, has dealt with three primary issues over the past three years: the economy, lost jobs because the university lost state funding, and increased regulation.

“Our compliance officer and our functional managers and operations staff have spent an increasing amount of time on regulatory issues, but I don’t want it to be dominant,” says E.J. Donaghey, president/CEO. “We have to be quick and nimble to handle it, and work with business partners like CUNA Mutual Group to do so.”

The $260 million asset credit union has a history of focusing on operational issues, says Donaghey. “Focusing on regulatory requirements and anything that helped manage risk was very comfortable for management. Part of my role has been to balance that with member service.”

He’s calculating how much time employees spent in compliance training in 2010. “It has gone up, and I want to explain to the board that it will continue to be higher. If it goes up 5%, that’s 5% less time spent on sales or services, and focusing on growth. If that means we need more hands on deck, we’ll do it.”

The credit union’s capital decreased in 2008 with the NCUA corporate assessment, and as members saved more and divi­dend payouts increased. “We lowered our loan rates because we felt it was impor­tant to retain our top-five position in the market. That helped us stabilize capital,” he continues. “We were able to help members refinance loans they didn’t hold with us.” While capital volume has recovered, the credit union’s capital ratio is 8%, down from 10% in 2008.

In 2010, the credit union achieved 8% loan growth. “At a time when the economy was down,” he says, “we made a conscious effort to help members and restructure their debt.’”

‘Wring out’ waste

Randy M. Smith, president/CEO at Randolph-Brooks Federal Credit Union, Universal City, Texas, says lending regulations cause “a great deal of stress for our senior staff, auditors, and programmers. We get probably one or two new regulatory proposals a week to read and comment on.”

The $4.2 billion asset credit union is hiring a full-time mortgage lender to read, respond, track, and comply with pro­posals and regulations. It also added internal audit staff. “We’ve changed our audit process to ensure compliance,” Smith says. “We take a risk-based approach. New regulations get a lot of attention.” The credit union reviews older ones and assigns more audit time to high-risk areas and fewer hours to low-risk areas.

To help compensate for time and money spent on compliance, Randolph-Brooks Federal is assessing its entire lending process, using the Lean Six Sigma methodology. “We outline every step,” explains Smith, “to eliminate any steps that don’t add value to members or the credit union.” If you can do something with one phone call or piece of paper instead of two, he says, you “wring out” wasted effort.

Fortunately, Randolph-Brooks Federal’s region isn’t among the hardest hit by the recession. It was able to build capital even through the recession—from $314 million four years ago to about $507 million today. Its capital ratio has stayed steady at 12%.

Smith credits pricing and a diversified portfolio. “We’re about one-third con­sumer loans, one-third real estate loans, and one-third investments such as government bonds,” he says. “We teach new employees, from day one, to make all the good loans they can. If a member needs a loan, we try to make sure they get it, in spite of red tape. In terms of loan volumes, 2009 [$1.69 billion in loans] was our best year ever, and 2010 [$1.65 billion] was second-best.”

A lighter regulatory burden would make it easier, and Smith says it’s critically important for credit unions to frequently explain that to elected representatives.

“That’s the way regulators shape these rules, based on feedback from people like us,” he says. “We can sometimes point out when rules are unworkable.”