Post-Recession Lending

Loan delinquencies and charge-offs are declining. There appears to be a light at the end of the tunnel.

June 1, 2011


  • More than one-fourth of homeowners are still “underwater” on their mortgages.
  • Loan data varies greatly by region, and even within an individual CU’s field of membership.
  • Board focus: Minimize losses with conservative underwriting policies.


The recession just might be loosening its grip. Credit unions are easing loan loss provisions and reaching out to expand members’ access to loans. And they’re using the lessons learned in hard times to find new ways to balance risk and opportunities within their loan portfolios.

Nationwide, credit unions’ annual delinquency and charge-off rates tripled over the course of the recession, according to Mike Schenk, CUNA’s vice president of economics and statistics.

Continued weakness in housing markets will slow the economic recovery, he says, with more than 25% of homeowners still “underwater” because they owe more on their mortgages than their homes are currently worth.

But improvements in labor markets should help credit unions and their members.

“People’s ability to pay will improve going forward,” says Schenk. He expects delinquencies and charge-offs to decline gradually in 2011, although they’re likely to remain higher than normal at year-end.

Declining delinquencies should enable loan loss provisions to dramatically decrease in 2011 and 2012, Schenk says, creating approximately 40 basis points of improvement in credit unions’ bottom lines.

Regional variations

The recession’s impact varies significantly by region. Horizon Credit Union, Spokane, Wash., has experienced that variation even among its own membership, with concentrations in northern Idaho, and eastern and central Washington.

The recession hit hardest in rural northern Idaho, where unemployment was still in the double digits in early 2011, says Jeff Adams, president/CEO of the $425 million asset credit union. Homeowners there struggled to recover from a 40% fluctuation in real estate values.

In eastern Washington, unemployment in early 2011 remained above 9% as economic recovery trailed national trends. Central Washington proved the most stable, with minimal recessionary effects on employment.

Horizon’s total delinquencies were at 0.2% in 2007 and peaked at 1% in 2009 before returning to near pre-recession levels in April 2011. Charge-offs mirrored delinquencies, and declined steadily in the first four months of 2011.

This should allow loan loss provisions to drop about 20% from the 2010 budgeted 1% of total assets, or $4 million. Horizon’s loan portfolio was $307 million as of April 1, 2011.

“Since we’re two to three years into this now, we’ve worked through a lot of the stuff that was really painful,” says Adams.

Conservative underwriting policies helped minimize losses. Horizon also hired an additional col­lections employee to work on mortgage modifications, and it reassigned a loan employee to work part-time in the collections area to handle payment modifications.

NEXT: New regs spur innovation

New regs spur innovation

Loan demand mirrored economic conditions in each region of Horizon’s field of membership—with loan applications decreasing 18%, from 12,420 in 2009 to 10,136 in 2010. In northern Idaho, for example, the 40% swing in real estate values sapped demand for first mortgages. Low rates fueled refinancing in 2010, but demand dropped as eligible members got new mortgages.

Regaining momentum in loan applications required a new approach. “We’ve introduced a lot of loan products to adapt to the changing environment,” says Adams.

The credit union switched from participating in a mortgage credit union service organization (CUSO) to an in-house mortgage program in anticipation of new regulations. This created an opportunity to develop new types of mortgages and home equity loans, including:

  • The HomeFree Mortgage, which allows members nearing retirement to refinance mortgage balances in a 10-year loan at a lower rate, with no out-of-pocket fees;
  • The HomeFree Flex home equity line of credit, which lets members lock in the interest rate on current home equity borrowing while retaining access to the remaining line of credit; and
  • Additional options for first-time home buyers, including Veterans Affairs, Federal Housing Administration, and U.S. Department of Agriculture loans.

Fully employed members continue to seek loans for discretionary items such as boats and recreational vehicles, says Adams. But most members also are trying to pay down debt and build savings.

A concerted effort

North Jersey Federal Credit Union, Totowa, N.J., also has refined its loan products. In 2008, loan activity at the $192 million asset credit union declined while delinquencies increased to 1.98%, as the typical two-earner household struggled with reduced hours or the loss of second incomes.

The credit union made it a priority to meet with members who were late with payments, to learn about their situations and create modification and repayment plans, says Lourdes E. Cortez, president/CEO. “With that approach, you ensure they’ll eventually get on track and make full repayment.”

A review of unsecured lending policies showed that North Jersey Federal’s credit score requirements were lower than its competitors’, so it increased the minimum score to qualify. It also added the requirement that borrowers must provide collateral for most loans, in exchange for lower interest rates.

“We made more collateralized loans, so our portfolio was more weighted in secured loans,” says Cortez. Those efforts helped North Jersey Federal reduce delinquencies from 1.98% at the beginning of 2009 to about 0.75% at year-end. Delinquencies averaged roughly 1.6% throughout 2010 and early 2011.

Network development

Even as delinquencies dropped, North Jersey Federal’s loan portfolio increased 21% in 2009—from $82.8 million to $100.3 million—and by 5% in 2010, to $104.4 million. Its loan balance at the end of first-quarter 2011 was $103.9 million.

The board and management team drove loan growth by setting a strategic goal to increase activity in first mortgages and auto loans. Mortgage lending gained an additional boost as new regulations reined in mortgage brokers.

And the credit union increased auto loans by developing a referral network with reputable dealers, as a member alternative to indirect lending. Participating dealers receive 1% to 2% of the loan amount as a referral fee and can promote vehicles to members, including displaying cars in the credit union’s lobby. Members who buy from these dealers receive special offers such as price discounts, free accessories, or free oil changes.

Shifting consumer attitudes drove some changes in loan products. For example, more members are opting for used vehicles over new ones, so North Jersey Federal now offers the same interest rate on both types of loans. The amount sought for unsecured loans has declined. For example, a member who once asked for $10,000 to fund a vacation now might request $3,500, says Anthony Couzzi, vice president of lending.

“People are living within their means for the first time in a long time and being reasonable with their requests,” he says.

North Jersey Federal will use a mortgage CUSO and member business lending to generate more loan activity. And it’s planning to participate in a CUSO that allows the credit union to purchase three- to five-year taxi medallion loans with a return on investment of 4% to 5.5%. Taxi medallions are highly sought in New York and Chicago, where they’re required to operate a taxi.

NEXT: Sound decisions

Sound decisions

Educating loan officers to make sound decisions paid off for $655 million asset Georgia (Duluth) United Credit Union, says Warren T. Butler, president/CEO. A slowdown among carpet manufacturers adversely affected employees who are credit union members.

Georgia United operates 13 branches across the state. In the north, however, unemployment remained above national rates at more than 12% in early 2011, in part due to the slow sales among carpet manufacturers.

But the credit union’s delinquency and charge-off rates consistently remained below 1% throughout the recession. Delinquencies fell slightly from 0.89% in 2009 to 0.78% in 2010, compared with a 2010 rate of 1.66% among peer credit unions. Georgia United has a loan portfolio of $345 million.

“When I say we’re conservative, I’m not saying we don’t make loans,” Butler notes. “But for years we’ve educated our loan officers to look beyond credit scores. We really take time to ask questions, and by doing that we make sound decisions.” Examiners haven’t given Georgia United a single lending exception in 10 years, he adds.

A second chance

The credit union’s members responded to tighter budgets by paying off unsecured debt and pursuing practical purchases, he says. When members fall behind on loans, Georgia United offers access to financial counseling.

It also offers a second chance to its members who’ve experienced financial difficulties, through pilots of two “restart” products:

1. Restart Checking allows members to open checking accounts with restrictions on the number of items processed and additional fees. If members handle the accounts responsibly for one year, the credit union removes the restrictions.

2. Restart Auto Loans offer access to vehicle financing to members who normally wouldn’t qualify. Participating members agree to have an “interrupter device” placed on their vehicle’s ignition system. If a member is late with payments, the device activates so the member can’t start the car. The device remains on the vehicle for the life of the loan, although interest rates decrease after 12 to 18 months of satisfactory payments.

Georgia United’s board was determined to find options to help members with poor credit histories due to insufficient financial skills, lost jobs or overtime pay, or a combination of those factors. While helping these members is more challenging now, it establishes relationships that position Georgia United to thrive when good times return, says Butler.

“These people need a second chance. If we can help them now, they’ll remember their credit union when things get better.”

Agricultural CU Celebrates Rain and High Prices

High grain and cattle prices have insulated $62 million asset Hometown Credit Union, Kulm, N.D., from the economic woes of other regions.

“This recession really hasn’t affected us at all,” says Tony Buerkley, president/CEO, noting Hometown’s assets increased almost $10 million in 12 months.

Hometown’s 2010 loan delinquency rate was 1.5% on a $53 million portfolio, dominated by member business loans for livestock, farm machinery, crops, and real estate. The delinquency rate typically increases in the fall when farmers have high inventory, and declines in the spring as they sell cattle and grain.

Members can also borrow to buy homes and cars. Careful loan monitoring keeps losses low, with 2010 charge-offs at only 0.03% (due to one member’s overdrawn checking account), says Buerkley.

While agriculture has its own economic cycles, rain can be a bigger factor than price in determining whether Hometown members have a good year. Buerkley sees some challenges ahead in new mortgage regulations, but he’s optimistic about 2012.

“If the moisture comes and people are contracting their grain now while prices are high, the next 12 months are going to be pretty good in North Dakota.”




   1. 2011-2012 Credit Union Environmental Scan

   2. Lending education and training