2013 Lending Outlook

Opening the door to loan growth requires innovation and higher risk tolerance.

November 1, 2012

To grow more loans, credit unions might do well to emulate the spirit of Apple’s “Think Different” campaign. That’s especially true during today’s
slow economic recovery.

Credit unions that do step out of their lending comfort zones are seeing results. Many are nurturing incremental growth by taking on more risk and re-imagining traditional loan products.

“We’re in a much better place than in 2010 or 2011, but we’re still not in a place that feels normal,” says Mike Schenk, CUNA’s vice president of economics and statistics. “Labor markets haven’t completely recovered.” Roughly nine million jobs were lost in the recession, but the economy has only regained about four million to date.


Do prepurchase home buyer counseling and foreclosure mitigation counseling reduce mortgage delinquencies
and foreclosures? Several studies suggest they can, according to Beth Luke, partner relations specialist with GreenPath Debt Solutions, a CUNA Strategic Services alliance provider:

  • A U.S. Department of Housing and Urban Development (HUD) study last spring revealed nearly 70% of delinquent homeowners counseled obtained a mortgage remedy to retain their home, and 56% cured their default and became current on their mortgage. The best outcomes occurred when homeowners received the counseling from one to three months after the initial delinquency. 
  • The National Foreclosure Mitigation Counseling Program found in a 2010 study that borrowers who had missed a payment on their mortgage were about 50% more likely to become current on payments when they received housing counseling.
  • HUD also evaluated prepurchase housing counseling. None of the participants that purchased a home had a major derogatory event on their mortgage accounts 12 to 18 months after receiving prepurchase counseling. HUD also concluded prepurchase counseling improves borrowers’ decision making about future home ownership.

Continued uncertainty

Businesses and consumers alike remain jittery about the potential fallout from failing European economies, including the potential impact on U.S. trade and investment banks. Businesses also are well aware the economy could be dragged down if the
federal government fails to avert the year-end “fiscal cliff” of mandatory spending cuts—required by the Budget Control Act of July 2011—along with tax increases.

Assuming the government avoids the fiscal cliff, CUNA projects loan growth of 4% in 2012 and 5% in 2013. Schenk notes those projections assume the housing market continues its gradual recovery, which took shape in 2012 through improvements in sales, construction activity, home prices, and builder confidence.

Credit unions interested in loan growth might be forced to re-examine their attitudes toward risk. Schenk says consumers are likely to hang on to 30-year fixed-rate mortgages made while interest rates remained low.

“When interest rates go up, the hits to net income will become obvious for many credit unions because funding costs will rise faster than asset yields,” Schenk says. “Because of this, many credit unions that are looking to boost bottom lines but are reluctant to take on more interest-rate risk are re-examining their appetite for credit risk and/or are looking to branch out into new types of lending programs—filling voids in their current menu of loan offerings.”

NEXT: Credit worthy members

Credit worthy members

Credit scores declined for many creditworthy members in recent years due to recession-related events beyond their control, such as job loss or reductions in household income. Schenk says many experts are questioning whether current credit ratings accurately reflect consumer behavior and economic realities. Proceed cautiously to seek out current and potential members whose scores have declined but have proven ability to repay loans, he advises.

Examining risk policies and making incremental changes in loan products can help reach these members. He highlights these opportunities:

No more niche lending

Heritage Trust Federal Credit Union, Charleston, S.C., $475 million in assets, is making multiple changes to counter an approximately 2% decrease in outstanding loan balances in the first half of 2012.

Factors sapping loan demand include the economy, consumer reluctance to take on debt, and increased competition, says David D’Annunzio, the credit union’s senior vice president/chief financial officer (CFO) and CUNA CFO Council chairman.

“We have to look across the full range of our products for modest forms of improvements, whether in the delivery, the pricing, or the focus,” D’Annunzio says. “A single niche that’s going to be the horse you can ride to total loan growth just isn’t there.”

So to spur loan growth, Heritage Trust Federal is:

D’Annunzio says the 10-year mortgage is the type of “home run” credit unions need to offer members. As a comparatively short-term mortgage with good amortization and a “decent” yield, it alleviates concerns about interest-rate risk while delivering real value by helping members achieve a financial goal.

“You have to figure out that slight change in the way you do business to hit the need of the member at the right time,” D’Annunzio says.

NEXT: Taking more risks

Taking more risks

About 56% of members who receive loans from $48 million asset Baptist Health South Florida Federal Credit Union, Miami, have credit scores below 640, which means their loans are classified as C, D, and E paper.

“These are the people in the most need and that’s where you can make more money because the rates are a little bit higher,” says President/CEO Michael Raley. “You just have to pay attention to risk.”

As a single-sponsor health-care credit union, Baptist Health South Florida Federal is acutely aware of the importance of building relationships with members. Raley says delivering value requires linking members with C, D, and E paper to affordable loans that respond to their needs.

The credit union’s average loan amount is $3,000, which typically represents an unsecured loan for immediate needs. Loan approvals hinge on members’ debt ratio and history of credit union loan repayment.

“The members have learned that we’ll work with them to do what’s best for them,” Raley says. “We’re not going to make someone a loan that will put them in trouble.”

When members apply for a loan above their limit, employees make a “counter-offer” for a realistic amount. They also deliver a straightforward message about repayment expectations and the benefits of making payments via bimonthly payroll deduction, used by 94% of members. Front-line staff are trained in the “Integrity Selling” program from Integrity Solutions, Scottsdale, Ariz.

These practices contribute to Baptist Health South Florida Federal’s steady delinquency ratio of 0.39 and charge-offs of 0.46, Raley says. The credit union experienced 5% loan growth in 2011 through the month of August for a total portfolio of $25 million and a loan-to-share ratio of 59%.

Baptist Health South Florida Federal plans to grow its portfolio with a credit card program launched in October, including a share-secured option for members who otherwise would fail to qualify. Its goal is to issue cards to 10% of members by year-end 2013.

The credit union  also offers “No Credit Check Loans,” a payday loan alternative with a loan limit of $500. Members who have worked for the hospital for at least one year are automatically approved without a credit check.

‘The race to zero’

Intense lending competition is creating a “race to zero” in the marketplace, according to Bill Vogeney, chief lending officer for $3.6 billion Ent Federal Credit Union, Colorado Springs, Colo.

“It’s just insane in terms of loan pricing because there’s so much liquidity,” Vogeney says. “I don’t know that the economy is strong enough and there’s enough consumer demand out there that you can significantly change your market share in the long term by dropping rates.”

Instead, Ent Federal aims for loan innovations that add annual incremental volume in the $500,000 range. Vogeney says those ideas wouldn’t have been worthwhile three to five years ago, but today’s marketplace makes them worth pursuing.

For example, Ent Federal hopes to streamline the application process for members buying cars from individuals rather than dealers. Ent Federal plans to reach out to B- and C-paper members with a history of repaying credit union loans by making a money-saving offer for auto loan refinancing or promoting other loan deals.

Vogeney expects new opportunities will emerge using business intelligence to identify small segments of the portfolio that can gain value from credit union loans.

“We’re really fine-tuning our pricing decisions and pricing models,” Vogeney says. But pricing discipline is essential to make new loan policies pay off.

“You’ve got to prioritize your resources, monetarily and time-wise,” Vogeney says. “We are looking at smaller chunks of incremental revenue than ever before.”

  NEXT: Term adjustments



CUNA’s Creating Member Loyalty program
CUNA Strategic Services alliance provider:
GreenPath Debt Solutions
Term adjustments

Competing on loan terms rather than trying to counter “shockingly low” interest rates from competitors is a strategy that’s building relationships with member businesses at $420 million Sun Federal Credit Union, Maumee, Ohio. An established member business might receive a locked rate for 12 years, rather than five years, for example, explains Dale Frankhouse, director of business services. 

“The banks are increasingly difficult and uncooperative, so after realizing there’s such a difference with the credit union, they’re excited to move their business relationship to us,” Frankhouse says. Business owners are typically so pleased that they move their personal accounts to the credit union and encourage employees to join.

Business loans make up $20 million of Sun Federal’s $270 million total portfolio. With consumers, Sun Federal is aiming for a larger share of home purchases and anticipating more activity as buyers act before prices rise.

“We’re able to talk to some of these people and show them it would most likely be beneficial for them to buy instead of rent once you consider how low rates are and how favorable real estate prices are—along with the tax advantage of buying as opposed to renting,” Frankhouse says.

Sun Federal also plans to target older members for new-car loans and young members for used-car loans. Branch referrals are an essential part of its strategy, using CUNA’s Creating Member Loyalty training program.


One Washington Financial—a credit union service organization (CUSO) owned by $1.6 billion asset Washington State Employees Credit Union, Olympia, Wash.—is leveraging the scoring matrix originally built for its payday lending alternative program to provide a fully automated short-term loan.

The CUSO launched Q-Cash Plus in August to serve C and D paper members who have limited access to loan or cash options and need a quick solution for financial emergencies or unexpected expenses, according to Heidi Tinsley, director, Q-Cash. 

Q-Cash Plus installment loans range from $1,000 to $4,000 for a term of 12 to 36 months with a $25 application fee plus a 36% annual percentage rate. No credit check is used, but members must apply through online banking and qualify under a relationship scoring matrix that provides instant notification of approval or denial.

Tinsley said offering a “no touch” approach keeps costs low, while the application fee and higher rate compensate for higher risk. An internal referral program is being planned so members who have been denied loans can use Q-Cash Plus as another option.

Building loyalty

Tewksbury (Mass.) Federal Credit Union, $51 million in assets, is using an outside vendor to call members to ensure they’re aware their credit union can give them a better deal. The calls promote a rate of 1.99% for auto loan refinancing.

CEO Shelley Robinson says risk-based lending makes it possible to offer lower rates than members can get from competitors. In a two-month period, the outbound calling program brought in $879,972 in loans, as compared with a monthly average of $142,884 in previous programs.

Tewksbury has a 13-year history of using risk-based approaches for all lending, with delinquency rates that have since remained between 1% and 3.5%. Current loan rates range from 1.99% to 17%.

“Risk-based lending also gives us an opportunity to obtain new members and reward current, higher scoring members with attractive lower rates,” Robinson says. “This builds loyalty and strategically grows the credit union.”

The rewards also outweigh losses. But Robinson cautions rates must be reasonable and you must monitor the program carefully. Tewksbury educates members about the importance of improving their credit scores to persuade low-scoring members to open checking accounts with direct deposit, apply for debit and credit cards, and use home banking with bill payment and e-statements.

And a good collections staff is vital, Robinson adds. Collections calls start at seven days for D/E paper so the collections specialist is aware of
life changes, such as divorce or job loss, that
could impact ability to pay.

Credit union leaders emphasize every credit union must seek new opportunities within its membership and loan portfolio. While analysis is important,
so is a willingness to experiment.

“Relying on the same old business activity just isn’t an option anymore,” D’Annunzio notes. “We have to change our perspective.”