Lending Opportunities in an Uncertain Economy

Stepping out of their lending comfort zones brings positive results for many CUs.

December 22, 2012

Businesses and consumers remain ill at ease when it comes to the economy -- and the threat of the federal government will fail to avert the fiscal cliff of mandatory spending cuts and tax increases. These uncertainties also contribute to credit unions’ slow lending growth.

But new lending opportunities do exist, credit unions say, especially in the areas of risk-based lending and auto lending.

Risk-based lending: Balance rewards and losses

Tewksbury (Mass.) Federal Credit Union, $51 million in assets, is balancing the rewards and losses of risk-based lending to add new members and reward current ones.

Risk-based lending, says CEO Shelley Robinson, makes it possible to offer lower rates than members can get from competitors. It’s a methodology of deploying resources to borrowers based on their probability of defaulting.

The credit union 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%.

Tewksbury leaders offer this scenario to compare the potential returns available from risk-based lending as compared with placing the same amount in a certificate of deposit.

Risk-based Loans  
Amount loaned $100,000

Minus delinquency worst-case scenario of 4%
(Actual range is 1% to 3.5%)

- 4,000
= 96,000

Plus average earned of 8% (8 x 96,000)   + 7,680
Earnings = $103,680

Certificate of deposit  
Amount invested $100,000

Interest rate of 2%

+ 2,000
Earnings = $102,000

Auto lending: Keep an eye on losses

Ent Federal Credit Union, Colorado Springs, Colo., is working to streamline the application process for members buying cars from individuals rather than dealers. The $3.6 billion asset credit union also plans to reach out to B- and C-paper members who have a history of repaying credit union loans. The credit union will make a money-saving offer for auto loan refinancing or promoting other loan deals.

Auto loans have performed well, despite the weak economy, says Bill Vogeney, chief lending officer at Ent Federal. Growth-oriented credit unions, however, may want to keep an eye on losses. Vehicle marketplace changes could cause auto loan losses to increase even as the economy improves.

“I think credit unions have to be leery of the fact that even though we’re not in a very strong economy, right now auto loan performance is extraordinarily strong,” Vogeney says.

Vogeney says unusually low repossession levels held down auto loan losses, reflecting consumers’ high priority on retaining a vehicle in a down economy. Meanwhile, used-car prices remained “unsustainably high” due to demand among cost-conscious consumers.

If the economy improves and more consumers buy new cars, the increased supply of used cars could cause prices to plummet and leave consumers “upside down” in existing used car loans. At the same time, looser credit standards could make it easier to get a loan for a new vehicle.

Vogeney says that could prompt people who bought high-cost used cars to get a loan for a new car and then turn in the used car to the lender. He compares this scenario to the high repossession activity in 2007 and 2008 when people turned in SUVs after buying more efficient compact cars.