Lending on the Mend
CU lenders say auto, mortgage, and unsecured loans will be bright spots in 2014.
The 2014 lending forecast is as optimistic as it has been for a few years. As of June 2013, credit unions had the strongest 12-month loan growth rate (5.5%) since 2009, NCUA reports.
Jim Keilholz (pictured above, at left) sees that playing out locally at $440 million asset Sun Federal Credit Union in Maumee, Ohio. While there hasn’t been a lending explosion, says Keilholz, vice president of sales and branch operations, “we’ve had a lot of activity in the mortgage and consumer areas, especially during the past three to six months. We have more loans in the pipeline than we’ve ever had.”
Industry observers believe lending activity will remain strong in 2014 fueled by growing consumer optimism and pent-up demand for cars and other consumer goods. But stiff competition from banks will keep credit unions on their toes.
The big picture
Total credit union loan growth will reach 6.5% in 2014, up from 5.5% in 2013, predicts Steve Rick, CUNA’s senior economist. He cites several other reasons for optimism in the coming year.
“Credit quality is improving dramatically,” he says, with an overall loan delinquency rate of 0.97%. “The last time it was below 1% was in July 2008.”
The long-term average benchmark, he says, is 0.75%.
He also expects consumer confidence to rise in 2014 as the economy improves, with 3% to 3.5% economic growth, compared with 2.25% in 2013.
“The other good news,” Rick says, “is that a lot of consumers have paid down their debt or had it charged off. The consumer debt burden has decreased dramatically.”
Banks, too, will benefit from these same developments, creating fiercer competition, Rick says. Banks will be more willing and able to lend in 2014 because they have rebuilt their balance sheets, and their charge-offs and provisions for loan losses are back to normal.
“They’re sitting on piles of cash,” he says.
What’s more, many banks have loosened requirements for down payments and credit score eligibility. Rick points to a Federal Reserve survey of bank senior loan officers “that shows strong evidence that banks are loosening their underwriting standards a bit and making more loans.”
Auto lending accelerates
New-vehicle loans are the fastest growing credit union loan category in 2013, with 11.9% growth over the previous year, says Rick. New-auto sales will total about 15 million vehicles this year and grow to 15.5 million to 16 million next year.
Used-vehicle loans grew 9.2% during the first half of 2013, compared with the same period in 2012. This trend should continue next year, Rick says.
That’s also the expectation at $220 million asset Heartland Credit Union in Madison, Wis., says John Wagner, vice president of lending.
“How well we do will depend on how competitive we choose to be with our rates,” Wagner says. “We need to look at higher loan volumes and lower rates. But we also have to crunch the numbers to make sure that approach aligns with our asset/liability management policy,” he adds.
Not all credit union lenders are as deliberate as Wagner about setting rates.
“Quite honestly, credit unions can be their own worst enemy on rate competition,” says Bill Vogeney, executive vice president/chief lending officer at $3.8 billion asset Ent Federal Credit Union, Colorado Springs, Colo., and chair of the CUNA Lending Council.
Vogeney says too many credit unions underprice auto loans with no expectation to make money on the loans. They figure they’ll make up for it by earning more noninterest income.
But with reduced debit card interchange fees and the possible increased scrutiny of courtesy pay fees, relying heavily on noninterest fee income in the future “is a dangerous proposition,” Vogeney cautions.
Heartland may pursue “credit-challenged” loans to grow its auto loan portfolio next year, Wagner says. This would entail lending to borrowers who have had credit problems in the past but still need a vehicle to get to work.
“We want to give them the skills and knowledge to be successful in paying for that loan,” Wagner says. “The hope is to get them on the right track for the future.”
Ent Federal launched such a strategy this year, and Vogeney reports “favorable results” in terms of delinquencies and losses. The emphasis has been on borrowers who already had account relationships with the credit union.
Loans in the B, C, and D tiers grew at about three times the pace of A and A+ loans, Vogeney says. The lower tier loans represent only “a small part of our portfolio, but they have the potential for more growth.”
Lending to nonprime consumers, however, requires a sharper focus on risk, including collateral risk. Surprisingly, managing collateral risk isn’t as widely practiced as it could be, says Steve Miller, president of Twenty Twenty Analytics, a CUNA Strategic Services alliance provider.
“In most cases, losses are driven by collateral risk,” Miller says. “It sounds simple, but if you are undercollateralized there’s a higher probability that you’ll have a loss if the loan defaults. So, by understanding your current collateral risk you can better understand your potential for losses.”
NEXT: Shifts on the home front
CUNA Training (select “lending & collections training”)
CUNA Strategic Services alliance providers
Shifts on the home front
Mortgage refinancing activity is slacking off from recent highs, but purchase mortgage business is on the rise. Rick expects that to continue into 2014 due largely to favorable housing affordability.
The shift in emphasis from refinancing to first mortgages will require a new business model, Vogeney says. Basically, it’s time to be more proactive.
“There wasn’t a lot of incentive to do that when you had applications coming in by the hundreds each week,” Vogeney says. “Now you’ll have to go out and find the business.”
But even though refinancing business is slowing, don’t assume it’s over, Keilholz says. Surprisingly, some members simply don’t know their mortgage rate, which could be around 8% for some consumers.
“We can’t refinance at 3% like we could months ago,” Keilholz says. “But we can get these members to 5% and they’re happy. My gut tells me there’s still business to be had in refinancing.”
Home equity loan balances have been on a downward slide in credit unions in recent years, Rick reports, but he expects them to decline at a slower pace next year. In fact, “2014 could see a turnaround in home equity loans,” he says, “mainly due to rising home prices.”
Vogeney is even more upbeat. “I think there’s tremendous opportunity for home equity lending in 2014 because people will have equity again. Plus, in a higher rate environment, they’ll use home equity loans to get cash instead of refinancing their mortgage.”
Other lending prospects
Two other strong lending areas for 2014 will be credit cards and unsecured personal loans, Rick says. Driving these will be pent-up consumer demand for durable goods.
Member business loans make up only 7% of credit unions’ total loans outstanding and will remain a small slice in 2014, Rick says. About one-third of credit unions currently other business loans.
Among them is Sun Federal, which saw “a strong recovery” in business lending during 2013, says Dale Frankhouse (pictured on first page, at right), director of business services. “We’re expecting the increase in loan requests to continue into 2014.”
The member business lending cap, which restricts business loans to 12.25% of assets, continues to stymie many credit unions. But Heartland received a waiver to the cap due to its large footprint in agricultural lending.
Heartland is an example of how much more credit unions could do for their communities if the cap were lifted.
“A third of our total loan portfolio is in member business lending,” Wagner says, “most of that is in agriculture.”
Lending goes mobile
Adults spend an average of nearly 2.5 hours a day on nonvoice mobile activities, including mobile Internet use on a tablet or phone, according to eMarketer. That’s nearly an hour more than the 2012 average.
The trend is clear: People are doing exponentially more on their mobile devices.
That’s why “credit unions need to embrace mobile lending,” says Steve Hoke, director of loan growth products at CUNA Mutual Group, “and they need to do so quickly.”
CUNA Mutual released the mobile-optimized version of its loanliner.com® application in June 2011. In the first month, roughly 4% of total loan applications originated from a mobile device.
By July 2013, the mobile-originated portion rose to 16.1% of applications. The dollar volume for mobile-generated loanliner.com applications passed the $1 billion mark this summer. That’s from the 560 credit unions that use loanliner.com.
Mobile applications have escalated in two years’ time, Hoke says, “and we’ll see more of the same in 2014.”
He encourages credit unions to adopt a new perspective on mobile services: Don’t think of them only as an expense; think of them as opportunities to provide services to members and create revenue for your credit union.
Credit unions sometimes ask him whether they should charge members for remote deposit capture services. “I don’t think they should,” he says. “Instead, look for ways to off set that expense by creating revenue through the mobile channel. Lending is a great way to do that.”
Read more about CUs’ lending strategies for 2014.