You’re presented with these three options. Which do you choose?
Make a 15-year fixed real estate loan at current rates to a well-qualified member.
Make a 72-month auto loan to a “B-level” borrower.
Have George Santos deposit $25 million from selling his shares in Microsoft, which he founded with Bill Gates.
Generally, this column talks about what you’d want to do—like lend more. But we all have liquidity issues while the Federal Reserve raises rates. This has led many of us to slow lending or avoid it altogether.
It’s a tricky task to be in the market, but not be in the market—like watching Tom Brady’s offseason love life. We don’t want to anger members, and we’ll need loans sometime. Just not now.
It’s a delicate balance between member service and keeping the balance sheet under control. Here are some ideas to help.
Auto loans
Sensing both reduced liquidity and higher rates, banks began distancing themselves from auto loans in late 2022. As such, credit union market share surged past 30%, up from 2021’s 22.8%. While normally credit unions’ bread and butter (or avocado and toast in California), these loans ate up available liquidity in a hurry.
Strategy: More than any other loan type, members seeking auto loans are extremely sensitive to payment. You need to make it look like they’re getting a good deal, but the payment is just a bit high. The easiest way to do that is to force shorter-term loans, even at good rates, by throttling back terms over 60 months.
Mortgages
While short-term rates have increased, mortgage rates have trended downward due to the inverted yield curve. While the market isn’t what it was in 2022—where even the kids’ corner lemonade stand sold for a cool $250,000—the market isn’t exactly dead either.
Strategy: While the average 30-year mortgage rate currently is a tad under 7%, many have portfolios filled with paper under 4%, which makes selling in bulk impractical. What you can do is bundle new with old, kind of like repackaging hamburger as “sloppy joes” on the third leftover night of the week.
HELOCs
Ah, the gift that keeps on giving. Like a feral cat, loans made in 2021 and 2022 continue to scratch at liquidity when members draw on them as they still have good rates. This is forcing many credit union loan portfolios to swell. While these are variable-rate loans, most limit their annual increase to 1%.
Strategy: Two strategies come to mind: hope and prayer. There’s not much you can do here. Decreasing lines is a possibility, but there are generally laws prohibiting carte blanche changes. Don’t market them. That’s the best I have.
Credit cards
If there’s a loan you may want during these turbulent times, it’s a credit card loan. As most are indexed to the prime rate, they absorb the fluctuations coming from the Fed. They also earn interchange, at least until the retail overlords have their way. Plus, credit card balances typically increase modestly.
Strategy: If you believe in a soft landing (per the Fed), send Jerome Powell a nice card and market yourself silly. If you believe in a harder landing, or what the Federal Aviation Administration calls “a controlled descent into terrain,” watch your credit risk.
Business loans
Costs for business loans have doubled in recent months. Coupled with difficulties in finding employees, high inflation squeezing margins, and supply chain shortages, business lending has moved from moderately risky to concerning, now reaching the “bat guano” phase of craziness.
Strategy: Be selective. Cash is king, so make sure commercial borrowers have ample supplies of it. Alternatively, Small Business Administration loans can work, but rates are very high.
While none of us want to decrease our lending, the facts are forcing our hand. Just a year ago, most of us were flush with COVID funds and wondering, “How will we lend this out?” Now we wonder, “Where will we find deposits?”
With diminishing money supply, part of the answer is reining in the size of our loan portfolios.
Credit Union Magazine’s Summer 2023 issue highlights the lending outlook for the rest of the year, how credit unions leverage fintech companies to boost digital lending, the power of lending partnerships, common Bank Secrecy Act violations, and the shift board members must make when becoming chair.
