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Thoughts on how to approach each
What can credit unions do to best manage a rising rate environment like the one we’re experiencing now? Two good steps are innovating and honing collections processes.
Plan to Innovate as Rates Rise
“We’re still planning on higher loan demand and overall growth,” reports Jamie King, SVP/credit and special loans at $18 billion Servus Credit Union, Edmonton, Alberta. That’s partly due to a diversification of loan product offerings in line with a digital transformation. “We expect to achieve market-leading growth by being easy to do business with,” he explains.
What new loan product offerings? “Without giving away too many trade secrets,” King says, “we are working through or implementing programs in operational financing, Shariah-compliant lending, franchise banking, etc. These are new to Canada. There are lots of exciting opportunities for the future.”
Even underwriting can be somewhat innovative. There’s more than one way to score a credit application, notes Christopher Leonard, CEO of Velocity Solutions, Fort Lauderdale, Florida. FICO scores count a missed payment for a long time.
“We have a Velocity credit score that doesn’t use FICO and focuses more on short-term payment activity,” he says. “It allows a delinquent borrower to recover quicker and supports more loan approvals. The regulatory agencies have endorsed that methodology.”
A lot of 2023 innovation may focus on finding ways to help members who no longer qualify for loans under traditional standards, points out Steve Hewins, SVP/CU members at CUESolutions Bronze provider CU Members Mortgage. That could include more portfolio mortgage lending to provide flexibility. The adjustments, he suggests, could include underwriting unique properties like log homes or geodesic domes. It could also include lighter documentation like requiring one year of tax forms instead of two and waiving appraisals and accepting attorney opinion letters instead of full title reports.
Assistance programs exist, especially for housing, and it will be particularly important in 2023 for CU lenders to be aware of such programs and when they might benefit members. “It’s always important to leverage those programs,” Hewins says, “to assist members to achieve sustained ownership.”
With purchases dominating mortgage originations, it’s also time to bolster relationships with realtors and builders, Hewins says.
Shift Focus From Lending to Collections
With weak demand and growing pressure on members from inflation and a possible recession, CUs should shift resources in 2023 from making loans to loss mitigation, Sweeney advises. “They’re out of practice sending payment reminders and making collection calls, and it’s time to get back up to speed,” he insists, even though the spike in delinquencies so far has been modest.
A CU may need to cut back on mortgage staffing or redeploy some of these resources in 2023 with the drastic decline in volume. Collections departments may need to be built up, advises Robert Parks, CPA, a shareholder in the Troy, Michigan, office of Doeren Mayhew, a CUES Supplier member. “Collections teams have grown lean and green because delinquencies and charge-offs have been at such low levels,” he observes. “That will change by 2023.”
Servus CU is preparing for more delinquencies in 2023 as government support programs disappear. “Our delinquency levels are the lowest they have been since 2018 in all product areas,” King reported in August. He doesn’t expect that to last.
Delinquencies are up slightly at Ginnie Mae, Sweeney notes, which tends to be a leading indicator of delinquencies because “that GSE (government-sponsored entity) caterers to slightly higher LTVs (loan to values) and lower FICOs.”
Get in front of delinquencies before they become serious,” he urges. A reminder call at 15 days past due might be a good idea, he suggests.
The tight job market could make it difficult to beef up call center staffs, Sweeney points out. Prime calling hours are 5-8 p.m. and weekends—times when CU call centers may not be staffed. Therefore, it could make sense, he says, to find a third party to help at those times.
Richard H. Gamble writes from Grand Junction, Colorado.
