Lending in the “New Normal”

Bill Vogeney
February 19, 2010 | COMMENTS

CUNA Lending Council members, there seems to be a new term being used about the economy these days. Typically, I stay away from buzzwords and catch phrases, but I like “new normal.” I've had my staff, friends, and people in the community ask over the last few months, “When are things getting back to normal?” Well, I guess it depends on your perspective of normal. If it includes:

• Homes going up in value at a rate of 3 to 5 times income growth, sorry, that probably won't (and shouldn't) happen any time soon. That rapid appreciation was artificial, driven by demand from sub-prime, low-doc and payment option (optional for you make any payment) loans.
• New car sales returning to 2007 levels, with lots of $45,000 sport utility vehicle loans, don't bet on it. New car sales are not projected to return to 2007 levels until 2015! Even then, expect the average price of a new vehicle to be lower than we experienced in 2007.
• Cheap and Easy credit, including $25,000 credit cards to waitresses (no offense to waitresses, if everyone tipped like me, they could afford that large of a line), you must be smoking something illegal. Or you have a prescription for its “medicinal” value.
• The “living large” lifestyle of the not really rich or famous, known for its Mc Mansions, Rolex watches and gourmet dinners, I think you'll be sadly disappointed.

Andy Grove, one of the founders of Intel, was famous for saying “Only the paranoid survive.” If paranoia manifests in your credit union through the management team crawling up underneath a rock, shutting down the lending flow, and sheer terror when making a loan decision, you're probably in the wrong business. But let me extol the virtues of paranoia. Paranoia, if it manifests via a different view of the future, a “new normal,” combined with a strategy for thriving in that environment, can be very positive. Prepare for the worst, and if you get it, you'll be better off than most of your competitors. If the economy suddenly is lead by a wealth of investment in new technologies including alternative energy, we could have a “boom” that rivals the tech boom of the late 1990's in the latter half of this decade. Your credit union should also thrive under a brighter scenario.

What could your credit union be doing to prepare for the new normal?

• Improve your processes. The banks and other competitors will be looking to cut expenses as much as they can. They'll make it as easy to get a loan as possible-for those borrowers with the absolute best credit. The credit card companies are still sending out pre-approved offers-that's the simplest way to “fulfill” a loan request. However, they are being quite a bit more selective with their process. Like I've said over the past year, “720 is the new 680.”
• Get better at making loans to members with less than perfect credit. If my view of the new normal is accurate, I think they'll be less competition and higher rates in the mid-prime lending market. For giggles, let's call that 600-660, perhaps as high as 680. Still a risky proposition, certainly if you're looking only at the credit score to make a decision. Like the Michael J. Fox series of movies, it's back to the future! Old school lending might be sexy in the next decade. You'll spend more time talking to the member, getting their “story,” and reading between the lines of the credit report. Figure out a way to help some members who were expecting a denial, and your members will think it's sexy.
• Re-evaluate your business model. Too many credit unions were forced to consider third-party providers, participation loans, sub-prime auto loans, etc., because they didn't have a business model that emphasized “selling.” Their philosophy was more like the famous Field of Dreams line, “if you build it, they will come.” The deposits came, the loans didn't-initially. “Creative” ways to generate loans that didn't require hard work appeared, and all of a sudden lending seemed like “Easy Street.” Yeah, how did that work out for some of our (former) peers?

My lending management team started the process of preparing for the new normal a year ago. It's a challenge, because so many of us are doing everything possible to deal with today. Yet today doesn't matter if you can't handle tomorrow. Find the time.

Bill Vogeney is Secretary/Treasurer of the CUNA Lending Council and Senior VP/Chief Lending Officer at Ent FCU in Colorado Springs, CO.