Diversify Liquidity to Keep Making Loans

By John Flynn, CEO, Open Lending

I saw many credit union friends earlier this week at NAFCU’s Congressional Caucus, of which we are a Preferred Partner, and had the opportunity to hear a lot of different points of view on the issues concerning credit unions, from an enthrallingly scary presentation on global cybersecurity to various politicians’ expounding on the virtues of credit unions and their support for them.

Something that really stood out to me, though, was NCUA Chairman Rodney Hood and Board Member Todd Harper’s commentary on credit unions’ need for liquidity. Chairman Hood noted, “Credit unions overall have enjoyed solid share growth, a reflection of the high-quality service you provide. Loan growth over the last several years has been very strong, also reflecting the value of credit unions to consumers, and has consistently outpaced share growth. However, this trend can create liquidity risk for some credit unions, so we will need to keep an eye on this. Also, low-interest rates and a flat yield curve may put pressure on some credit unions’ earnings.”

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Board Member Harper observed that credit unions’ loan to share ratio peaked at the end of 2018 at 85% and fell to 83.3% at the end of June, however, it’s something the agency is watching closely. He added, “During times of economic stress, such as those caused by a recession, financial institutions need to have sufficient liquidity to meet their cash demands. But when a financial institution’s assets are held in illiquid long-term assets like long-term loans, it may be difficult to sell those assets at normal prices and obtain needed cash.”

Chairman Hood concluded regarding liquidity, “Because of this, credit unions should avoid the temptation to take potentially undue risk, such as credit risk, to offset the impact of low interest rates on your earnings.”

As credit unions’ and their members are facing potential recession headwinds, we must responsibly continue serving the credit needs of our members. They may require a car to get to work and their kids to appointments, even if it’s not a great time for them to be taking out a loan. They may buy used rather than new, or a less fancy model, but American consumers still need us. Credit unions’ not-for-profit status means business strategies center on serving members rather than stockholders, and those who continue helping through a crisis will come out stronger on the other side.

Read John’s recent op-ed in Credit Union Times, Keep Lending Through a Downturn.

Credit unions’ lending has been booming in recent years, particularly in autos. A downturn is not only a great time to refinance members who need it but also helps your credit union maintain a brand of service, trusted advisor and integrity.

No one would advise that credit unions take undue credit risk, but even as we head into a downturn, credit unions can take advantage of Open Lending’s high-quality data analytics to determine the better risks and optimal pricing among your already existing loan application stream and our flagship Lenders Protection default insurance, so when the occasional loan goes south, your credit union doesn’t take the hit.

This could be particularly important in rural areas, which has been a priority mentioned by Chairman Hood multiple times is speeches. American consumers in rural areas have greater needs for vehicles due to lack of public transportation options, and they tend to have more dings in their credit reports as I wrote last week. With Open Lending, credit unions can continue safely making loans to those with lower credit scores, while also reserving less (and credit unions will need all the help they can get once CECL comes into effect) because these loans are backed by Lenders Protection. Contact us today to learn more how we can help you delight both consumers and the regulators!