By John Flynn, CEO, Open Lending
It’s been 10 years since the last economic crisis, and the yield curve has inverted – an event that’s preceded that last several recessions. Some have been mild while the Great Recession of 2008-2009 was severe, and economists are torn on what this potential one will look like or whether it’s just the new norm.
During the Great Recession, credit unions fared better than most because most don’t take the big risks that other lenders do. While KYC has become standard, credit unions actually knew their members. No-doc and low-doc loans were relatively unheard of among financial cooperatives, and credit union mortgages are vanilla for the most part. Credit unions serve their members, so doing the right thing for the health of the institution is job No. 1, not generating higher returns for demanding stockholders.
That said, credit unions certainly did not survive unscathed, and industry experts are growing somewhat weary of the concentrations credit unions have built up in auto loans as defaults rise to new highs. It’s all relative, as we’ve discussed before, but we must revisit lessons learned from the last economic crisis.
Diversify. Mostly banks, but a handful of credit unions, too, were caught holding the bill when homes built on spec sat vacant for years, particularly in Florida, Nevada, Arizona and California.
Research underlying assets. Participations can be a wonderful, strategic tool, but be sure to do your homework on individual loans comprising the pools you’re considering. In the last recession, investors were buying so-called A-rated investments that ended up being far riskier.
Document, document, document. Ensure your borrowers have the ability to repay, which came out of the Dodd-Frank Act following the 08-09 recession.
Update your accounting standards to comply with mark-to-market, Current Expected Credit Losses, etc.
Plan for the unexpected among any of your borrowers, who could face job loss in a potential recession. And it may not just be your members; their adult children may be forced to move in with mom and dad due to job loss. How can your credit union help responsibly?
Align. Incentive-based compensation must align with strategic values as well as financial goals.
Risk. Lending greater than 100% of collateral is a risky proposition, particularly for a vehicle that drastically decreases in value once it’s driven off the lot.
Educate. Financial education is desperately needed. Credit given irresponsibly and treated irresponsibly by borrowers is a bad mix.
Even as the hue and cry of the credit union community equated to “we didn’t cause this,” we also learned that it doesn’t matter. Global interdependency has created the economic equivalent of the butterfly effect – one minor change can change the course of the world. In fact, the cooperative integration of the credit union community limits diversification. We saw this with the corporate credit union bailout and resolution; every credit union was affected, whether they were involved in the corporates or not.
Government oversight isn’t all bad, but it’s not all good either. We found credit unions at the mercy of politics, which never wastes a good crisis. Democrats were able to establish the Consumer Financial Protection Bureau, CECL and more in the name of consumer protection. Politicians can’t watch 8.8 million jobs disappear, 8 million home foreclosures and nearly $20 trillion in household wealth decimated, not do something about it and expect to keep their jobs. Unethical lenders needed reining in, but all lenders were hit with it because one lender can’t appear less consumer-friendly than another. Of course, credit unions should continue serving all members – we’re countercyclical precisely because credit unions are there to serve their members and not stockholders. We can keep lending because we can afford to be a little less profitable when the value shines through to our members because that’s who we serve. Open Lending is here to provide some security to our clients as they offer stability in unfortunate economic times to their members. Contact us today!