ELGIN, Ill.—It’s time for credit unions to move money out of investments and into higher-yielding auto loans, and to reach down to lower credit scores.
That is the advice of Rex Johnson, founder of Lending Solutions Inc. and Lending Solutions Consulting Inc., who outlined for CUToday.info several key steps credit unions can take this year to boost lending and the bottom line.
“The outlook for credit unions looks strong for 2016,” said Johnson. “Our research suggests credit unions are poised to continue growing loans as spending continues to rise and average credit card debt per household is ticking up. The auto industry is also poised to have an excellent year.
Johnson said all of these are favorable signs, but the key in 2016, he emphasized, is for credit unions to “work smarter, not harder.”
Aggressive Targets
Johnson reminded that having goals is important, including setting an aggressive growth target in the total loan portfolio—15% to 20% or more each year. ROA, Johnson said, should be at least 1% with a goal of 2% or more.
Johnson also stressed that dollars in low-paying investments need to be moved into higher-yielding auto loans. “Credit unions, essentially, should have all their money working for them in loans.”
It’s time, too, to extend credit to more members.
“Focus on yield by marketing to members who have less than perfect credit, yet they always pay you,” said Johnson. “They are stable on their jobs and they need good transportation
Rex Johnson, LSI
to and from work. We believe that 60% of a credit union’s marketing should be directed at C, D, and E paper. How much of a typical credit union’s marketing campaign is directed to the underserved?”
Johnson insisted that CUs must begin “making themselves the money first. Car dealers are getting rich, credit unions are making lots of A+ and A paper loans with little or no return. This has to change now.”
When it comes to loan decisions, credit unions need to “empower the right people—decision-makers who can say ‘yes,’ are not saying ‘yes,’” asserted Johnson. “They are costing their credit unions a lot of money and they tend to get other decision makers to agree with them. Decision-makers with authority have to always be looking for a way to say ‘yes,’ not ‘no.’ They also need more training.”
Besides issues with decision-makers, CU lending policies often keep credit unions from helping responsible members who need assistance, said Johnson.
“It’s time to rewrite policies and focus on what can be done versus what can’t be done,” he said. “Members are going elsewhere for help because they have been turned down with their credit unions. Payday lenders are doing what credit unions should be doing. We should take over what members now owe.”
Don't Focus Too Much On Deliquencies
Johnson added that that credit unions focusing too much on charge-offs and delinquencies to keep those at their “incredibly low” current levels is “costing credit unions a fortune.”
On the other side of the balance sheet, Johnson reminded that CUs need liquidity to fund increased lending.
“Grow deposits—deposits are slowing down. Members want higher returns on their investments,” pointed out Johnson. “Credit unions may run out of money if they don’t increase their returns.”
Johnson said that by credit unions having more of an “open mind” toward lending that the “future looks bright. We are way too focused on having the lowest delinquencies and charge-offs. We can make more money and help more members. Remember there’s always a solution.”