Elephants in Lending

It pays to have a solid memory of how the marketplace has acted in the past

by Bill Vogeney

Over the past few years, credit unions have struggled to make enough loans to keep pace with deposit growth. This desire for loans and the shortage of qualified borrowers seems to have driven credit unions to “stretch” their lending guidelines to generate sufficient volume. Arguably, guidelines should be more liberal than what were used in 2009 when none of us really understood where the economy was going to land, but they should not return to 2006-2007 standards.

Perhaps more troublesome is the desire to re-examine lending programs that, in my opinion, are difficult to “sustain.” When I use sustain in the context of a loan portfolio, I mean:

• The credit union can maintain a reasonably consistent level of volume over a period of five years or more through a period of economic expansion and contraction.
• The credit union can manage loan losses without having to dramatically change lending guidelines in an economic downturn.
• The credit union doesn’t have to resort to “market share” pricing (giving it away) to build volume.

Through contacts with various peers, I’ve heard that credit unions are seriously reconsidering some of the following ideas:

• 96-month (or longer) auto loans,
• 100 percent home equity loans,
• 90-100 percent loan-to-value first mortgages without private mortgage insurance and
• auto leasing.

My natural response is “don’t they remember when…?” That’s the problem: They either want to forget or don’t realize some of the risks.

continue reading »