Member business lending can help dampen economic swings

By Kent Moon

Lenders need to be prepared for continual and often rapid shifts in the economy.

One such change is increasing interest rates, an abrupt wake-up call that is occurring. The average rate on a 30-year fixed mortgage, for example, for the week ending Sept. 13 was 4.5%, compared to 3.53% in May, according to the Mortgage Bankers Association.

One effect of this jump of about 100 basis points in just six months is the winding down of the refinance boom.

Banks and credit unions tend to react to developments of this sort with different strategies. Large banks have been shedding mortgage staff since 2012. JPMorgan announced in February that it would eliminate several thousand jobs, mainly in mortgage servicing, by the end of 2014.

This is a traditional bank path—add staff during boom times and deliver pink slips during down times.

Credit unions, though, are averse to laying their employees off. Those that offer real estate and auto loans with fixed rates face a dilemma, however, when rates climb. If interest rates go up just 1%, the auto loan portfolio—on life support these days—suffers, especially when margins are tight. Typically they hover around 1% or 2%.

It would also be a problem for commercial real estate. If the loan was made at 4.5%, margins would be cut dramatically.

One option that holds promise for lenders is offering business loans. The time to do so is now while margins continue to slide downward and ROA limps along—credit unions with SBA business loans earn a net ROA in the neighborhood of 3% to 5%.

The costs of developing business lending can be considerable; this can be a barrier to entry. It costs an estimated $300,000 to $500,000 annually to fund a business development unit with qualified commercial lenders and support staff. Most credit unions lack the consistent sales volume to support this ongoing fixed expense.

 

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