Harper: CUs Entered Pandemic Recession in Strong Position, But Will Be Challenged

In a speech to the Mountain West Credit Union Association’s Annual Meeting on Thursday, April 23, National Credit Union Administration Board Member Todd Harper stated that federally insured credit unions entered the pandemic-induced recession in a strong position.

At the end of 2019, the system had a net worth ratio of 11.37 percent and a delinquency rate of just 71 basis points.

However, he cautioned that credit unions will face a challenging environment.

He noted that the COVID-19 pandemic will likely lead to sizable losses in the commercial real estate portfolio at credit unions. While the industry has an overall exposure to commercial real estate of 4.8 percent of the industry's assets, those credit unions that have concentrated in commercial real estate lending will be carefully monitored by the agency.

He further stated that residential real estate comprises 31 percent of the industry's balance sheet. Credit unions should expect elevated losses from higher rates of unemployment.

Credit unions hold $380 billion in auto loans. Harper told the audience that the agency expects auto loan delinquency rates to be high to very high, but he pointed out that credit union borrowers have better than average creditworthiness.

Harper noted that credit unions with large exposure in used auto loans could be challenged as used car prices plummet. He said: "These credit unions could face unexpectedly higher losses if the borrower defaults and the actual market price of the vehicle is lower than the value of the loan."

He also commented that these credit unions could face earnings pressure as both new and used car sales fall.

Harper stated that unsecured loans accounted for 7.5 percent of the industry's assets. Unsecured loans include credit cards, private student loans, and other unsecured products. Harper warned that if people don't return to work within the next 3 months, delinquencies on unsecured loans will start to hit credit unions.

Harper also encouraged credit unions to join the Central Liquidity Facility (CLF). He stated that even if your credit union does not borrow from the CLF, your joining the CLF will ensure that the CLF has the resources to meet the liquidity needs to other credit unions that are facing liquidity issues.

Read the speech