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

Is NCUA AWOL in Examining CUs for SCRA Compliance?

Is the National Credit Union Administration (NCUA) absent without leave (AWOL) with regard to ensuring credit unions are complying with the Servicemembers Civil Relief Act (SCRA)?

On November 2, Hudson Valley Federal Credit Union (Poughkeepsie, NY) settled allegations that it violated the SCRA by repossessing vehicles owned by SCRA-protected service members without first obtaining the required court orders.

But what I found of interest in the press release was that prior to August 2014 Hudson Valley FCU did not have any written policies and procedures that address SCRA's protections against non-judicial auto repossessions.

You would have expected that one of the largest credit unions in the country would have had in place policies and procedures prior to August 2014 to ensure that the credit union was complying with the law.

Also, it is notable that NCUA was not part of this settlement. According to the press release, the Department of Justice launched its investigation after learning about two private SCRA lawsuits filed against the credit union.

This begs the question as to why there was not a referral from NCUA to the Department of Justice regarding these SCRA violations.

The evidence suggests that NCUA has not historically examine federal credit unions for compliance with SCRA. A July 2012 Government Accountability Office (GAO) report found that between 2007 and 2011 NCUA only examined 0.02 percent of federal credit unions for SCRA compliance.

But a NCUA official told GAO that the agency would start to review credit union lending practices to ensure compliance with SCRA.

It is possible NCUA examined Hudson Valley FCU and recommended remedial actions to address the credit union's SCRA issues.

To determine if NCUA has followed through on its pledge to GAO, the NCUA Inspector General should launch an audit reviewing NCUA's examination of credit unions for SCRA compliance.

CFPB Flags Risk Associated by Longer Maturity Car Loans

A study by the Consumer Financial Protection Bureau (CFPB) flags the higher risk posed by longer term auto loans.

The study noted that auto loans with longer maturities continue to expand market share, despite a cooling in the auto finance market. According to the CFPB, loans with maturities of six years or longer accounted for 42 percent of the market in 2017 year-to-date, up from 26 percent in 2009.

Six-year auto loans are the most common term used to finance auto loans.

Longer-maturity loans may pose greater risks to consumers. These loans are more likely to be used for larger loan amounts and by borrowers with lower credit scores. The average credit score for a borrower for taking out a six-year auto loans was 674 -- 39 points below the credit score for borrowers taking out a five-year auto loans. And given that the average length of U.S. car ownership is 6.5 years, longer loan maturities may mean borrowers are paying off loans for cars they no longer drive.

The dividing line in loan quality between five-year loans and six-year loans was especially stark, with default rates for the latter roughly double the former at comparable points since origination. For example, a six-year car loan made in 2014 had a cumulative default rate of over 5 percent two years after origination, but a similar five-year loan saw a default rate of just over 2.5 percent.

Read the report.

OCC Finds Auto Lending Risk Is Increasing

The Office of the Comptroller Currency (OCC) today expressed concern about increased auto lending risk.

The OCC's Semiannual Risk Perspective for Spring 2016 found less stringent underwriting standards and increased risk layering, as lenders compete for market share. In addition, used car values have started to decline, which could lead to higher losses on repossessions.

OCC wrote:

Auto lending risk is increasing because of notable and unprecedented growth across all types of lenders. Recently, delinquencies on auto loans have begun to increase and used car values have started to decline. As banks have competed for market share, some banks have responded with less stringent underwriting standards, or both, for direct and indirect auto loans. In addition to the easing of underwriting standards and potential layering of risks (higher loan-to-value ratios combined with longer terms), concentrations in auto loans have been increasing. These factors create the potential for increasing levels of embedded credit risk in auto loan portfolios. The elevated risk results in higher probable credit losses and may warrant additional provisions to the ALLL or higher capital allocations. Supervisory work to date has noted that some banks’ risk management practices have not kept pace with the growth and increasing risk in these portfolios.

Read the press release.