creating and implementing lending strategies...pos for auto loans via cudl in ca, and other...
TRANSCRIPT
Joe Brancucci, President, CU Rate Reset, McLean, VA Keith Reynolds, SVP Lending, CEFCU, Peoria, IL
Creating and Implementing Lending Strategies
New Lending Strategies for a Changed Market
Joe Brancucci
President CU RateReset
Retired Chairperson –
CUNA Lending Council &
CUNA Councils’ Forum
What Will We Discuss?
• Challenges in the marketplace
• Challenges in credit unions
• What are credit unions doing today?
1970’s – WWII & Boomers Signature Loans Some auto lending – 24-36
month terms Some home equity loans
1980’s - Boomers Debt Consolidation loans Some credit cards Bank deregulation Inflation and interest rates
very high
1990’s – Boomers & Xers Longer term consumer loans Credit cards become a product Home equity lending thrives POS for auto loans via CUDL in CA,
and other solutions in other states
2000-2007 – Boomers & Millenials Full adoption of credit models Automated underwriting systems Auto loan terms extend to 60 months Home equity lines of credit Minimal dependence on income
verification Wide spread use of loan preapprovals Origination experience greatly
improved and virtual lending prevalent
2007(8)-2013(14) The Great Recession Financial Markets Collapse Record high member
defaults Home equity disappears Auto lending slows down Home Equity loans default
escalates Credit scores suspect Historic low interest rates
Today – Millennials and Boomers Auto borrowing robust - 72 and 84
month terms more prevalent Home Equity loans see resurgence Consumers demand “click-it”
solutions Income verification necessary After loan closing still stuck in 1980’s Loan approval process still labor
intensive and mediocre experience Credit cards evolving quickly
Credit Union Lending Landscape and Generational Concentration
Challenges in the marketplace
The faces of the generations…
5 generations of consumers are members
Challenges in the marketplace Tsunami of regulations
Challenges in the marketplace
• “Wait till I can afford it”
• Traditional lenders are risk averse
• College graduates are saddled with high debt
• Boomers not prepared for retirement
• Boomers hampered by “buy it now pay later”
• The Silent Generation– income from investments inadequate
• Fintech companies “seized the moment and the money”
• Millennials have become a major consumer segment
Lingering effect of the Great Recession
Challenges in the marketplace Non-conventional lenders in the marketplace
Challenges in Credit Unions
• The products are the processes
• Product designs were new in 1980’s
• Regulators are a deterrent to innovation
• “It’s the way we always did it” mentality
• Fear of being a “disruptor” in the market place
• High cost of technology development
• Eye on where the puck was…rather than the Wayne Gretzky position – “I skate to where the puck is going to be, not to where it has been.”
Static nature of the lending experience
Not Seeing the Forest for the Trees • Auto loan terms have extended from 36-48 months to 60-84
months on average • Member’s life changes after the date the loan is funded • We refinance a lot of our loans to increase term, lower
payment or to take out some cash – more than you think! • Our preapproval process is not easy to complete • Most members have most of their loans elsewhere • POS financing for auto and home loans very dominate • Lending products are pretty ubiquitous – how can we be
different? • The member wants to be in control • Most millenniums and a lot of others “click-it” only
Recognizing Multiple Generations
What are the loan priorities of each generation?
Great Rates of course…....
Link to video https://www.youtube.com/watch?v=VBtqA96lwtk
Credit Union Loans at the Dealer ….
Link to video https://www.youtube.com/watch?v=uDP-8VWuprQ
Enhancing Credit Cards with Mobile…
Link to video https://www.youtube.com/watch?v=uDP-8VWuprQ
Auto Loan Retention Case Study
Challenge: Provide Member benefit on Auto Loans to lower payments, increase retention, and increase yields on existing loans without staff interaction necessary; minimize FAS 91 adjustments
Coastal Federal “Loan Cutter”
Coastal Federal “Loan Cutter” Number of Loans Reset 501
Percentage of offers accepted 4.1%
$ Volume Loans Reset $10m
Avg. Yield Increase 50 bps
Avg. Duration Increase 15 months
Potential Increased Earnings 22%
Pilot Launch Limited
Universe Expanded in
October
Members reduced payments by 22%.
Member satisfaction increased.
Challenge: New servicing regulations require 1st ARM adjustment notification 10 months prior to adjustment. High pre-payment speeds as a result. FAS 91 implications onerous based on trend of prepayments.
Home Loan Retention Case Study
Percent of Offerings Accepted 73%
Number of Loans Reset 1560
$ Volume Loans Reset $441,000,000 Back Office Cost $0
New 5 Year Fixed 60 months
Potential Increased Earnings $3,120,000+
PenFed 5/5. Member reset their own loan in 60 seconds with $0 back office cost.
PenFed ”Mortgage Rate Preset “
Challenge: Create multi-layered approach to develop an organic and community lending strategy and to control the pre-payment of the loan portfolio.
Moving to Organic Lending
Partnered with CUDL for member access to loans at the auto dealer PSCU relationship expanded to increase credit card utilization and new cards Intuovo – Marketing programs to follow-up on leads “Member Advantage” relationship benefits - the more the member does with the
credit union the more deposit account and loan benefits they earn CU Rate Reset – member in control of modifying their loan thru virtual banking Credit repair and starter loan programs Extensive preapproval programs Development of numerous internally developed virtual solutions such as GTE 3D,
Revamped OnLine Banking, Mobile, Instant issue credit and debit….
GTE Financial – Moving To Organic Lending
Through August, 2016 RESULTS
Number of Loans Reset 1435
$ Volume Loans Reset $27.2 million
Avg. Yield Increase 48 bps
Avg. Duration Increase 86 months
Potential Increased Earnings $1,411,399
Healthy growth in member loans originated at the dealers Attracting new members with an average age of 32 years old = more loans Over 90% loan to deposit ratio – sell participations which increases return
from auto loans Home equity loans beginning to increase in demand Credit starter program helping members to build credit history Rate Reset initiatives:
GTE Financial – Moving To Organic Lending
Summary Multiple generations in the market provide both challenges and opportunities
Virtual banking solutions need to be extended to all facets of the loan cycle – “if they can’t “click-it” they will not do it”
Members want to be in control
Preapproval process needs to be automated
Credit unions need to create intimacy with the member – use “trigger” programs to initialize offers
Create the ability to react to an early payoff request
Use the CUSO products in the marketplace to secure market dominance
Recognize that member’s lives change from the date the loan was originated – create options to have the loan reflect the member needs today
Create strategies and “click-it” solutions to recapture loans members have elsewhere
Any questions??????
Keith Reynolds, SVP Lending – CEFCU • CEFCU - $5.5 Billion in Assets
• 20 Branches in Central Illinois
• 4 Branches in Metro San Jose, CA
• 320,000 Members, 870 Employees
Loan Portfolio of $4B, 83% Loan-to-Share Ratio
• Delinquency .42%
• Net Charge-offs .30%
• $1.55B in Consumer Loans
CEFCU
• Will Originate $760M in Consumer Loans
• Will Risk Price $225M of those loans
Principal Objective
Achieve “sustainable” growth based on disciplined underwriting and pricing, consistent with CEFCU’s values.
Corporate Values Create Constraints • No Excessive Dealer Flats
• No Dealer Mark-ups
• No Incentive Pay
• Decentralized Lending
Strengths • Illinois Market Share/ Name Recognition
• Established Branch Network
• Management Continuity (including Branches)
Weaknesses
• Strengths do not translate to California
• Core System/Legacy Applications not nimble
Strategies Impact Market Share
Analytics to Validate/Invalidate Strategies
From the Federal Reserve Bank of New York…
From 2001 to 2006, total balances of second lien borrowing grew from under $200 billion to
$1.1 trillion.
Risk Pricing Strategy
High
Low
Auto Loans 60 Day Delinquency
Charge-Offs
12% rate bump between top tier rate and highest risk tier rate
PSL’s – 2011
• Delinquent $ Net Charge-offs similar to 710 FICO Auto Loan
• Yield 200 basis points higher
• Variable rate
Good Decisions Require
Good Information
July Year-Over-Year Consumer Loan Volume
Dropped 15%
21.7%
21.1% 21.6%
22.7%
21.8% 21.9%
22.6% 22.7%
21.3%
21.6% 21.4%
15.0%
20.0%
25.0%
30.0%
1Q2014
2Q2014
3Q2014
4Q2014
1Q2015
2Q2015
3Q2015
4Q2015
1Q2016
2Q2016
3Q2016
CEFCU Market Share IL 14 Counties
% of Financed Units
1,512
1,688 1,736 1,777 1,625
1,905
2,173
1,446
288 178 121 125 159
283 393
224
0
500
1,000
1,500
2,000
2,500
July 09 July 10 July 11 July 12 July 13 July 14 July 15 July 16
SANGAMON COUNTY
Total Financed CEFCU Financed
Layered Risk (Attribute Analysis)
LTV Avg Loss Comparison (650+ vs <650)
• 2014 Indirect Loans
Average of Cho Balances Column Labels
Row Labels <50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100-104 105-109 110-114 115-120 >120 Grand Total
875-900 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
850-874 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
825-849 $0 $0 $0 $0 $0 $0 $0 $0 $8 $0 $0 $0 $0 $0 $0 $0 $1
800-824 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $394 $356 $0 $16
775-799 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
750-774 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $56 $0 $86 $0 $441 $207 $36
725-749 $0 $0 $0 $0 $0 $0 $0 $2 $0 $0 $0 $0 $0 $214 $672 $0 $43
700-724 $71 $0 $0 $0 $0 $0 $16 $43 $0 $0 $0 $25 $387 $0 $352 $0 $64
675-699 $0 $0 $0 $0 $0 $41 $0 $107 $84 $0 $449 $0 $0 $168 $234 $0 $108
650-674 $0 $0 $0 $53 $0 $146 $96 $118 $155 $71 $168 $124 $324 $134 $291 $193 $152
Grand Total $3 $0 $0 $2 $0 $10 $9 $22 $25 $8 $81 $22 $119 $110 $314 $49 $44
Average of Cho Balances Column Labels
Row Labels <50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100-104 105-109 110-114 115-120 >120 Grand Total
625-649 $0 $0 $0 $0 $288 $38 $0 $34 $279 $415 $348 $689 $396 $164 $855 $293 $362
600-624 $0 $0 $0 $70 $0 $139 $334 $254 $579 $1,085 $532 $1,107 $717 $851 $1,548 $1,945 $718
575-599 $242 $477 $207 $0 $0 $303 $1,183 $947 $751 $1,081 $850 $1,506 $1,522 $2,274 $1,496 $1,067 $1,048
550-574 $0 $0 $215 $291 $587 $361 $402 $1,353 $868 $881 $1,574 $1,278 $1,388 $1,141 $3,876 $4,217 $1,073
525-549 $19 $0 $0 $697 $391 $1,760 $313 $583 $1,317 $1,332 $732 $1,267 $895 $1,918 $1,567 $0 $975
500-524 $28 $0 $56 $843 $1,184 $564 $1,480 $1,045 $1,109 $3,448 $397 $2,822 $0 $2,504 $14,901 $1,245
475-499 $0 $0 $1,592 $834 $528 $1,837 $1,623 $1,652 $1,082 $3,841 $2,525 $2,802 $0 $0 $1,645
450-474 $0 $978 $0 $0 $0 $0 $379 $1,184 $0 $1,312 $0 $0 $0 $603
425-449 $0 $0 $0 $0 $0 $4,891 $0 $7,307 $1,743
400-424 $2,948 $0 $0 $983
<350 $13 $0 $0 $527 $429 $650 $1,219 $1,047 $1,300 $1,247 $1,045 $370 $0 $0 $3,114 $842
Grand Total $27 $117 $77 $303 $356 $637 $685 $855 $828 $1,034 $835 $1,075 $869 $927 $1,401 $1,437 $832
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Co
st %
FICO Score
Auto Loan Portfolio
Collection Loan Loss
ROA on Auto Loans
12/31/2014 6/30/2016
>800 0.23% 0.60%
710-719 0.77% 1.48%
670-679 2.98% 2.86%
640-649 5.15% 5.65%
610-619 8.10% 7.76%
570-579 11.11% 11.42%
<520 10.53% 9.94%
What is the Threat?
Loan Product Convenience
OR
Delivery Channel Convenience?
From American Banker…
• Banks are among the most unlikable brands with Millennials.
• 92% of Millennials would choose a bank for digital services.
• J.D. Power Retail Banking Survey of Millennials found large banks had higher satisfaction ratings than both community banks and credit unions for the first time ever.
CEFCU Consumer Lending “Direct” Volume Today
• 46% originated through Branches
• 31% originated through Contact Center
• 23% originated through Web/Mobile
Is it economically sustainable to try to be all things to all people through all
channels? • What happens in 2020 when today’s millennials are 46% of
the workforce?
Origination Cost per Delivery Channel
3X for Branch vs. Mobile
Meet Marcus, Goldman Sach’s Online Lender for the Masses
• Goldman Sachs, which has been rolling out its first foray into banking for the little guy, is going back to its history to name its new big push: an online lender for the masses.
• Initially, Marcus will offer relatively small consumer loans, a business that Goldman has traditionally avoided.
• In a separate operation that was introduced in April, Goldman began offering online savings accounts with no minimum under the brand GS Bank.
From The New York Times, August 18, 2016
Delivery Channel Shift Goal by 2020
• 20% “Direct” Loan Volume in Branches
• 20% through Contact Center
• 60% through Mobile
Questions? Thank You!!!