Lending

Learn From the Squirrel in Rush-Hour Traffic

July 02, 2010
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I noticed a squirrel running to the middle of the road in rush-hour traffic. He got halfway across and stopped, realizing the potential danger.

He waited until the traffic going in both directions finally slowed and stopped—taking that as his opportunity to make his way across the road, alive.

I watched this little drama unfold with much interest, rooting for him to make the right move. In this case he did, safely reaching the other side. I thought about how much we can learn from his decision not to panic and make the wrong choice.

While some people believe consumers will return to their borrowing and spending ways when the economy turns around, many publications tout the “new frugality” as the norm for American consumers next year and beyond.

The concept is that Americans have turned away from the “shop-‘til-you-drop” mentality and are saving money, clipping coupons, paying off debt, and generally turning to a borrow-free lifestyle.

So what if Americans truly do embrace the new frugality? What if credit unions’ lending growth rate slows so that outstanding loans actually shrink, or only grow at a small rate—at least for a while?

In addition to low loan growth, credit unions face:
* Increased regulatory pressures. (How's that Truth-in-Lending compliance coming?); and
* Potential attacks on noninterest income sources, such as interchange fees and courtesy pay programs.

So what steps should you take? And, based on past experience, what steps should you avoid?

When loan growth and interest rates are low, there are some natural steps credit union leadership may take. One is to look for ways to pump up loan volume under the theory that the alternative to having more money in low-rate loans is better than more money in even lower-rate investments.

This theory is correct and matches the credit union mission to serve members’ lending needs.

To pump up loan volume, credit unions can turn to:

  • Business lending;
  • Specialized lending, such as home equity lines of credit or credit cards;
  • Indirect lending programs;
  • Lower rates and competitive prices; and
  • Lower creditworthiness standards to serve borrowers with damaged credit.

There are pros and cons for each of these options. They can be successful tools to continuing member service and financial success, if properly managed. But they also can be deadly to a credit union if not carefully approached.

For example, many credit unions have been successful in increasing loan volume through business lending programs. But business lending isn't just another variation on consumer lending. It's an entirely different type of lending, where experience and expertise are critical. Without them, business lending can be dangerous to a credit union's financial health.

Similarly, indirect lending can be a strong addition to a credit union’s product offerings—but also dangerous if not well-managed.

For example, an indirect lending program that fails to limit the quality of loans purchased can quickly cause delinquencies and charge-offs to go through the roof, endangering the credit union's financial health.

So what can we learn from the squirrel caught in the middle of the road? Don't panic and jump into something you don't understand.

These times require more thought and planning, not less. To grow loans, a thorough, well-researched and planned approach will yield better results than jumping at the first option that comes your way.

During good times you can survive quick moves, but not now. Before deciding, think about that squirrel in the middle of the road.

Bill Klewin is associate general counsel at CUNA Mutual Group, Madison, Wis. Contact him at 608-231-7009.

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