Managing Liquidity Constraints at Small Credit Unions Part 2

[00:00:00] Tyler: I think it’s really important that we as a credit union, and our desolations and collections teams understand the reasons behind the delinquency and then that’s going to tell you the path forward if they can’t afford it. Period. If there’s no way to restructure the debt, the best thing to do is to have a repossession or volunteer surrender or get them to sell it on their own, get rid of the collateral and move on, rather than dragging this out through a collection sphere and then getting legal involved and then, you know, garnishments, all the things that come from that worst case scenario.

[00:01:04] Vince: Welcome everyone to part two of our special panel discussion on 22 minutes in lending with three credit union leaders. I’m your host, Vince Passione, and I’m continuing the conversation with our three panelists. Joining us are Dee Edie, the president and CEO of Pine Bluff Cotton Belt FCU in Pine Bluff,Arkansas. Tanya Romero Sturgeon, the president and CEO of Guadalupe CU in Santa Fe, NewMexico.And Tyler Valentine the president and CEO of StagePoint FCU in Laramie,Wyoming.

[00:01:31] Vince: Together, they’re going to share their experiences, strategies, and visions for the future. Offering what I believe to be a very unique glimpse into smaller credit unions and the critical role that they play in fostering financial well being in their communities. So consumer under stress, we’re starting to see delinquency spike across all portfolios.

[00:01:50] Vince: So how are y’all dealing with that? How do you change the way you deal with your member? I mean, Navy is one of our clients and they always say the same thing, and I’m sure you view it the same way. These are members for life.

[00:02:02] Vince: So how do you take someone who’s a member for life, who’s not paying on a loan? How do you get that money back? Is it easier? Is it harder? You know, typically you see certain lenders, they’ll use legal as a way to try to make sure the consumer is meeting their commitment.

[00:02:17] Vince: So how are you all dealing with this right now?

[00:02:19] Tanya: We use our financial coaching department a lot, conjunction with our collections department.We try to see if we can work with them with a budget. sometimes people are struggling to pay, because money is going out elsewhere, like to other family members or, casinos or things like that. And so it’s really important to have a really judgment-free zone, open, honest conversation and really dive deep in with the members to see.

[00:02:53] Tanya: Where there are options and how we can help them by restructuring their budget. It takes a lot of sessions, a lot of time and education, but when people are willing to work with us through that, we see a lot more success when they work with us through the processing of course, not everybody’s ready to jump into type of program, but, it, it can be very successful.

[00:03:17] Dee: I think that’s very true, what Tanya said applies here as well. It also depends on, members addictions, I’ll say,based on if they’re willing to make some changes,sometimes in their personal lives, in their priorities. Then, you’re able to accomplish much more with them, and actually they can become healthier financially.

[00:03:44] Dee: But that takes commitment, and not everyone’s willing to make it.

[00:03:49] Vince: you know, payment priority has lots to do with it as well, right? Talk about their psychology of what they pay, right?

[00:03:55] Dee: Yeah.

[00:03:56] Vince: Used to be a time when we would say to people, you paid your mortgage, then you paid your car loan, and then you paid your credit cards. But it seems like the first thing people pay is their mobile phone bill.

[00:04:07] Dee: Very true.

[00:04:08] Tyler: very true. I think we’re finding early intervention is really key. to ensuring that, or at least. Understanding the delinquency, the loans that are going to go bad, we’re really working hard. We brought in an additional part time staff person focused on death solutions to do those early intervention phone calls.

[00:04:29] Tyler: We have automated systems and reaching out. but there’s no replica for a person on the other end of the phone we found. And so we’re really want to know and understand why that payment Is it getting made, as Tanya and Deepo said, then what can we do, right? Is there a budget restructure so we can do, is it a life event that happened?

[00:04:51] Tyler: And if we can, you know, do an extension of these payments for this period of time and then they’ll get back on track.

[00:04:58] Tyler: Do we need to do a temporary or permanent modification in order to the budget that exists today? , but we have to understand it, right? And asTanya said, it’s really hard sometimes.

[00:05:08] Tyler: For members to want to engage with that.

[00:05:11] Tyler: And so what we’re really focused on is that early intervention. So at 10 day, making sure that they have a personal contact of,

[00:05:20] Tyler: Hey, you’re late. What’s going on? Let’s have that conversation. And we all have our frequent flyers, those that are always out there. and that is just kind of a component.

[00:05:29] Tyler: Of what we call desolations collections, but I think it’s really important that we as a credit union, and our desolations and collections teams understand the reasons behind the delinquency and then that’s going to tell you the path forward if they can’t afford it.

[00:05:46] Tyler: Period. If there’s no way to restructure the debt, the best thing to do is to have a repossession or volunteer surrender or get them to sell it on their own, get rid of the collateral and move on, rather than dragging this out through a collection sphere and then getting legal involved and then, you know, garnishments, all the things that come from that worst case scenario.

[00:06:08] Tyer: So we’re really trying to stop it before it gets there or at least get gain understanding

[00:06:12] Vince: now you talk about restructuring and. The trouble deck restructure process is highly sort of scrutinized by the regulator, right? From an accounting perspective, has that process become easier for you all harder for you all in this,in the regulatory environment? We’re under

[00:06:29] Tyler: TDR is specific to the trouble debt restructure is specific to mortgages. So it’s only in mass circumstance that it’s as challenging to get through from a regulatory aspect. We haven’t really seen it on the mortgage side, but we’re definitely seeing it on, you know, the consumer and the recreational and the powers for sides of the auto,and in recreational and powers for it in that space.

[00:06:53] Tyler: You know, we have our procedure and our process and our policy and procedure that says this is what’s needed, right? They still have to prove the ability to repay. We can’t, camouflage our delinquency just by extending a payment or restructuring the debt and then in 60 days they can’t make the payment again.

[00:07:10] Tyler: Right? We don’t do things like that. They still have to. Have a lot of the requirements of a TDR, just so that we make sure that we’re covering our bases, and make sure that it’s not just a bandaid on the situation. so we actually had a lot of, kudos from the regulator around working with our member, doing those restructures, keeping members in their vehicles or in their homes or even.

[00:07:34] Tyler: You know, making sure that the collateral doesn’t go through repossession and things like that by doing some of the modifications. temporary or permanent.

[00:07:43] Vince: obviously with these heightened delinquencies. Now that Cecil is out and about, it’s taken a long time, but it’s here. Impact to Cecil and how you look at lending, how you look at your balance sheet. Do you want to go first

[00:07:57] Dee: Oh, well, CECL did not hit us as hard as we thought it would. What happened for us was, I had a loan officer who had, what I consider a healthy loan officer approval amount. And she was conned by someone. So, had it not been for some of the CDFI funds, I would have taken a 1. 2 million dollar loss.

[00:08:24] Dee: That hurts like everything when you’re 70 million.

[00:08:27] Dee: but the con person, I mean, we’re really working with them. He included about another 15 people that became members and we’re all, it’s all fraud. So we’ve got this big case going, but so right now, my delinquency shows and our charge off. That’s very unusual for us.

[00:08:50] Dee: We have, we were doing great right before that, so, our delinquency really is affected by that. You know, I think with the CDFI loans and all that, we ended it. We made sure that everything was, the hazard bill that you would pay, just like Tyler spoke of.

[00:09:10] Dee: So, we’ve done a good job with that. It’s just that we’ve got this one big list that I’ve got to work through.

[00:09:16] Vince: and those grants, those CDFI grants, you can use them as regulatory capital to cover. Cecil,

[00:09:24] Dee: depends, not if.

[00:09:26] Dee: Well, for us, because of this broad case, you cannot use them for something like that. cause it was fraud, had it been, you know, just regular provision for long loss. Yes, you can use it there, but it could not cover our situation.

[00:09:45] Vince: understood and Tanya, your credit on Cecil and reserves.

[00:09:49] Tanya: same thing, we anticipated it hitting us a lot harder than it ended up being when we first implemented it. however, now we’re seeing that, well, I mean, we’re also seeing increased delinquencies, but we’re having much higher allowance transfers month over month. That’s really. Started more in 2023 than, in the later part in 2023.

[00:10:13] Tanya: So I think it just maybe took longer for us to feel an impact but in the beginning we were pleasantly surprised that it, we weren’t having toput aside more money than we thought we were going to from our previous calculation methods.

[00:10:27] Vince: So let’s talk about indirect lending and Tyler in our prep session, we talked about your portfolio. So can you share size of the portfolio and sort of the profile from a FICO perspective and, you know, the type of member that you’re pursuing in your indirect program.

[00:10:44] Tyler: So our indirect portfolio makes up about 50 percent of our little over 50 percent of our total loans. So that’s going to be somewhere around 35 million, in total loans within the portfolio. the makeup of that, you know, the vast majority is prime, but we certainly have non prime. We use service interruption devices on those that may have credit challenges, but may have the down payment and those other factors, the ability to repay. So we really work across the full spectrum of borrowers within that indirect portfolio. We want to be there for those people that might not be able to get a loan anywhere else and have options available for them. And of course, you know, the

[00:11:26] Tyler: A paper somewhat offsets some of the risk that is taken on some of the non prime borrowers, but it does it. There’s also not a lot of profitability in the A plus paper either. And so it is a balancing act. it indirect for us has been a component of our portfolio since the 90s back when they used to fax over the deals from the dealership. Right. So we’re very well-versed in doing it. I think that we’re really good at it.

[00:11:50] Tyler: I think it fills a need that often could be overlooked by other credit unions that aren’t in the indirect space. Because unless that member is coming to the credit union for that auto loan before they go to the dealership, the likelihood that auto loan at any credit union, let alone potentially the credit union that member banks at, is next to nothing because that dealer isn’t going to let that person leave without getting financing secured somewhere, and often it may not be with the credit union, so we work really hard to cultivate relationships with dealers, make sure that we’re In front of them, I think the auto loan.

[00:12:28] Tyler: There’s going to be an evolution of auto lending right from self driving vehicles to maybe less,vehicle ownership in some parts of the country. But, as D talked about being, in rural Arkansas, I’m in rural Wyoming, and,I think people are going to continue to own and buy cars and, not probably trust Carvana and online, vehicle places as much as you might see at urban centers and things like that.

[00:12:53] Tyler: So it’s really knowing your member, it’s knowing your market, and it’s being on the forward edge of.

[00:12:58] Tyler: Ensuring that we are going to be a finance partner with our dealers, cultivating those relationships in the same way we cultivate member relationships. We have focused on making sure our dealer partners are taken care of.

[00:13:10] Tyler: If they need something, they have a person to reach out to. and really continuing a business model that is mutually beneficial for the dealer and the credit union and the member.

[00:13:20] Vince: So Tyler, Any silver bullets on converting those indirect members into sort of true members crossing up sell now, huh?

[00:14:02] Tyler: No, you know,they really do view us and if they’re local people, you know, know who we are. I think they really view us as a finance, option. , not very many members see us as a full service financial institution.

[00:14:16] Tyler: They view us as where they got their car.

[00:14:18] Tyler: We have had some success here and there in converting them.

[00:14:22] Tyler: We do have an onboarding program, so when they come in, they get a card that says, Hey, this is who we are. You just financed a vehicle and it’s with us. And it’s a thank you card. So hopefully they open it.

[00:14:33] Tyler: Because sometimes they don’t open the disclosures that come that they’re in a regular pizza mail.and then they go into an email queue where they get,you know, an email, Hey, set up your payment for automatic payment.

[00:14:45] Tyler: And then they get an email that says, Hey, we can do all the things as well. But we don’t see a ton of success in converting them. and we’ve tried so many different things over the years. to be honest, we spend more money trying to do bad than we would. To spend on a member off the street that’s coming into us for a checking account.

[00:15:04] Tyler: So, it’s really not a focus this point for us. We’d love to have them.

[00:15:08] Tyler: We’d love to have more that would do more with us over the course of the relationship. but we’re not going to spend a lot of time or energy or effort to get there just because we have really struggled to find success in that conversion.

[00:15:22] Vince: mean, yeah, I think you have lots of company in that problem.

[00:15:25] Tyler: We do.

[00:15:27] Vince: Yeah, now, D, you had an indirect lending program, I think we talked about, but you, did you shut it down? and then if I’m right, why?

[00:15:35] Dee: shut it down because we weren’t making any money off of it, but the more we analyzed the program, first time we were risk averse. Okay. So We were too conservative. Secondly.

[00:15:50] Dee: We discovered that our dealerships were not trustworthy. Basically what I have in this area is one dealer that’s a GM, one that is a Nissan, and one that’s a Ford.

[00:16:01] Dee: So they have no competition. And it ended up being that we could not trust what they put down as income. When we’d get a vehicle back, for instance, it wouldn’t have the equipment, but they said it had those kinds of things. I think we were just in a raw, indirect program.

[00:16:22] Dee: It was our only one here for credit unions in the state, but,would love to have access to a better program. I’ll be honest. But,

[00:16:27] Vince: Yeah, when I was in the auto finance business, we used to call it when someone came in and said, yeah, we just sold a car that had a sunroof and it was a convertible. So, I know, I. It’s all about the dealer and it’s all about the collateral and Tanya, you have, I was looking at your 50 to a hundred point, you have no indirect lending program.

[00:16:50] Vince: Is that right?

[00:16:51] Tanya: That’s right.we always had the strategy or the mindset of we really want our members to come in. We didn’t want to,face those struggles of not being able to make them, a full member. And, and we, yet we were seeing success in auto lending, though we weren’t experiencing a need for it.

[00:17:11] Tanya: Although we do have lender dedicated to auto loans, and we call that our dealer relations department.

[00:17:20] Tanya: And so, we really just worked on getting out there with the different dealerships, chatting with them. We participated in car sales, just trying to become like a friendly face and name so we’ve always had good rapport with the dealerships around us.

[00:17:35] Tanya: And, I think the fact that, What helps them wanting to keep coming to us is the fact that we do ITIN lending.

[00:17:43] Tanya: And, several of the people around us don’t. And so that would be someone that they maybe couldn’t get approved in an indirect lending program so those are some reasons I think we’ve still seen continued success even without indirect lending.

[00:17:59] Vince: so you touched on this and we talked about this during our prep.

[00:18:02] Vince: So you are an ITIN lender. Most ITIN lenders are typically starting in auto. Is that where you started or did you start in, in mortgages? Where did you start ITIN lending?

[00:18:13] Tanya: We didn’t start it with a specific product. We just started helping members of our community with ITINs.so depending on what product they were needing to be placed in that time. but we do offer accounts and all of our lending products for ITIN holders.

[00:18:31] Vince: Now, it’s hard to get research. I was looking at, there was a recent Filene report, right? They talk about the size of the market. It’s probably like 23 million folks in the United States that are under bank that fall into this category. How does this fit into your balance sheet?

[00:18:44] Vince: How important is this to you? I’m proud of it serving your community. I perfectly understand that.

[00:18:49] Vince: But from a balance sheet perspective, how does this fit? How important is this to you?

[00:18:54] Tanya: It’s very important. I don’t know if any of you have ever heard of the book called, Blue Ocean, ,

[00:19:00] Tanya: I’ll summarize, you know, so there’s the Red Ocean or the Red Sea where it’s like, this is the prime. member or consumer.

[00:19:09] Tanya: They have the ideal credit score, ideal, you know, they have a social,they have this ideal income level, and this is the person that everybody’s going for, where all the competition is.

[00:19:20] Tanya: But when you turn this way, there’s this whole other ocean of untapped market, of business, of people who need services.

[00:19:28] Tanya: And I think we’ve seen a lot of success. we’ve certainly seen, Rapid growth, you know, around percent growth on an annual basis. We’ve seen a lot of lending growth for sure. And, more loyal payback because some people are with the mindset of no one else will lend to me.they’re quite grateful for getting this opportunity and they’re diligent in their payback, often prior to maturity of the loan. so it’s been very successful for us in terms of our growth in our lending and account areas.

[00:20:04] Vince: And it must be pretty challenging. we obviously were in the education loan business and international students are always difficult, right? Because people are very concerned about trackability and repayment and what happens to them when we pay. Challenges for you so far as an ITIN lender?

[00:20:20] Tanya: Well, when we first started doing this around 20 years ago,

[00:20:24] Tanya: I think the biggest challenge was a language barrier. You know, we didn’t have, the staff that could fully communicate. We didn’t have any, I mean, we had some people that were bilingual with English and Spanish, but it wasn’t a full fluent Spanish.

[00:20:42] Tanya: And communication was a struggle, so was building the trust. I think that was the biggest struggle because a lot of people coming from another country didn’t always have trust in the banking system from where they were from. So they weren’t experienced with, I should just trust my credit union. Yeah, they’re my go to reliable resource.

[00:21:01] Tanya: And so we really had to work hard at building a positive rapport. And one of the things that we did was we did receive grant money to build, A branch, and we built out on our south side of town where we saw that population was really growing, the immigrant population there, and we, hired staff that was all, everyone in that ranch was bilingual, and, to this day, it’s our fastest growing branch.

[00:21:27] Tanya: They average like a hundred accounts a month, they do normally the highest volume and dollar amount of loans on a monthly basis. it’s the busiest transaction branch, you know, we’ll do around 20 plus thousand transactions a month there. we see that these members are very, Reliant on cash versus other types of services and so it’s been an interesting development.

[00:21:52] Tanya: That branch was so successful that within a few years we outgrew it.

[00:21:56] Tanya: And we had to build a bigger building.

[00:21:59] Tanya: Luckily, it was on the same side of town, just a little further down the street. But we’ve just seen so much success with this business model with serving our members of our community, regardless of immigration status.

[00:22:11] Tanya: And by bringing that branch, by going to them, being on the side of town where they were being more visible, having staff that communicated with them effectively really helps to open the doors to trust and word of mouth because look how fast we were booming and growing because they’re bringing everybody they know in saying Guadalupe helped me, let’s see how they can help you.

[00:22:35] Tanya: So it’s been a very successful business model for us.

[00:22:39] Vince: And that concludes part two in our series with D Tanya and Tyler, but don’t miss our final episode of this 22 minutes in lending panel discussion.

[00:22:51] Vince: Thank you for tuning in and hit subscribe. So you don’t miss our next episode.