Bracing for Impact: The Unexpected Challenges with the Loan Surge

Credit unions have experienced a remarkable surge in loan origination over the past few years. According to recent data from the National Credit Union Administration (NCUA), credit unions' loan portfolios have grown by an average of 8% annually since 2015. In fact, according to Steve Rick, Chief Economist of CUNA Mutual Group, loan growth was an incredible 19.4% over the 12 months ending Q1 2023. This growth is attributed to factors such as the rising demand for consumer loans, particularly in the auto and mortgage sectors, the willingness of credit unions to partner with fintechs to increase originations, and the increasing popularity of credit unions among borrowers seeking a more personalized banking experience.

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Understanding the Challenges Ahead

The surge in loan origination has brought numerous benefits to credit unions and consumers alike. For credit unions, increased loan volumes translate into enhanced interest income, higher member retention, and a strengthened competitive position in the financial market. At the same time, consumers benefit from access to affordable credit and personalized service, fostering a sense of trust and loyalty.

Despite the advantages, unprecedented loan origination poses several challenges for credit unions. One of the primary challenges is the strain on loan operations and back-office channels. As loan volumes increase, credit unions must ensure seamless processing and timely disbursement, requiring efficient loan officers, underwriters, and support staff. In recent years, credit unions took steps to automate processes for origination and account opening. It is a further reason why credit unions have grown so successfully.

Unfortunately, these great strides in automation during account opening have not extended past the funding and disbursement process. As many credit union executives are no doubt aware, loan servicing operations will come under stress as the high volume of originations mature in the loan life cycle. 

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“Typically, loans that are between 12-24 months aged will show signs of stress. The regular course of changing financial situations for borrowers will lead many to request hardship assistance or delay making payments. Any changes to the economy will exacerbate the volume of these requests. Failure to have a plan to handle this volume could result in delays, duplicate requests, processing errors – and ultimately losses.”

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A Modern Approach

Historically, credit unions address loan servicing needs by relying on call center and branch staff and managed work queues for tasks that cannot be performed by agents on the phone or in branches. Some credit unions may even have some parts of loan servicing automated, such as online forms available for member requests. But the shortage of valuable loan servicing representatives, particularly in collections, will make it difficult to handle the incoming volume effectively.

To address the burden on loan operations and back-office channels, credit unions should turn to technology, specifically automation. Modernizing the back office does not necessarily mean replacing core systems. There are robust tools available to help avoid hiring new employees to cover the volume or overwhelming existing operations staff. Credit unions should start by exploring options to reduce manual processing that may be available with their current core or online banking providers. While these may only automate portions of the loan servicing process, it can help to alleviate immediate pressures until better solutions can be implemented.

To have a material impact on lowering operational costs and expanding margins, credit unions should implement a tool that can automate key loan servicing tasks all the way through, from the member-facing experience to core processing. To get the most immediate value, credit unions should prioritize high volume and simple tasks such as payoff quotes on letterhead, due date changes and promotional skip-a-pays that are almost always manual. This will allow employees to focus on specialized, higher risk tasks, which may be more prone to error or provide higher value to the credit union.

The most sophisticated automation tools that exist today can also incorporate complex decisioning. This means that with rules set based on product, account status or other behaviors, credit unions can customize individual member experiences based on their rules and policy. For example, in a digital experience, members can be guided to a solution to meet their personal needs. This could include a new loan application after a payoff request or in other instances be offered hardship assistance. Just like over the phone or in the branch, the digital experience shouldn’t be a one size fits all solution.

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Time for Thoughtful Action

While it is crucial for credit unions to continue catering to the growing demand for loans, maintaining a sustainable balance between loan origination and back-office efficiency is paramount. Imagine buying a rental property and making a strong profit from the negotiated price (hooray!), only to lose that profit by high management costs, non-paying renters and public complaints about the property’s decline (yikes!). The parallels to investing in loan growth and then moving members to a highly manual, outdated servicing experience are real.  Here’s what Forbes had to say about it: 

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“Loan servicing is largely a backwater of outdated technology and poor customer experience. The reach of fintech into this dusty corner of the industry is still nascent.”

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It doesn’t have to be this way. By investing in automation and member self-service technology, optimizing processes, and adopting proactive operational risk management strategies, credit unions can not only protect the margins they projected at the time of origination but also meet their members’ digital-first expectations where answers are measured in seconds not minutes or hours.

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About RuthAnn Riggs 

RuthAnn Riggs joined Constant in April 2023 as Chief Growth Officer after over six years as EVP & COO of Credit Union Loan Source. As a Lean Six Sigma Black Belt, RuthAnn has implemented process improvements and technology initiatives that have increased net revenue by millions of dollars over the course of her 20 years in financial services.

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About Constant

Constant, a CUNA Strategic Services alliance partner, is the only software provider that fully automates loan servicing so members can resolve issues entirely in their online banking account - and then leverages insights from those actions to make relevant product offers to the member. With Constant, credit unions can reduce operating costs, empower members to self-serve, and leverage member self-service actions to deliver tailored product offerings.

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