August 19, 2020 by Jeremy Smith
Credit union lenders were forced to make very tough, very quick decisions when COVID-19 began to impact member income. Business and school closures forced job losses, furloughs and lay-offs in unprecedented numbers, creating a situation no credit union was fully prepared to navigate. Although examiners were quick to say they would take the chaotic circumstance into account, the NCUA specifically has reiterated that lenders under their purview will be expected to adhere to the principles of safety and soundness.
Now is the time to go back to those hurried COVID-19 decisions to ensure they are in alignment with your credit union’s risk appetite and examiner expectations. Here are a few things to check…
Are members equipped to abide by loan terms? The spirit of Ability to Repay regulations ensures credit unions and other lenders do not allow consumers to overextend themselves. Many credit unions fast-tracked the rollout of brand-new small dollar loan programs to help members cope with what everyone hoped would be short-term economic challenges. However, as positive COVID-19 cases continue to rise and different states rollback their reopening plans, now may be a good time to check in on those members to see if they can, indeed, abide by the repayment terms of their small-dollar or short-term loans. Getting policies in place for those that can’t is a good prerequisite to those one-on-ones with member borrowers.
What does your borrower pool look like? As the nation addresses a needed reprioritization of diversity, equity and inclusion values, new reputational and legal risks are likely to emerge. Having awareness of who was approved, who was denied and how those decisions line up with applicant and borrower demographics is a best practice. It’s also good business. A well-documented post-mortem review to look for any worrisome trends, patterns or biases is something examiners, not to mention your members and board, will appreciate. If you do spot any potential issues, dig deeper. Find out why the decisions were made and on which criteria they were based. Document your plans for making corrections to any mistakes that may have been made and follow up by making note of every milestone you hit within those plans.
What more can be done? As stimulus money begins to dry up and one-off assistance programs like skip-a-pay are no longer helpful, it’s a good idea to sit down and brainstorm additional member relief strategies. It may also be a smart time to reevaluate the credit union’s appetite for risk. Is now the time to loosen the purse strings in an effort to help more members? And if so, how can that be done in a way that is still cognizant of the credit union’s own long-term financial health? Did the credit union overextend during those first few weeks of the pandemic? And if so, what adjustments need to be made to get the credit union – and its members – back into a position of financial strength? Because the future is far from certain, the best way forward may be to create a tiered plan that can be rolled out in different phases based on the country, or more even relevant, your community’s level of recovery.
The long-tail fallout from the pandemic is likely to take different forms for different credit unions. It’s much better to get a handle on potential issues now than to be surprised and have to scramble to address them later. As people-centric organizations, credit unions come from a place of dignity, respect and operating in the best interest of their members. Looking ahead to anticipate trouble spots, while also looking back to ensure no mistakes were made is one way credit unions can demonstrate that distinctiveness. Governance, risk and compliance leaders have a tremendous opportunity to lead this effort for their cooperatives.