Rise of the Credit UnionsBy Rob Chrisman,
Rob Chrisman's Perspectives
Here’s a trivia question. Which set of financial institutions charge materially lower interest and fees for most loan products, pay higher interest on a wide range of deposit products, and score materially higher than banks in borrower satisfaction and trust? If you guessed payday lenders, keep reading.
Long viewed as the little brother or sister of depository and non-depository lenders, credit unions are on the rise — but how will they manage it? In its most recent March issue, Consumer Reports noted that, “Overall, our members relied more on credit unions than banks for savings accounts, credit cards issued by the financial institution, loans, CDs, and mortgages. One reason is that credit unions generally charge lower interest rates on loans. For example, credit unions were charging 2.79 percent on average on a 48-month new-car loan in the fourth quarter of 2017, while banks were charging 4.64 percent, according to the National Credit Union Association, using data from S&P Global Market Intelligence.” Credit unions charge a higher rate for non-QM loans? Nah, why bother — they’re going into the portfolio anyway.
“Credit unions are among the highest-rated services we’ve ever evaluated, with 96 percent of our members highly satisfied vs. 80 percent for the three biggest national banks. That satisfaction is driven by good customer service, not surprising when you consider that credit unions are owned and managed by their members.” To obtain a mortgage from one do you have to work for Lockheed or be a Texas State Trooper? No. Community-based credit unions have more relaxed membership rules, and almost anyone is potentially eligible to join a credit union somewhere. Which means that almost anyone can obtain a home loan from one.
You can be a “customer” pretty much anywhere. But where can you be a “member?” Many credit unions only require $5-$30 to open an account and become a member. Due to their status (not-for-profit, member-owned financial institutions with no source of secondary investment capital) credit unions in the US are exempt from federal and state income taxes. Many credit unions participate in shared ATM and branch networks. Most credit unions participate in the CO-OP Network, which allows members of participating credit unions to use nearly 30,000 ATMs without fees or surcharges. Shared branching is a cooperative venture whereby members of one credit union can perform basic transactions at no additional cost at any branch owned by other credit unions within the network.
Credit union membership growth has averaged over 4% annually since 2016, 5x the rate of population growth in the U.S., and loan balances increased over 10% annually since 2014!
With this kind of environment, it is not hard to see why credit unions have attracted borrowers and taken away mortgage market share from banks and non-depository lenders. But now what? How do credit unions continue to leverage what they’re good and not try to be something they’re not? And should mortgage banking even occupy a primary role at a credit union?
A STRATMOR survey shows that most credit unions employ Loan Originators that are predominantly focused on sourcing internal referrals. These Loan Originators are likely paid a base salary plus basis points on volume originated and CUs are likely to provide a cell phone, marketing materials, customized websites and other support to their Loan Originators. Recruiting is focused on experienced Loan Originators that are currently employed with banks or non-depository mortgage banks. Unlike the traditional Mortgage Bankers who use recruiters, sign-on bonuses and guarantees extensively to recruit LOs, the credit unions use job postings and the promise of better benefits to entice LOs to join their sales force.
With that as a backdrop, many believe that CUs will steadily steal mortgage market share (and retain customers) from banks and independents. As credit union membership grows CUs will find it easier to access a growing pool of potential residential borrowers, just as those borrowers will find it easier to access credit at their credit union. The historical weaknesses of CUs (less convenience because of a lack of branches and ATMs, to name one) are becoming far less of a factor because of the CO-OP ATM networks, shared branching, and mobile technology. Independent mortgage banks do not offer these.
Residential lending’s competitive landscape is always in flux, whether it is products, price, service, or lenders. Credit Unions are expected to continue to rise in prominence, and some suggest that they will dominate community banks, smaller independents and possibly large bank and non-bank mortgage lenders as well. Once a consumer becomes a CU member, they become a customer for life with that CU or another CU in the network should they move out of area given the pillars of superior pricing, service, trust, and customer retention.
Are CUs still flying under the radar screen? No. They need to determine how they will fly above it. While the market share of mortgages has grown for CUs, in the coming years they will be asking themselves, “How do we get better at who we are instead of trying to be who we’re not,” in competing for a piece of the mortgage pie.