By: Michael Gulledge, Principal, Advisors Plus and Barney Moore, Principal, Advisors Plus
The unprecedented COVID-19 crisis has shaken the U.S. economy. Credit unions are juggling tough decisions like never before to help members in need, while grappling with market volatility and potential revenue loss. With so many people and businesses in financial turmoil, how can credit unions provide member support while ensuring their own financial position and operations are sound?
It’s a difficult task – one that requires credit unions to recalibrate their strategies, methods and tools to work through and recover from the pandemic, and to sustain future success. Particularly for credit card portfolios, a thoughtful series of actions and treatments need consideration as it relates to both member care and ongoing program viability.
Maintaining Member Relief and Compassion
Member service has always been of paramount importance to credit unions. Members are relying on you perhaps more than ever during this crisis. Many are working reduced hours, have lost their jobs temporarily – or, in some cases, permanently – and are trying to get by on lower incomes. While we don’t know how long the situation will continue, we can expect that it will remain for at least a few months and the recovery will be gradual. Thankfully, credit unions are on strong financial footing and have already been coming to the aid of their members.
Specific to credit cards, some of the ways that credit unions can provide relief to members include:
- Offering “skip-a-pay” or payment deferral programs whereby members can skip one or more payments without incurring late fees or being treated as delinquent.
- Waiving penalty, transactional and annual fees.
- Offering extended terms and lower rates on introductory and promotional purchases and balance transfer options.
- Extending duration of introductory bonus qualification periods.
- Providing members with additional buying power through modest temporary and permanent increases in credit lines.
- Increasing daily spending authorization limits, similar to the temporary increases during the holiday season.
- Softening normal collection protocols in recognition of the strains members are facing at this time.
The abrupt economic impact of the coronavirus pandemic has created unique challenges related to traditional credit evaluation methods. The ability to assess a member’s financial status is hampered. Current income information of members may not be accurate. Credit scores may not reflect a true representation of a member’s current or future risk profile. Lenders typically provide updated performance information to the credit bureaus on a monthly basis. Due to a lag in timing, abrupt and dramatic changes in individual circumstances and updates to scoring models could lag reality by 30 days, 60 days, or longer.
- Without warning, traditional credit underwriting and monitoring tools have become less reliable.
- Existing income information may not reveal a recent sudden job loss or reduced income.
- Debt-to-income ratios are not reflective of lower income and potentially ballooning balances on other obligations.
- Credit and bankruptcy scores have reduced reliability as past payment behaviors in many instances will not reflect an impaired ability to pay or underlying financial distress.
Actions Credit Unions Can Take
In light of these challenging circumstances, credit unions need to take prudent steps to protect their safety and soundness while expressing continued empathy and accommodations on behalf of their members. In the near term, as it relates to new credit card account generation and existing account management, credit unions should strongly consider some of the following:
- Underwriting adjustments – temporarily returning to “old school” methods for evaluating credit-worthiness of new applicants:
- Review complete credit bureau file and trade lines – don’t rely on scores alone.
- For existing members, consider their total relationship and history with the credit union – deposits, loans, mortgages, years of membership, etc.
- New members – perform income verification as opposed to relying on inferred income provided by the credit bureaus.
- Consider lower initial line assignments – you may not be as generous as you are in normal circumstances and lines can be increased on a qualified basis at a later time.
- Exercise prudence in opening new credit card accounts with line amounts below $1,500 – returns generated are challenged by relatively low balances and volume.
- Existing account management – establish a disaster relief program that is clearly documented and approved to avoid any compliance or regulatory issues. Implementation of these programs is common following a natural disaster such as a hurricane, tornado, earthquake, or fire. They are typically more localized or regional in nature, but are a valid way of managing through the COVID-19 pandemic.
- Non-delinquent accounts:
- Consider offering 60- to 90-day payment deferrals across the board. Interest will normally continue to accrue and members can still make payments if they prefer. This will help prevent current accounts from rolling into delinquency and driving up reportable delinquency.
- Delinquent accounts – actions that will provide relief to members under duress, aid reported delinquency, and allow repurposing of collection staff:
- Offer 90-day payment deferrals to all levels of delinquency.
- Consider whether to accrue or suspend interest during this period. Accounts 90 days delinquent or more should strongly be considered for interest suspension to suppress balance growth that could increase charge-off levels following the payment deferral period.
- Utilize staff to conduct outreach to these members to strengthen the relationship with them and update information (address, phone, employment, etc.), perform skip tracing, and devote time to training and skill development.
- Review or develop hardship programs – detailed programs that outline alternative solutions that can be offered to members to get them through temporary financial setbacks, and facilitate your ongoing relationship and your members’ loyalty:
- Well documented, specific workout arrangements that are viable and workable for both the member and the credit union.
- Reward members that make payments and adhere to plan requirements through lower rates, fixed payment amounts and re-aged delinquency status.
Pulling Through and Preparing for the Future
While providing much needed member support, protecting the credit union’s financial well-being and ongoing viability is also critical. Credit unions must strike a balance between member compassion and care so that they can continue to provide much-needed financial products and services into the future.
PSCU and Advisors Plus are here to support you as we navigate together through this unprecedented period of adversity to our physical, social and economic well-being. We will provide additional insights moving forward on how to manage through this crisis and encourage you to reach out to us with any specific needs related to your payment card programs.
Michael Gulledge is a Principal Consultant with the Credit Card practice at Advisors Plus. Mike uses his 25-year track record as a senior executive in the credit card industry to perform in-depth credit card P & L reviews for credit unions. His analyses focus on presenting both strategic recommendations for improving a credit card portfolio’s financial performance and on creating a blueprint for its ongoing management.
Barney Moore is a Principal Consultant with the Credit Card practice at Advisors Plus. Barney advises credit unions on ways to enhance portfolio growth and profitability through P & L and key metric performance analyses, competitive product assessments, and industry and peer benchmarking reviews.