6 risk management tactics for credit unions in 2021

While there is a lot to be optimistic about in 2021, it’s important credit unions take realistic precautions regarding risk and recovery management. There is much uncertainty regarding the true state of the economy as we continue to recover from the COVID-19 pandemic. Stimulus relief and deferral plans helped consumers manage finances, and credit unions enacted their business continuity plans in 2020. But in 2021, there’s growing uncertainty about the true state of delinquency as current recovery protocols and restrictions in place are masking some realities and data trends. 

One example: 2020 repossession volume was lower than anticipated, which in turn increases rates for repo services due to lack of demand and could lead to future delays as deferral measures come to an end. 

Additionally, the industry is facing a change of federal administration, a weakening used car index, rising auto retail prices, low auto supply matched with growing demand, high unemployment, and higher loan loss reserves. 

Having strategic tools and services in place is imperative for credit unions preparing to best manage risk and continue to serve their members.  

6 Risk Management Tactics for Credit Unions in 2021

1. Develop the game plan for how to manage collections now

Invest wisely in resources, tools, and technology (especially member self-service) now to prepare for the future. Consumer demand for self-service and technology solutions is on the rise. Having certain automations in place can help your credit unions best manage resources and accommodate increased service volume.  

2. Focus on data to better understand members

Data tells a story. With information such as location services, credit unions can monitor member collateral despite shelter-in-place orders or remote work flexibility changes. Tracking loans, insurance verification, and online banking activity can help outline anticipated behavior or flag potential risk behavior. This all helps build a comprehensive risk profile that can establish institutional risk specific to your credit union. 

3. Leverage data to understand associated risk

Data shows that repossession volume in 2020 softened to the lowest level in five years. Cox Automotive shared that they anticipate a jump from 1.4 million units in 2020 to 2.1 million units in 2021. Auto defaults are also moving counter to other credit segments and slowly rising, according to the S&P/Experian Consumer Credit Default Indices. However, auto defaults are still below pre-pandemic conditions and remain below 2019 metrics. Following industrywide metrics can help shape how risk may impact your institution and strategically implement preventative tactics to curb exposure and proactively prepare. 

4. Expect increased regulatory scrutiny and enhanced measures to ensure compliance

The Dodd Frank Act, passed in 2010, has largely focused on the stability of financial institutions. Now, new state and federal guidelines are shifting to fairness and ensuring consumer protection. One example: increased scrutiny around the auxiliary products purchased with auto loans and how refunds are tracked and implemented. Additionally, as part of the COVID-19 recovery response guidelines, moratoriums have led to delayed impact and service changes to accommodate changes and delays. It will be increasingly important to keep up to date on changing regulations to make sure service processes remain compliant. 

5. Aggregate repossession volume with other lenders

With heightened demand and limited resources, repossession agents will go to where the volume is. Ensure you have buying power and volume to retain your repossession agents. Deficiency balances and increased debt defaults are on the horizon. An agent deficiency is anticipated as business remains slow with deferrals in place. Credit unions may consider aggregating resources to remain competitive. 

6. Optimize recovery with loss mitigation strategies and recovery tools

Overall consumer sentiment regarding the economy is down, which translates to fewer loans and less income for credit unions. By optimizing risk services, credit unions can continue to protect their portfolios and better pinpoint future risk exposure. Tools such as predictive modeling, location services, insurance tracking, and loss mitigation can help plan for future growth opportunities and reduce risk in the meantime.