The many faces of risk
Credit unions have a two-fold mission — providing for the needs of their members in terms of member experience and access to financial products and services, and also protecting the institution so that it can remain profitable, grow, and be there in the long-term for future members.
The sources of risk in financial institutions are plentiful, but certain areas spring to mind readily when thinking about the risks any financial institution faces:
Economic Risks:
- Consumer Confidence
- Unemployment Rate
- Yield-Curve Performance
- Housing Market Performance
Political Conditions:
- U.S. Trade Relations
- Tariffs
- Public Opinion
- Media Influences
Financial Assessments:
- Loan-to-Value Ratios
- Collateral Protection/Loan Security
- Deposit Balances/Share Growth
- Delinquencies and Charge-Offs
- Fluctuating Interest Rates on Both Deposit Accounts and Loans
In addition, there are some risks that may not be as obvious but can be just as impactful in their effects. We discussed a few of these myriad areas of risk that a credit union faces with a group of risk mitigation professionals.
DATA INTEGRITY AND SECURITY
Dave Brydun
VP of Consumer Lending, BCU, Vernon Hills, IL:
“Over the past few years, we’ve increased the percentage of loans (auto loans, credit cards, unsecured loans) that are automatically decisioned, vs. manually decisioned by an underwriter, to roughly 60%. The next frontier for us in terms of growing this percentage entails the use of “on-us” data and incorporating it into our system decisioning. Having strong data quality within our organization enables this opportunity but also presents risk if the data isn’t managed properly.”
Henry Robaszewski
Director of Risk Management, Finance, BCU, Vernon Hills, IL:
“This area of data quality also relates to CECL, the new loss allocation model for loan losses that FASBI has required to be implemented in a few years. Adoption hasn’t taken place yet, but eventually all financial institutions will have to comply with that, so it is causing us to take a look again at the data, all the past history, and what it could mean for the future.”
Eric Fuglister
VP Consumer Lending, Wings CU, Apple Valley, MN:
“Data security is obviously a huge risk. Especially with the Equifax data breach a couple of years ago — I think that should have shocked every financial institution down to its core. Every financial institution has a lot of sensitive information and you sure wouldn’t want to have something like that happen. So, your investment in data security and keeping on top of that is a huge deal.”
COMPLIANCE OMISSIONS
Deborah McRae
VP Risk Management, Five Star CU, Dothan, AL:
“Failure to give disclosures on new accounts can definitely be a source of risk, and in lending, if you fail to disclose certain things in advance of a real estate loan, you’ve got issues. Whether in account opening or consumer loans there are so many disclosures we deal with, and the failure to do any one of those could get you into trouble because we’re in such a litigious environment, where everybody wants to get together and have class action suits for everything.”
TECHNOLOGICAL COMPETITION
Eric Fuglister
VP Consumer Lending, Wings CU, Apple Valley, MN:
“One good reason to automate as many of your loan decisions as possible is the risk of competition. Each member, while they might be a member of your credit union, might also use a number of other institutions or have other financial relationships. So when a potential borrower is auto shopping, for example, when they apply you need to be able to get them their decisions as quickly as possible. Because if you don’t, you’re at a competitive disadvantage — gone are the days of, ‘hey, submit an application, we’ll get back to you in two business days.’ Now you need to get them a decision right away because otherwise they’re just going to walk across the street to someone else.”
HIRING, STAFFING, AND TURNOVER
Eric Fuglister
VP Consumer Lending, Wings CU, Apple Valley, MN:
“Trying to hire, especially for entry-level positions, has become extremely tough and competitive, both on pay and what you have to offer in benefits. Getting people in the door has been tough. You schedule interviews and people don’t show up, or you make offers and they accept and then they don’t show up for the first day of work — this is not just at Wings, I think everyone has seen a lot more of that. And then when you’re not fully staffed, your other employees are having to pick up the workload and you have staff burnout.”
Deborah McRae
VP Risk Management, Five Star CU, Dothan, AL:
“Sometimes training can be a challenge, making sure staff is trained to watch for red flags of potential fraud. And if you’re having a lot of turnover, it can feel like you never really get anybody trained before they’re gone again, before they get past the basics of how to make a deposit or withdrawal and move up to the level of developing relationships with members so they can provide the proper products and services based on each member’s needs. That not only lessens the member experience, it means passing up income opportunities, which is a profitability risk.”
VEHICLE VALUES AND EXTENDED LOAN TERMS
Dave Brydun
VP of Consumer Lending, BCU, Vernon Hills, IL:
“Financial institutions are certainly taking on additional risk by originating auto loans with extended terms. Over the past few years, the percentage of auto loans with terms beyond 72 months has grown quite a bit. While we don’t originate much volume above 75 months, for the small portion that we do, we make sure additional rate premiums are in place to ensure that we are being compensated for the additional risk. So, yes, even though it’s a risk, in the end it’s how the financial institution or credit union prices for the risk that’s most important.”
Eric Fuglister
VP Consumer Lending, Wings CU, Apple Valley, MN:
“Yes, I think the average price of new vehicles now is well into the mid-30s, and it’s not uncommon to have new vehicles well over $50,000. People are leasing or extending the terms to keep the payment down. Some financial institutions have even started going to 96 months to keep the payment manageable for the member or the customer. God forbid something happens and they total that vehicle or have something happen — all of a sudden they could be staring at a lot of negative equity. GAP claims have continued to rise because if someone does total their vehicle that deficiency balance on their insurance is getting to be larger and larger. It’s not uncommon to have negative deficiency of $5,000, $10,000, even $15,000. And if someone doesn’t have GAP it’s a large enough number that they might have to structure a personal loan and maybe they can’t really afford it. It has definitely created some issues in the auto lending world.”
A comment from one of our interviewees summed up just how many areas of exposure a financial institution faces each and every day. When asked which parts of her business face risk, Deborah McRae said, “I can’t think of one that doesn’t! I don’t know that there’s any area that doesn’t have risk.”
This article is the second in a special four-part series focused on various aspects of risk mitigation. Keep your eye out for the next article, which will discuss specific steps these experts take to mitigate risk in their institutions.
