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THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS THE CREDIT SCORE ISSUE CEO VELOCITY SEPTEMBER 2015 VOLUME 10 ISSUE 9 Rodney Showmar CEO Arkansas FCU SCOTT MCCLYMONDS Creating Purpose and Relevance in Arkansas LENDING SOLUTIONS REX JOHNSON Are Your Loan Policies Making It Too Easy for Your Lenders COMPLIANCE UPDATE Flood Insurance Compliance Hardly Water Under the Bridge MICHAEL R. CHRISTIANS TABLE OF CONTENTS VOLUME 10 ISSUE 9 Credit Union BUSINESS THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS 4 6 12 15 17 23 26 PUBLISHER S POV Video Stores and Paper Publishing Tim O Hara CEO VELOCITY 28 30 33 37 CAR SALES A Perfect Partnership Beth Wheeler THE LAW Rodney Showmar CEO Arkansas FCU Creating Purpose and Relevance in Arkansas Scott McClymonds CFO CURRENCY Important Considerations in Using Electronic Repossessions Brad R. Bergmooser STRATEGIC PLANNING Valuing Non-Maturing Deposits and Why It Matters Alec Hollis CU CONTENT (MARKETING) 2016 Strategic Tipping Point CFPB s Mission vs. CU Business Model Marvin C. Umholtz DIRECTOR EDUCATION Staying Competitive in a Saturated Market The Small Fish Can Take on the Big Fish Laura Enock LENDING SOLUTIONS Credit Union Board Members Must Be in a Constant State of Learning Another in a Series of Articles on Board Responsibilities and Expectations Dennis Child Are Your Loan Policies Making It Too Easy for Your Lenders Rex Johnson COMPLIANCE UPDATE 39 42 MEMBER BUSINESS LENDING Creating a Better Member Experience Through Cross-Selling Ryal Tayloe BRANCH BUSINESS Flood Insurance Compliance Hardly Water Under the Bridge Michael R. Christians CREDIT SCORES It s Not All About Mobile and Online Performance-Based Commissions Drive CU Efficiencies Meredith Deen How Can Credit Unions Serve CreditChallenged Members Goeff Bacino U N I O N B U S I N E S S S E P T E M B E R 1 C R E D I T 2 0 1 5 C U B U S I N E S S . C O M ABOUT US THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS PUBLISHING TEAM Tim O Hara Editor & Publisher tim Ashok Kumar Associate Publisher ashok Patti Manzone Designer THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS THE CREDIT SCORE ISSUE CEO VELOCITY SEPTEMBER 2015 VOLUME 10 ISSUE 9 Rodney Showmar CEO Arkansas FCU SCOTT MCCLYMONDS Creating Purpose and Relevance in Arkansas LENDING SOLUTIONS REX JOHNSON Are Your Loan Policies Making It Too Easy for Your Lenders COMPLIANCE UPDATE Flood Insurance Compliance Hardly Water Under the Bridge MICHAEL R. CHRISTIANS PUBLISHER S POV Tim O Hara CEO VELOCITY Scott McClymonds STRATEGIC PLANNING Marvin C. Umholtz LENDING SOLUTIONS Rex Johnson CFO CURRENCY Alec Hollis BRANCH BUSINESS Meredith Deen MEMBER BUSINESS LENDING SUBSCRIPTIONS Ryal Tayloe THE LAW Brad R. Bergmooser COMPLIANCE UPDATE Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine Inc. A one-year Digital subscription 75. Special Team Builder membership for 8 Executive Team Members 500 register. SALES AND ADVERTISING Michael R. Christians CU CONTENT (MARKETING) Tim O Hara Publisher tim or 561-282-6015 1 CONTACT INFORMATION Laura Enock CREDIT SCORES Geoff Bacino CAR SALES Beth Wheeler DIRECTOR EDUCATION Credit Union BUSINESS Magazine P.O. Box 2223 Palm Beach FL 33480 (561) 282-6015 (561) 588-7711 (fax) tim Dennis Child 2 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M service The occupation or function of helping. What limits should a function like this have A good CUSO not only knows the answer to this question but also builds their availability upon it. At PSCU our 24 7 365 Total Member Care Team embodies your credit union to assist your members all hours of the day and night. We have the tools and technology to address concerns quickly and we spring to action when you wish to unwind. As for limits that s not our business. tmc 888.918.7357 PUBLISHERS TAB POV BY TIM O HARA Video Stores and Paper Publishing T he other day a business friend told me how much she enjoys reading CU BUSINESS articles and that she learns something almost every time she reads the magazine. And then she acted surprised to learn that we haven t published a printed issue since December of last year eight months ago. She had been receiving our monthly flip page issues and our weekly eNewsletters and had been reading it all on her tablet smartphone or desktop computer. I didn t miss a beat of information and didn t even realize I wasn t receiving the paper magazine she said. Welcome to the Information Age When was the last time you visited a video store Remember those I was recently talking to my cousin who lives north of Toronto. She was bursting with pride over scoring a boxset of old The Honeymooners TV shows on video tape. She bought them at a liquidation sale of their last Blockbuster store. Wow I haven t seen one of those around here for a couple of years As we all know by now video streaming has quickly become the king of home entertainment. It seems like not too long ago that a common complaint around my house was a lack of things to watch on TV despite more than 500 channels of cable choices. But now thanks to my Apple TV we can choose between Netflix Hulu HBO Go and about a dozen other players. Now it seems there is too much available to watch and not enough time to watch it The same thing can be said about the technology that determines the way you do BUSINESS. Payments lending platforms teller and ATM automation are improved upon all the time making the tasks around your credit union faster and more accurate. And I m happy to say that the technology behind the way we publish our Business news for you takes just a few minutes to get to you. Meanwhile I continue to subscribe to the other paper trade pubs both the weekly tabloid newspapers and the monthly association magazines. When you consider the weekslong time lag between when the information is gathered and edited printed placed in the mail and finally delivered to your desk a lot is lost in translation. Think about that the next time you go downtown to pick up a newspaper and a movie Thanks for reading Tim 4 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M Ready for more value from your ATM provider Open your doors to a new ATM provider For decades Cummins Allison has helped you make the most of your branch resources. Now we re excited to offer a complete line of highly reliable secure full-function ATMs to t any branch con guration from drive-up to walk-up. And best of all our ATMs are backed by the responsive dependable local service you need and have come to expect. So open your doors and give us a try. When you re ready to replace add to or expand your ATM network let s talk. Visit letstalk 2014 Cummins Allison Inc. All rights reserved. CEO VELOCITY BY SCOTT MCCLYMONDS Rodney Showmar Creating Purpose and Relevance in Arkansas CU BUSINESS s resident CEO expert sits down with Arkansas Federal Credit Union s Rodney Showmar. This head of the largest CU in the state came to his position a bit differently from others which gives him a unique vantage point into the important issues raised by other industry leaders. Movement with an Identity Crisis In my work with credit union CEOs I sometimes hear comments like we re acting too much like banks we need a bigger vision of who we can be we can be so much more than lowrate providers and we ve got to find a way to communicate the credit union advantage. These critical and legitimate concerns come from passionate seasoned leaders who believe the credit union movement is the best option among financial services providers. Despite the serious nature of these concerns I rarely see them addressed head on at the conferences I attend. The agendas are filled with presentations on Millennials mobile banking and cyber security but it is very rare that I have seen these topics presented in a credit union wrapper. National regional and community banks are addressing the same issues so how do credit unions tackle them in a relevant differentiated way Arkansas Federal Credit Union s Rodney Showmar Embracing the Credit Union Difference in Arkansas With these issues in mind I made the three-hour journey from my home in Fayetteville Arkansas to Little Rock to visit with Rodney Showmar CEO of Arkansas Federal Credit Union (AFCU). AFCU is the largest credit union in the state with just over 1 billion in assets and 15 branches. At 46 years old Rodney has been AFCU s CEO since August 6 C R E D I T U N I O N B U S I N E S S 2014 but he did not come to the position with a typical CEO background in lending or finance. Instead he spent 13 years in the roles of COO and Vice President of Marketing at AFCU and he worked in the retail industry the decade prior to that. His background in retail and marketing help him see things through the eyes of members and his COO role has prepared him for executive leadership while providing a deep understanding of the day-to-day issues facing the credit union. I was eager to visit with Rodney since he was relatively new to his role as CEO and has led AFCU through a cultural transformation as he and his executive team have sought to not only reinvent themselves but also create better member and employee experiences. I wondered if the cultural change addressed any of the important issues other industry leaders are raising. With great enthusiasm I am happy to tell you that what is happening at AFCU under Rodney s leadership epitomizes the credit union difference with a strong emphasis on what I call the Three C s of Capital Culture and Community. That means there is a strong focus on profitability and financial strength creating an outstanding place to work and improving lives in the communities the CU serves. Rodney realizes that ACFU is in the S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY truest spirit of a credit union a resource to the communities it serves throughout Arkansas. Being the Difference With these ideals as a compass the executive team landed upon the phrase Be the Difference as the guide for AFCU s direction and actions going forward. The simple statement Be the Difference helps Rodney and his team point employees toward a higher purpose. It s a simple but powerful statement that says to employees Be the difference today in the lives of your teammates members communities and business partners. AFCU s purpose of being the difference in the lives of its employees members communities and business partners is not just words as some corporate slogans and missions tend to be. AFCU has tied its purpose to what the credit union calls its dreams. These dreams are tangible measurable ways in which the credit union can see how well it is achieving its purpose. These dreams which are widely publicized and communicated within AFCU are Giving back 1 million annually to members Investing 1 million annually in new business startups and expansions Donating 1 million annually to help cure cancer heart disease juvenile diabetes and Alzheimer s. AFCU s dreams obviously go far bigger than just the credit union doing well financially and the executive team designed them to be motivating and achievable to give people a bigger reason to come to work and be part of the team. From a branding standpoint the purpose and dreams at AFCU differentiate the credit union because they allow the CU to say Sure you can get a checking account at the bank across the street but are they committed to giving you money back as an owner of the company Will you be able to fight deadly diseases as a result of being their customer Will you help small businesses in your community create jobs as a result of doing business with them Purpose the Heart and Soul of Differentiation The idea of having a deeper purpose for work as opposed to doing it just for a paycheck has gained more attention during the last decade and it is a real differentiator. Many CEOs are familiar with Gallup s Study on the American Workforce which shows 73 percent of American workers are disengaged from their work. That study documents the economic impact of disengagement as well as the financial benefits of increasing engagement. Wise CEOs like Rodney understand that an engaged workforce built around a solid core purpose will take better care of members and will help the credit union achieve its mission. It was with this differentiation in mind that Rodney and his executive team undertook the cultural transformation. Such an approach was designed to more deeply engage employees to provide an excellent member experience and to help the CU become a source of inspiration and change in its communities. Prior to the shift he and his executive team would talk about typical items such as net income and new accounts but they found those topics uninspiring as a reason to come to work every day. They were searching for a stronger more motivating purpose than just taking deposits and lending money. They were seeking what author Simon Sinek calls their why or their true purpose. Rodney embraces Sinek s idea that people buy why you do something rather than what you do. For example checking accounts are part of what you do and they can be acquired at numerous financial institutions. However consumers will gravitate toward an institution whose mission serves a greater purpose than making money as long as its products services and experiences are competitive. In the book People Over Profits author Dale Partridge asserts that putting employees customers and members first is not only a profitable strategy but also a world-changing one. As they began their cultural transformation the AFCU leadership team embraced the same concepts acknowledging that their work at AFCU can have life-changing impacts on employees members their communities and even the nation. 7 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY AFCU s Be the Difference and 10 Core Values Chart annual reviews with scaled-down quarterly meetings where employees get quicker feedback on performance and can make adjustments throughout the year instead of just once. This regular check-in helps eliminate surprises and keeps AFCU s 270 employees close to the purpose dreams and desired member experience. Branch Redesign for Better Member Experience To help employees live out their purpose AFCU has redesigned its branches to be relationship centers rather than just transactionprocessing facilities. Rodney believes that members are looking for a retail store-like experience but unlike retail there is no tangible product. Therefore the experience has to be excellent. The CU has worked hard at building a friendlier environment starting with eliminating teller counters and replacing them with an open floor plan. No two AFCU branches are alike since the team learns something new each time. Nevertheless the credit union keeps tinkering with the design to optimize the member experience. Delivering on the Purpose Starts with Employees Brands with strong purposes like AFCU s attract members and employees because people want to be involved in something bigger than themselves. However a strong purpose and its dreams are just wishes if the business doesn t deliver value to members. So a critical part of the cultural transformation has been redesigning the employee experience with the goal of being named one of the best places to work in Arkansas. As a starting point for that goal part of AFCU s cultural transformation has focused on helping employees understand the full impact they can have on the lives of their members if they do their jobs with excellence. A major factor in reinforcing this mission has been the effort to redo the employee evaluation process. AFCU is making a strong effort to tie the performance of each position back to the achievement of its 10 core values and beliefs which are designed to achieve the credit union s dreams and create an excellent member experience. This is a work in progress and AFCU is experimenting with the correct metrics to accurately reflect each position s contribution to the purpose dreams and core values. Another aspect of the employee evaluation redesign is replacing 8 C R E D I T U N I O N B U S I N E S S Member Consultants for Better Member Experience In addition to modifying the physical aspects of the branch to create a better member experience AFCU has worked even harder at transforming its employees into a more consultative role referring to them as Member Consultants. The focus is to become better at engaging members proactively rather than simply being order takers. Members often don t really know what products and services can best help them so a more consultative approach looks out for their best interests as opposed to the more passive order-taking approach. This universal banker approach streamlines the member experience and reduces the need to hand members off to other departments. Unlike the typical bank or credit union which has tellers new accounts handlers and consumer lenders AFCU s front-line people can fulfill all those functions. AFCU is restructuring its entire training program for its Member Consultants to emphasize greater all-around skill and more confident empowerment and decision-making. Rodney likes to say Your worst decision won t cost us as much as some of my bad ones have. This change has not been easy and AFCU s best source S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY of consultative-type front-line people has been the retail and hospitality industries as opposed to banking. People in those industries tend to have better-developed people skills and feel comfortable asking questions that can lead to a better member experience and solutions. remain strategically focused is another goal Rodney and his executive team are working hard on. To that end they are making every effort not to do tasks that would be better accomplished at different levels in the organization. Creating Strategy in a Fast-Paced Era From a strategic standpoint Rodney spoke about the pace of change and how difficult it is to stay agile in light of regulations. Regulations and technology change so fast that by the time you adjust and execute they ve changed again. The demand on IT resources is a big part of executing strategy and AFCU is making changes to fund and staff its IT area to make changes easier. One of those changes involves creating fewer goals. The credit union s executive team is what Rodney calls overachieving geniuses but the downside is they come up with so many great ideas that it can be tough to manage them all. Great leaders master the art of prioritizing ideas that are truly strategic and in line with their goals and resources. Pushing down delegation to lower levels so executives can Be Open and Keep Learning Rodney takes a humble approach to his role as CEO. He believes the position has developed and will continue to develop into a cultural leadership role rather than being the all-knowing expert-on-everything go-to person. That outlook results in him seeking new ideas from all parts of his organization. He values diverse opinions and approaches and wants employees to act like an owner of the areas they lead and work in. He encourages them into action by saying There s no way a bad decision you make can be costlier than some of the ones I ve made. As a leader Rodney has a large and impressive collection of books which he has read himself and loans out to his employees. He does not think he has reached his highest level of performance or leadership simply because he is in the CEO role. Scott M cClymonds and CEO Velocity help financial institutions like yours increase earnings member loyalty and employee productivity. Scott has helped hundreds of CEOs and senior managers find answers and solutions to tough questions like Who are your most profitable members and how vulnerable are they to attrition Where can you find m ore of them Are they already doing business with you How does your strategy need to be adjusted to improve your results by 20% or more What technology updates will give you the highest payback How should you develop your most promising leaders Email scottm to request a free paper on how to find and close earnings gaps in your credit union. 479.263.0774 C R E D I T U N I O N scottm B U S I N E S S Scott McClymonds is one of the most creative strategists in the financial services industry. - Elio Spinello Principal RPM Consulting 9 S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY He takes a very aggressive approach to personal development and believes if you stop growing you start dying. He also believes that you always have to be learning and developing yourself and that you can t expect your team to be growing and developing if you aren t. One approach Rodney takes to growth is putting himself into situations where he is stretched and made to feel uncomfortable. He told me You don t lead to develop followers you lead to develop leaders. CEO Challenge Questions 1.When you examine what you and your team actually do are you functioning more with a bank or credit union philosophy 2.What are you doing at your credit union to make the credit union difference known in your marketplace 3.Besides better rates what would make consumers and businesses in your community want to bank with you instead of the competition Authentic and Outwardly Focused In a commodity business like financial services the outwardly-focused approach Rodney and his team have taken yields the kind of differentiation people in the credit union movement are seeking. But I want to emphasize it is not just an approach to make money. It is the credit union s heart and soul the core of what the CU is. It is completely authentic and it sets AFCU apart from competitors. With membership increasing assets growing and net income healthy the strategy is putting AFCU into a better position to be able to achieve its dreams. Doesn t your credit union owe it to your employees members and communities to take similar approaches 10 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY 4. How would your board executive team and employees respond if you asked them to define the purpose of your credit union 5. Do the majority of your employees feel like they just have jobs and are there to collect paychecks or do they believe working at your credit union links them with a greater mission 6. What do you need to do as CEO to strengthen the link between employee jobs and those employees sense of Scott McClymonds is a veteran thought leader in the financial services industry who produces high-impact long-lasting being tied to your credit union s mission changes for clients. His company CEO Velocity is a strategic 7. What are at least three ways you have improved your consulting and coaching firm helping forward-thinking CEOs members experiences in 2015 raise the bar on their credit union s relevance impact and performance. You can reach Scott at scottm ceovelocity. 8. What are you doing as CEO to raise the bar on your com or 479.263.0774. performance and how are you encouraging your employees to do the same 27617_Dolphin_Debit_Ad_B_CUBMagazine_PROD.pdf 1 2 12 15 4 07 PM Who has time for ATM management Dolphin that s who. They make sure I m ready when my customers need me. Walk-Up ATM Carolina Foothills FCU Dolphin Debit offers complete ATM management services that eliminate the capital costs associated with ATM ownership and reduce operating costs by as much as 30% allowing you to focus on what you do best keeping customers happy. Continue the conversation at 2015 Dolphin Debit happy 11 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M CFO CURRENCY BY ALEC HOLLIS Valuing Non-Maturing Deposits and Why It Matters The use of non-maturity deposits is becoming more widespread making proper modeling of them increasingly important. Given the many types of these accounts however irregularities in deposit behavior can make modeling difficult. Read on for some key insight that may make the effort a bit less complicated. and depositor behavior so the goal is to model these behaviors in different interest rate scenarios. Institution-driven behavior relates to how management sets dividend rates. Depositor-driven behavior relates to factors that cause funds to be withdrawn or deposited. In order to model NMD IRR principal and interest cash flows are estimated. Two key assumptions used in these estimations are pricing coefficients and decay rates. Pricing coefficients also known as beta coefficients intend to model how management adjusts the rate of an NMD account. Autoregressive models are most commonly used relating deposit rates to short-term market rates to determine the pricing coefficients. A pricing coefficient describes how offer rates respond to changes in short-term market rates. For example a coefficient of 1 indicates offer rates are adjusted in sync with the market whereas a coefficient of less than 1 indicates offer rates are less volatile than market rates. A higher coefficient indicates a more aggressive pricing strategy which leads to increased levels of IRR. The greater IRR stems from both an economic value and income perspective because the account has less duration and interest expense rises more quickly in an income simulation when all else is held constant. While the use of a coefficient may seem oversimplified there are techniques that can improve this assumption. For example ensuring an adequate number of data points improves the reliability of the estimates. Call report data can supplement internally tracked data if needed. Q uite possibly the most controversial aspect of asset liability management (ALM) modeling is valuing non-maturity deposits (NMDs). As the name implies an NMD is a deposit that has no maturity date funds can be withdrawn by the accountholder at any time. Major types of deposit accounts are savings checking (transactional) money market and others such as club accounts. Each has its own set of requirements and regulations and differing regulations and limitations lead to unique behavior by account. Given the widespread growing usage of NMDs proper modeling of these accounts has become increasingly more important. Further the modeling methods for NMDs have strong implications on the modeled interest rate risk (IRR) of a balance sheet. NMDs generally comprise a rather significant majority of an institution s liabilities and can be rather difficult to model given the irregularities in deposit behavior. NMD cash flows have no contractual principal component and deposits can come in or be withdrawn without notice. To further complicate matters the interest component is also subject to change at any time although the interest rate is determined by each credit union s management team. NMD risk is more behaviorally driven than any other balance sheet instrument and thus measuring its IRR is much more abstract than measuring for example the IRR of a treasury bond or even a mortgage-backed security. Ultimately the risk of an NMD account is determined by the combined effect of institution 12 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M CFO CURRENCY Appending quarterly data with monthly data is a good tactic because it adds to the number of data points and improves the reliability of estimates. In addition there is evidence that deposit rates tend to adjust asymmetrically with offer rates increasing at a slower pace in rising rate environments than they fall in a declining rate environment. The standard practice of symmetric adjustment may not capture reality as accurately as the calculation of both rising and declining scenario pricing coefficients. The decay rate intends to model depositor behavior and defines an account s run-off over time it is the primary assumption relating to the principal component of NMD cash flow. Decay rates can be measured using either dynamic or static pool analysis. The advantage of the former is that it s less computationally intensive and the advantage of the latter is its in-depth nature. Dynamic pool analysis looks at aggregate balance trends and calculates decay rates based on changes in aggregated deposit balances net of new balances. Static pool analysis examines instrument-level data and calculates decay rates by dividing accounts into vintages based on when they were opened. It holds the vintage pools constant over the analysis (hence static pool) and examines vintage balances over time. Decay rates are driven by both macroeconomic and microeconomic (firm-specific) factors. Macroeconomic factors include the term structure of the yield curve GDP growth trends the supply of money seasonality and regulations. The current yield curve is important because it represents the opportunity cost to depositors who could have invested their funds in longer-term products. In today s market environment which is characterized by ample liquidity and low interest rates the opportunity cost of holding cash is low. Therefore it makes sense that many institutions are currently seeing low or even negative decay rates. Microeconomic factors include the pricing strategies employed as well as strategic initiatives undertaken by the institution to attract retain or even reduce funding. For example an aggressive pricing strategy leads to lower decay rates because the institution is attracting funding by offering higher deposit rates. This practice can be thought of as buying hot money and it can be detrimental to the institution. That is because this low decay rate must be maintained by consistently offering deposit rates that are above current market rates. C R E D I T U N I O N B U S I N E S S Separating non-core deposits from core deposits is an important aspect of modeling NMDs. Institutions typically accomplish such separation using statistical analysis ranging from simple moving averages to more complex methods such as confidence intervals or economic models. Surge deposits and hot money are two forms of non-core deposits. Surge deposits are balances that flow into accounts as a result of systemic (macroeconomic) factors or a specific event such as the 2008 collapse of Lehman Brothers. Surge deposits are subject to reverse given a change in the systemic factors responsible for them. Hot money on the other hand represents balances that flow into accounts as a result of the interest rate paid to depositors. Hot money is subject to reverse if the interest rate paid ceases to be competitive with short-term market rates because hot money is owned by depositors who are seeking the highest overnight yield. Financial institutions with significant non-core deposits are very risky because non-core deposits can be thought of as short-term funding. Conversely core deposits remain at the institution for reasons other than (or in addition to) yield and are thought of as stable funding. The techniques mentioned above are empirical in nature. However techniques for setting NMD assumptions can also be theoretical. Empirical methodologies are backward looking meaning they are calculated by performing analysis on historical data. In contrast theoretical techniques are forward looking seeking to define assumptions based on management expectations and current and predicted market conditions among other factors. Ideally institutions should draw upon both methods. It is important not to fall prey to na ve empiricism meaning the use of statistical results without further questioning or justification. While ample data points serve to increase the 13 S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M CFO CURRENCY CFO CURRENCY CURRENCY CFO CFO CURRENCY are calculated figures not assumptions. The have significant implication on the ALM conclusion. The of time. Credit will need to be assumptions used should be changed government bond inputs allow the user to model cash flows with an end maturitybenchmark if budget surpluses dry up thein progressive intervals Alec reviewed and authorized and the standard ALM First sample rates that are the reliability of statistical and They have already become Hollis joined for pricing and decay size and thus similar to amortizations. estimates it market. the output should be recalculated to determine the impact this can take weeks. 2012. is Dividend and for the data to no longer represent today s many corporate bonds. also possible discount rates allow for the present value of a different assumption. Financial Advisors in If Mr. Hollisyouperforms allow Knowing where swap rates and spreads are uncertain as to are will asset environment. Thus the reliability of the results is scenario. calculations (premiums) in each modeled interest ratereduced. the When requirements many for financial liability analysesinvestors need of It s useful to provide a supporting then for assumptions Effective duration calculations can narrativemathematically bebetter hedging and investment execution. Conclusion applying using derivatives institutions various what-if used which can aid institution s assets. In this case effectiveto gauge credit risk and market be viewed asand franchise is in determining and or validating NMD compared to that of the Non-maturing deposits can sentiment theaswap curve value consider analyses budget forecasting assumptions. Much like modeling macroeconomic behavior becoming the more important curve to analyze.engaging an external duration is calculated by merely backing into the price change or benefits generated from loyalty of the membership when serviceforecasting help you provider to as liquidity modeling demand deposits is often as much art as science. formula. For example if the liability present value is 100 in the deposits are retained when dividend rates are low in a higher well with any the steps. as ALM other Financial While modeling demand deposit behavior may not seem Emily Hollis CFA is a partner through First modeling base 101 in the up 100 basis point scenario and 99 in the down market environment. And vice versa to financial derivatives requirement A fit used institution Properly the needs of intuitive not doing so (or using blanket assumptions for all Advisors LLC. 100 basis point scenario the effective durationdeposit base is is one percent that offers a non-maturity dividend ratean interest rate risk our clients.offset Associate Mr. accounts) fails to capture reality. A strong core can As higher than market (i.e. (101-99)most important driver of financial institution value Hollis additional responsibilities that the economic withinofthe to attract hot money will decrease is inherent value its include the presentation arguably the 200). is imperative senior management as well more of liabilities. client ALCOs and This is vital because as competition results to Itindustry model these accounts for aas and it also serves as a major differentiator in The second part competencies to meet the final requirements.institutional IRR. credit union accurate depiction of interest rate unions Sensitivity Analysis submittedhas increased in recent years mentoring new financialallow creditrisk. to compete more analyst team members. NMD funding in the banking sector and final application is when all requirements are grows derivatives can The regulator strongly suggests of institutional funding. Thus it Mr. Hollis holds a bachelor s degree in finance from the and represents a major source sensitivity analyses as a means effectively. completed including dealer contracts. to is more important than ever to adequately model an institution s University of Notre Dame in South Bend Indiana. Financial quantify the effects of changing assumptions. Sensitivity Emily Mor Hollis CFA is a partner with ALM First Setting up a line at a dealer is similar to becoming a deposit base. Failing because the core share evaluation may Advisors LLC. analyses are essential to model this aspect of a balance sheet can Emily Hollis CFA is a partner with ALM First Financial member of the FHLB--it can be laborious and takes a good deal significantly undermine the reliability of IRR results. Advisors LLC. Exhibit 4 The outputs Some analysts view swaps as the most likely replacement for Treasury bonds as a financial benchmark if budget surpluses dry up the government bond market. 14 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M November 2014 Credit Union BUSINESS 15 CU CONTENT TAB MARKETING BY LAURA ENOCK TAB Staying Competitive in a Saturated Market The Small Fish Can Take on the Big Fish Do you feel like a small fish in a big ocean Regardless of your credit union s size and available resources it is possible to eat well from the vast waters. All it takes is a certain attitude. Read on to find out what mindsets will have you grabbing your fill of the market. they will. Planting seeds is vital to marketing for credit unions small and large. But it s even more important for those who are on limited resources. For instance the listeners may not need it now but when they are in the market for a new home and they remember hearing your jingle on the radio you ll be the first call they make to get pre-approved for that new home. Our biggest successes have been our jingle and our tagline the friendly credit union says Bagstad. People who have no affiliation with GECU are able to sing the jingle and remember the tagline. One more key to marketing success is a willingness to embrace social media. For better or worse social media is now a firm part of our American culture. For most people Facebook is the new Yellow Pages when people want to find a business they ll look online. Start simple with a Facebook page Bagstad advises. You don t want to try to learn all of the social media platforms at once. Build your audience and give your followers T ake a short drive around town and count the number of financial institutions you see. In the city of La Crosse Wis. you d be hard pressed to drive a mile without seeing several. In a market of approximately 100 000 people there are 14 banks and nine credit unions accounting for more than 50 branches. How does a small fish take on the big fish when it comes to marketing and grabbing a slice of the market Can credit unions with only one or two branches compete with mega financials that seem to have endless resources The answer says Dustin Bagstad marketing director at GECU is we can. At GECU ( there are three keys to the outstanding marketing success the credit union has seen. The first key is the understanding that a marketing strategy does not need to be expensive to be effective. With limited budgets it s easy to get overwhelmed by sales professionals who are selling advertising space across all forms of media. Throwing money in every direction will end up costing more than it may be worth in the long run. Do your research discover where you get the greatest coverage for the lowest cost and build from there. Pick the top two or three opportunities and focus your budget on those forms of media. The second key to marketing success for GECU is an ability to be memorable. Perhaps it s the messages you use the people who portray your credit union or the catchy jingle at the end of an ad. If you give your audience something to take with them C R E D I T U N I O N B U S I N E S S 15 S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M CU TABCONTENT (MARKETING) information they ll find interesting articles quotes rate specials and links to important web content. You can put all of that on Facebook it s the Swiss Army Knife of social media Bagstad says. A Swiss Army knife and Yellow Pages in one website. Engaging your members virtually is an easy and inexpensive way to reach those who don t already know about your credit union. With the click or tap of a button your members can share your posts and spread the word for you Once you have built a strong Facebook audience begin to expand to additional forms of social media (Twitter YouTube Instagram etc.). GECU has been able to penetrate the market by allocating resources effectively and efficiently giving listeners something to remember in each advertisement. They ve also grown their social media following organically by posting meaningful and relevant content. As a small fish in a big pond we have an uphill battle to fight says Bagstad. But our one branch credit union is as competitive as the multi-branch multi-state credit unions and we continue to be leaders in our community in membership and asset growth. For small credit unions GECU is an inspiration. Bagstad and his team have proven beyond a doubt that you don t have to spend the most. You just have to spend the smartest. Laura Enock is Founder and Publisher of CUcontent. com a credit union-specific content service. Join hundreds of credit unions getting FREE monthly content Email her at laura or visit millennials A generation marked by increased use of social media and digital technologies. Would this ad matter to the generation that can make or break a brand within a few keystrokes These digital natives are the current prime target for credit unions everywhere and PSCU has the social media tools and insights you need to reach them in a way that s relevant. The leading CUSO for 30 years we know a thing or two about embracing change and having conversations that matter. Let us show you how. 888.918.7357 16 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS BY REX JOHNSON LSCI FOUNDER Are Your Loan Policies Making It too Easy for Your Lenders I n my years working with credit unions one of the most frustrating things I come across is when I review credit union s turndowns and see they turned down loans to really good people. More times than not this is not due to a lack of desire on behalf of employees but rather employees adhering to policies stricken with unnecessary barriers. As I go around the country and work with credit unions I see firsthand there is no better feeling than helping someone who needs it. We as credit unions need to make sure our policy always allows judgement to prevail and to always have the right of first refusal. I am providing a copy below of what I believe should be the first page of every credit union s policy manual. Coincidently this is also what every employee should have to read and learn to believe from day one of employment. While many things have changed over the years in lending my philosophy listed below has withstood. Credit Union Philosophy Our Board of Directors our various Committees Senior Management Team and staff all support this philosophy. All of our new employees or volunteers will read and have explained to them what this philosophy means and will subscribe to this philosophy. It is the philosophy of (Insert Name) Credit Union to help as many of our members as possible with their credit needs. Our credit union believes in relationship lending. We have strong evidence based on years of experience that members pay us when they do not pay others. While we will not ignore the fact that others may not be getting paid we also will not solely use that as a reason to deny the loan if it is evident the member has and will continue to pay the credit union. We also will consider a member s credit score but will not deny a loan due to a credit score. We understand that credit scores are very volatile and can and will change quickly. Our mission is to counsel our members showing them how to dramatically improve their credit scores so they can pay us less. We believe lending has been and still is a judgment business. While we will instruct our staff to use good judgment in decision making they must be careful not to judge someone s character. We realize that bad things happen to good people. We also understand that under enough pressure our members can and will make mistakes. Our members deserve a chance to get a fresh start. The only reason we believe a member should ever be turned down is when we believe the member will not pay the credit union. It s important for our employees to be honest with our members in communicating their decisions and then to listen to their response. We realize that it is far more important that our employees make the right decision than to personally be right. Finally our goal is to come up with a solution for all our members. In order to do this we must have the best trained employees and we will not compromise training. We are the professionals and our members should trust us and not have to come up with their own solutions. This is our philosophy. One of the common culprits in denying loans too early is excessive obligations this in reality is a dressed up version of denying for a debt ratio calculation that does not fit into your policy. My recommendation to credit unions is this denial reason should not allowed if payments are being made on-time. In almost all cases there s simply more to the story that we failed to find out because there was an easy stopping point (a.k.a. barrier). When you find out more than your competition did you will be able to approve good loans that others prematurely deny. Another common culprit in stopping short is for delinquent history with others. If you look back at my credit 17 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS TAB union philosophy my years of research has proven to be true credit union members will pay their credit union when they don t pay others. This is a huge advantage we have in this industry if we allow ourselves to take advantage of it. In fact I require decision makers to add up every payment that has been ever made to the credit union on-time and highlight this as a reason to approve a loan instead doing the exact opposite which is denying for how others get repaid. In simple terms I like to say if others are not getting repaid it s their problem not mine . Listed below are some common barriers that prohibit a number of good loans from ever being approved and my recommendations to change them. This is critical because in the vast majority of cases when you put something in print is often taken too literally and as a way to not have to think too hard . 1. Loan requests exceed credit union maximums. This can be a quick fix however as you will see below. Unsecured loan limits are too low and are not competitive with the industry. You must look at the assets of the credit union to determine how much you will loan on an unsecured basis to an individual member. Could B-U Credit Union s Policy Barrier (Not Competitive) Maximum Amount Minimum Amount Maximum Term Minimum Term 7 500.00 1 500.00 4 Years 1 Year C M Y CM MY CY CMY K University of Lending May 11 - 15 Crystal Lake IL August 10 - 14 Crystal Lake IL 4th Quarter 2015 Las Vegas NV C M Y CM MY CY CMY K Management Institute for CEOs and Managers September 15 - 17 Phoenix AZ Collections Institute April 7 - 9 Chicago IL October 6 - 8 Phoenix AZ Indirect Institute May 4 - 6 San Antonio TX 18 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M With 80% of U.S. households saving coins coin processing is in demand especially at nancial institutions where most prefer to redeem their change. Give customers the means to do it themselves and you can increase their satisfaction by as much as 20%. That s the power of self-service coin counters. Now Cummins Allison gives you more ways to add coin machines to your branch. Choose from fast quiet and reliable coin counters that you can buy rent lease or place free of charge. We ll even pick up and process your coins. Coin counters are a proven way to increase traf c and member satisfaction -- let us show you how. Get a custom report comparing your self-service coin options. traf c Copyright 2014 Cummins Allison Inc. All rights reserved. LENDING SOLUTIONS My Response Guideline for Loan Maximum vs. Asset Size Asset Size 25 million or less 26 to 49 million 50 to 99 million 100 to 249 million 250 to 500 million 500 million and above Unsecured Maximum Guideline Up to 10 000 Up to 20 000 Up to 35 000 Up to 50 000 Up to 75 000 Up to 100 000 Why do I recommend that credit unions should be so aggressive in unsecured lending Look at your loan yield for unsecured loans and compare them to other products you offer members. Measure your income after charge offs on all your loan products see how unsecured loans are stacking up. You may find out these loans after charge offs are by far your most valuable products Make sure your examiners know that your employees have been trained and that you monitor the results and make changes as necessary. Unsecured Loan Amount Guidelines Start with using their salaries as a guideline to how much you are willing to loan. 2. Excessive Request to Income Could B-U Credit Union s Policy Barrier Vehicle Loan (% of Annual Income 95% 80% 65% 50% 30% 15% Score 1 2 3 4 UNREALISITIC A A B C D E 720 680 719 660 679 640 659 560 639 560 5 6 When Unsecured Debt Becomes a Problem While I do not endorse placing a lot of stock in debt ratios I believe strongly in computing and analyzing unsecured debt ratios (UDR ). My experience has been and continues to be that UDRs is one of the strongest indicators of bankruptcy. My Response Guideline A A B up to 75% of gross annual income (with little to no other secured debt excluding real estate) C D E up to 50% of gross annual income (with little to no other secured debt excluding real estate) As a guideline loan to value exceptions for ancillary products negative equity is one month s gross income. UDR Total Unsecured debts Total Gross Salary This is a guideline and exceptions can be made for absorbing over the guidelines in negative equity when there is evidence members have handled other car loans and other debts well and the vehicle is important to them. 20 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS 3. Excessive Obligations Many credit unions use debt ratios as a way to Opt Out . This is by far the most common denial reason on adverse action notices. Could B-U Credit Union s Policy Barrier My Response Guideline We will use good judgment and common sense in assessing housing responsibilities. We will focus on Is the mortgage getting paid Does the spouse pay all or half Are they running up other debts One spouse may be making substantially more than the other. My Response Guideline My recommendation is to not have a debt ratio policy. If you must use it as a guideline and don t allow lenders to hide behind it. A good guideline is 60%. Also write your policies so that you can count all income both verifiable and unverifiable if it s apparent it exists. There are lots of members who get tips and other sources of income that doesn t show up on their tax returns. It s apparent it exists if They are making all their payments on time. They are not running up their debts. They don t have lots of inquiries. They manage their money well. They have assets. Assure the member you don t work for the IRS and you don t report to them. We will not allow a high debt ratio being driven by including an entire mortgage payment be used solely as a means to deny a loan. How Student Loans Factor Into Debt Ratio How to calculate payments and factor them into the debt ratio Ask your members if they are making payments and how much those payments are. If the member is in deferment right now find out when they will have to start paying. If they don t know then multiply the amount they owe by .006 or .6%. This will give you a good idea if the member can still afford the loan. What you really want to find out Where they went to college and did they graduate Will the degree change their current income Is the member likely to get a better job How Housing Expenses Factor Into Debt Ratios Could B-U Credit Union s Policy Barrier In determining a member s debt loan a loan officer shall use 100% of the loan payment or housing cost if the loan or housing cost is jointly liable with another person. If the original loan request is not approvable and the situation warrants a loan officer is encouraged to propose a counter offer to the member. For example the loan officer may approve the loan for a lesser term or require a qualified co-signer to lessen the risk. 4. Barrier Where Credit Union Turns Away Members Who Have Caused a Loss Could B-U Credit Union Policy Barrier No officer or staff member of this credit union will in any manner discourage a member from submitting an application for credit. However no loan will be granted to a member (applies to all applicants on the loan request) who has caused the credit union an unrecovered loss. Therefore a loan application may be refused if the credit union representative is aware of the known loss. 21 2 0 1 5 C U B U S I N E S S . C O M C R E D I T U N I O N B U S I N E S S S E P T E M B E R LENDING SOLUTIONS This needs to be changed you will never get your money back if you end the relationship. My Response Guideline When you take a chance with a member that has caused you loss you afford yourself the opportunity to recapture some if not all of your lost money. There are many loans that you can package where the risk is minimal to the credit union The bankruptcy law changed in 2005. Members cannot reaffirm a loan when there is no collateral without the approval of their attorney and the court You will never recover money if you lose the relationship You want the right of first refusal In closing I recommend you go back and take a hard look at your loan policy manual. Also take a look at a sampling of your recent turndowns to see how many of those were denied due to policy barriers. As prefaced earlier the number one thing I tell credit unions is You are not going to be able to make every loan but you want the choice to be yours. As we see on daily basis working with credit unions there is no better job satisfaction then people helping people. I believe almost every credit union in America is turning down way too many loans. When you are successful at doing something that others are not you will stand out from the competition and others will turn to you and ask how did you do it That is a great feeling Lending Solutions Consulting Inc. is the premier consulting group in the country. Rex Johnson is the Founder and CEO of LSCI. LSCI has worked over 3 000 credit union and has trained over 30 000. For a personalized policy review to assess whether your credit union has hidden barriers prohibiting you from an 80% approval ratio or a lucrative loan yield please contact Scot Vackar at svackar or 224-286-6070. 22 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M COMPLIANCE UPDATE BY MICHAEL R. CHRISTIANS COMPLIANCE ATTORNEY Flood Insurance Compliance Hardly Water under the Bridge Credit unions extending credit secured by structures in special flood hazard areas better familiarize themselves with NCUA s new flood insurance requirements. Read on for a succinct section-by-section breakdown of all the most pertinent rule changes. Knowing their responsibilities will help keep your lending and compliance teams head above the waters. I t s hard to find an area of financial services that has undergone more transformation in the last five years than mortgage lending. And it isn t over yet. This fall your cooperative s responsibilities when it comes to flood insurance are getting a makeover of their own. Let s take a closer look. At its monthly board meeting in June the National Credit Union Association (NCUA) approved a joint agency rule implementing changes to its flood insurance requirements. These changes came as a result of the Homeowner Flood Insurance Affordability Act of 2014 which intended to rectify increases consumers were experiencing in their insurance premiums. Most components of the rule will be effective October 1 2015. If your credit union is extending credit secured by buildings or mobile homes located in special flood hazard areas it s important for you to become familiar with these new requirements. What follows is a breakdown of each section of the rule including your lending and compliance teams responsibilities. Exemptions from Flood Insurance Coverage The rule adds the following exemption from mandatory flood insurance coverage Any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. For purposes of this exemption residential property is defined as a structure used primarily for personal family or household purposes. A structure is detached if it isn t joined by any structural connection to the residence. It will be the responsibility of your credit union to ensure any exempted structure does not serve as a residence. A non-residential structure is generally one that lacks sleeping bathroom or kitchen facilities. It s important for credit union lenders to note that nothing in the amended language prohibits them from requiring flood insurance coverage on a detached non-residential structure. You may require it if your team deems it necessary from a safety and soundness perspective. Requirement to Purchase Flood Insurance The rule clarifies flood insurance is not required for land. Specifically it reads Flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself. Required Use of Standard Flood Hazard Determination Form The rule reiterates that your credit union must use the Federal Emergency Management Agency s (FEMA s) Standard Flood Hazard Determination Form to identify whether a property securing a loan is located in a special flood hazard area. It 23 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M TAB COMPLIANCE UPDATE makes clear that credit unions must use this form even for those properties they believe will qualify for an exemption. The loan is non-performing (90 days or more past due). The loan has a term of less than 12 months. If your credit union determines one of the exceptions identified above no longer applies you are required to begin escrowing flood insurance premiums as soon as possible. Your credit union must notify members of this mandatory escrow requirement by including specific language on the Notice of Special Flood Hazards form beginning January 1 2016. That language can be found in the final rule located on NCUA s website http News Pages NW20150622FloodRule. aspx. For all loans outstanding as of January 1 2016 that require flood insurance your credit union must make the option to escrow flood insurance premiums available to the member. You communicate this escrow option to the member with a specific notice which can also be found in the final rule. There is a general exception to the mandatory escrow requirements for small lenders. If all three of the following situations describe your credit union neither escrow provision identified above is applicable to your cooperative You had total assets of less than 1 billion as of December 31 of either of the two prior calendar years. On or before July 6 2012 you were not required under federal or state law to escrow property taxes or homeowner s insurance on loans secured by residential property. Force Placement of Flood Insurance The rule also clarifies procedures related to the force placement of flood insurance. In the event that a flood insurance policy lapses or no longer provides sufficient coverage your credit union must notify the borrower in writing and allow them 45 days to provide adequate coverage. If the borrower fails to provide adequate coverage within that 45-day window your credit union may force place flood insurance. You may charge the borrower for the cost of premiums and fees beginning on the date flood insurance coverage lapsed or did not provide a sufficient coverage amount. If you have chosen to force place insurance you must complete the following actions within 30 days of being notified that the borrower has obtained his or her own flood insurance o Terminate the force placed flood insurance policy. o Refund any premiums paid on the force placed policy during any period of overlap between the force placed policy and the borrower s policy. Escrow of Flood Insurance Premiums For this portion of the rule credit unions have until January 1 2016 to finalize compliance. For all loans secured by residential property located in a special flood hazard area that are made increased extended or renewed on or after January 1 2016 your credit union must require all premiums and fees associated with flood insurance to be escrowed. There are a number of transaction-specific exceptions to this requirement. They are The loan is an extension of credit primarily for business commercial or agricultural purposes. The loan is in a subordinate position to a senior lien loan that already provides flood insurance coverage on the property. Flood coverage is provided on the property by a condominium or homeowner s association. The loan is a HELOC. 24 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M COMPLIANCE UPDATE On or before July 6 2012 your credit union did not have a policy to escrow property taxes or homeowner s insurance on loans secured by residential property. Private Flood Insurance Coverage To encourage borrowers to consider options for flood insurance outside of the National Flood Insurance Program beginning January 1 2016 your credit union must include specific language on your Notice of Special Flood Hazards form. The disclosure aims to inform borrowers that they may obtain similar insurance coverage through an agent. You can also find this specific language in the final rule. While many of the changes implemented by NCUA simply clarify practices your credit union is likely already familiar with the new mandatory escrow provisions may lead to significant additional compliance burden for your lending team. With these new requirements taking effect next month it s time to get your implementation strategy rolling now before you find yourself in deep water. Michael Christians is a compliance attorney for PolicyWorks. Contact him at michaelc or at 515-224-8954. Loan Originator training You ve got this. Do you still need to satisfy your training requirements Look no further than the comfort of your own office. A new NMLSapproved self-study course is specifically designed for credit unions and meets the continuing education requirements of Reg Z. Enroll today at MLO Check it off your to-do list Enroll today at MLO OFFERED BY INSTRUCTED BY The services provided by PolicyWorks should not be construed as legal services legal advice or in any way establishing an attorney-client relationship. Making compliance easy for you. 866.518.0209 POLICYWORKSLLC.COM 25 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M CREDIT SCORES BY GEOFF BACINO How Can Credit Unions Serve CreditChallenged Members In a perfect world every member who walked through a credit union door would have an excellent credit score. In the real world every CU faces creditchallenged members. Several solutions exist for serving them. A simple fourstep strategy is one of the most effective means of doing so. he recent financial crisis has caused a drop in the average credit score of most Americans. According to Credit Karma 77 percent of the credit scores in this country are in the poor to fair spectrum. As a lender credit unions understand that this score is not a final indicator of the ability or willingness to repay but it is a guideline. How can a credit union continue to provide services to those members who might be considered credit challenged One of the solutions is behavior-based scoring. This approach moves the credit union closer to the member and factors in the stability of previous account activity behavior. Behavior-based guidelines are a much more realistic tool to knowing and understanding your members. Effective underwriting is the natural secondary component in considering a program for members with less-than-stellar credit scores. Underwriting standards which are based on the member s depository history allow big data to work for the member. Some of the most effective programs that allow credit unions to better serve credit-challenged members contain four simple steps. These steps create more responsible member borrowers while helping members rebuild their credit score. The four steps are 1. Account Verification The member s account is verified against a pre-approved list provided by the credit union. 2. Payment Terms The member is allowed to choose a payment plan that best fits his or her budget. Terms are limited to 6 12 or 18 months. 3. Funded Loan The member chooses the desired product the loan is funded through the credit union and the merchandise is shipped directly to the member. 4. Payment Deductions Semimonthly ACH payments are automatically deducted from the member s account. Programs using these steps can provide products and services to members at or below retail costs. Predatory lenders can prey on non-prime members which only perpetuates the lending issues that created the initial problem. A person with poor credit is punished in the ongoing cycle of high interest rates and exorbitant pricing from predatory lenders. A branded shopping experience conducted through the credit union provides a win-win situation as the credit union receives a fee for each product purchased. One of the companies that offers this innovative product is ClearChoice ( Products that members need such as electronics appliances and furniture are offered through the site. ClearChoice s goal is to provide the products and the loan at an affordable rate. And it s not only credit unions that are increasing their focus on credit-challenged borrowers banks and Wall Street are bringing back the rent-to-own feature for an unlikely product mortgages. Rent-to-own programs are designed to take advantage of the recovering housing market. Consumers get a chance to lock in a home price before they have the money for a down payment. The danger is that the rent may be higher than average and the final price of the house may be higher the longer the buyer waits to commit to buying the house. One of the initial investors in the rent-to-own companies is Lew Ranieri who is acknowledged by most as the father of mortgagebacked securities (MBSs). The recent financial crisis provided numerous examples of T 26 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M CREDIT SCORES TAB houses being sold to borrowers with no money down or little reasonable chance to repay the loan. California lenders often offered interest-only loans that took advantage of what appeared to be never-ending rising housing prices. Problems arose when the market plateaued and then fell. Home values dropped and the resulting losses and foreclosures were a major contributor to the crisis. Serving all segments of the credit union membership base is a core value for credit unions. The answer to serving creditchallenged members is one that credit unions examine every day. Recognizing that the reasons for a lower credit score can be varied and that the score is not always indicative of the aptitude of the borrower is an important lesson for all lenders. Credit unions have always placed service to members above all else. This is our chance to put our money where our mouth is. Geoff Bacino is a partner with Bacino & Associates a Washington D.C.-based consulting firm that specializes in advocacy strategic planning and credit union growth. He is a two-time Presidential appointee having served on the National Credit Union Administration (NCUA) board and the Federal Housing Finance Board where he regulated the nation s 12 Federal Home Loan Banks. He can be reached at Geoff How would your customers rate their experience at your drive up Maximize Teller Productivity with a Currency Dispenser (or Recycler) Contact us at Proven Performance and Quality Phone 800-243-2624 Email dispensers Online 27 2 0 1 5 C U B U S I N E S S . C O M C R E D I T U N I O N B U S I N E S S S E P T E M B E R CAR SALES BY BETH WHEELER A Perfect Partnership When it comes to gaining a competitive edge the most successful credit unions know how to think outside the box. One way they are stepping out and strategically differentiating themselves is by partnering with car sales companies as a means of increasing their auto loan volume. See this approach in action. win situation. In 2014 alone Enterprise Car Sales generated 483 million in loan volume for credit unions nationwide. At Enterprise customer service is a way of life. From the first day Enterprise began selling used vehicles in St. Louis in 1962 customers have been assured that the listed price is the price they pay. This approach allows our sales team to focus on the customer experience and the exceptional service that is a hallmark of the Enterprise brand. Enterprise Car Sales customers also appreciate worry-free ownership. With each vehicle purchase Enterprise offers a Perfect Used Car Package which includes a Limited Powertrain Warranty for 12 months or 12 000 miles and 12 months of roadside assistance. Each vehicle passes a rigorous 109-point inspection conducted by an ASE-certified technician. It also comes with a seven-day 1 000mile repurchase policy and complimentary roadside assistance for one year. And we make a free CARFAX Vehicle History ReportTM available for all certified vehicles. T he auto-lending business has grown increasingly competitive in recent years. But that certainly hasn t stopped credit unions from getting in on the action. As they do many are gaining a competitive advantage by forging strategic partnerships with companies that sell vehicles. These relationships are mutually beneficial with the credit union receiving increased loan volume and the car sales partner gaining increased exposure to new customers. For more than 30 years Enterprise Car Sales has helped generate almost 10 billion in auto loan volume for more than 1 000 credit union partners across the country. The name Enterprise may sound familiar to you. That s because Enterprise Car Sales is a division of the internationally known car rental brand Enterprise Rent-A-Car. Enterprise Holdings owns and operates Enterprise Rent-A-Car as well as the National Car Rental and Alamo Rent A Car brands. Over the years as the company has grown and its fleet of vehicles has expanded used car sales have become an increasingly important part of its business. Today Enterprise Car Sales operates more than 130 locations in the United States and features more than 250 makes and models of certified high-quality late-model used cars trucks vans and SUVs. As a result of our decision to join forces with credit unions of all sizes Enterprise Car Sales and the credit unions we partner with have experienced a great deal of growth over the years. These partnerships are a natural fit we share the same deep ties to our local communities as well as a strong commitment to putting the customer first. Enterprise benefits from quality customer referrals from its credit union partners. In exchange Enterprise refers members back to the credit unions for financing 100 percent of the time. It s a classic win28 C R E D I T U N I O N B U S I N E S S A Trusted Partnership Neighbors Federal Credit Union based in Baton Rouge Louisiana has partnered with Enterprise Car Sales for more than 20 years. With more than 75 000 members across 10 different branch locations Neighbors Federal Credit Union manages in excess of 740 million in assets and auto lending is a key component of the CU s business. Enterprise was one of the first partners to give Neighbors Federal Credit Union members the flexibility to complete and sign loan papers directly from the Enterprise Car Sales location. In addition to streamlined auto loans members regularly benefit from special Enterprise promotions. At least once a 2 0 1 5 C U B U S I N E S S . C O M S E P T E M B E R CAR SALES year the credit union will offer special discounts for Enterprise vehicle purchases. Neighbors Federal Credit Union also holds contests to reward employees who refer the most customers to Enterprise. The exceptional service we provide has produced unprecedented levels of customer satisfaction among Neighbors Federal Credit Union members. In fact several of the CU s employees who are also loyal members of the credit union have taken advantage of the Enterprise partnership when purchasing their own vehicles. Stephanie Newman for example turned to Enterprise when it came time to buy a larger vehicle for her growing family. After an initial conversation Stephanie s local Enterprise representative could tell she was attracted to technology so he pointed her in the direction of a minivan that was equipped accordingly. At the time Stephanie s Enterprise Car Sales location didn t have the exact make and model she was looking for so Enterprise located it for her. A year later Stephanie loves her van as much as she did the day she took her test drive. She happily recommends Enterprise to all of her friends and family. Fellow Neighbors Federal Credit Union employee Joseph Madere was in the market for a vehicle that matched his needs and personality. Within hours of connecting with an Enterprise Car Sales representative he received an e-mail full of tailored vehicle suggestions including a late-model used truck that was exactly what he had in mind. When Joseph arrived at the Enterprise Car Sales lot to see the truck firsthand he was impressed by the service he received from the Enterprise sales team. After he indicated that he was strongly interested in purchasing the vehicle but still needed time to work out the financing his Enterprise representative put the vehicle aside to allow him the time he needed to get everything in order. When Joseph returned the Enterprise sales team stayed late to help him through all of the paperwork and put him into his new truck as quickly as possible. Though he was originally skeptical of purchasing a former rental vehicle Joseph has become a lifelong fan of Enterprise Car Sales thanks to his experience with the customer service and quality vehicles Enterprise provides. Success stories like these fuel our business and underscore the value of our continued collaboration with credit unions of all sizes. For more information about Enterprise Car Sales and its partnership with credit unions visit http perfectpartnership. . Beth Wheeler is an experienced manager and sales professional with nearly 15 years of experience in the automotive industry. She currently serves as the Corporate Director of Business Development for Enterprise Car Sales where she manages the division s sales team. E-mail her at Beth.V.Wheeler 29 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M THE LAW BY BRAD R. BERGMOOSER FREEBORN & PETERS LLP Important Considerations in Using Electronic Repossessions GPS tracking and starter interrupt devices offer a safeguard for credit unions in terms of collection costs and vehicle repossession. Laws governing electronic repossessions however pose some tricky liabilities. These implementation strategies will help your CU tip the balance of these risks in favor of the obvious rewards. is to use them only if the member agrees to it. Prior notification and consent is already the law in a number of states and it could help the credit union defend other claims such as a violation of the CFPB s Unfair Deceptive or Abusive Acts or Practices rule. State and federal law also protects member privacy. The credit union can use the member s agreement to allow the use of such devices to waive any privacy protections related to the location of the vehicle. Regardless of whether the loan is written on credit union paper or purchased through an indirect program with a dealer the use of GPS tracking and or a starter interrupt device must be disclosed to the member. The disclosure should include consent to install such devices how and when each is used available emergency override codes for the starter interrupt device and a statement waiving the member s right to privacy for the location of the vehicle. In terms of placement adhere to the clear and conspicuous standard found in Reg. Z and NCUA regulations. Consider creating an amendment to the loan agreement setting forth all the disclosures for the electronic repossession devices and including a separate signature for the member s consent. Most auto loans are closed ended so the credit union needs to make the disclosure when the original loan is made and can t unilaterally modify the agreement to include electronic repossession later. Additionally any fee the credit union plans on charging the member for the installation or use of electronic repossession devices is considered a finance charge so it would need to be calculated and properly disclosed when the loan is Written Consent The golden rule for GPS tracking and starter interrupt devices made. 30 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M G lobal positioning system ( GPS ) tracking and starter interrupt devices can help credit unions reduce collection costs. They can also create a simpler process for repossessing vehicles tied to delinquent loans. At the same time these techsavvy tools can be sources of potential liability however and can subject the credit union to costs far exceeding any savings created by their use. Conducting electronic repossessions through GPS tracking or starter interrupt devices implicates member privacy concerns and possible discrimination claims. In addition such devices create a need to review and amend loan documents. On the other hand their use could provide credit to certain members who would not otherwise qualify and could reduce the overall cost of credit to the membership as a whole through an efficient repossession process. Much of a financial institution s repossession and collection process is governed at the state level and there is little federal guidance or case law in place. Hence using electronic repossessions becomes a complex balancing of risk and reward more than picking between right or wrong. Despite the lack of a clear legal roadmap a credit union can look to existing laws and regulations to come up with several actions to consider adopting if it wants to implement electronic repossessions into its collection practice. TAB THE LAW Post Default Activation While ongoing monitoring of collateral may be beneficial for the credit union it should consider not activating the GPS device until the member is in default. This approach of treating GPS tracking as an activity associated with repossession as opposed to regular monitoring will help avoid violating certain state laws. In Connecticut for example GPS tracking is considered part of electronic self-help repossession (as defined by state law) and can t be used without giving the member 15 days advanced notice. Activating the GPS device only after default better ensures the protection of member information by reducing the amount of data collected about the individual s location. Because the scope of the member s consent to GPS tracking may be limited to actions by the credit union when it is attempting to repossess the collateral the CU would be further shielding itself from liability by treating the GPS tracker as a repossession tool using it only when taking steps to seize the vehicle. Not using a starter interrupt device prior to default is obvious but credit unions need to also be careful of activating such devices if the member files for bankruptcy. Any collateral not yet liquidated is property of the bankruptcy estate. A credit union could be in violation of the automatic stay if a starter interrupt device has immobilized the member s vehicle during bankruptcy. Similar to normal repossession actions the credit union should work quickly with retained counsel to seek appropriate leave from the bankruptcy court if available to repossess the vehicle. State Law Issues Most laws impacting the use of GPS tracking and starter interrupt devices are at the state level. Credit unions should review and understand the rules of their home state and those of the other states in which they operate (and the vehicles are titled). A good place to start is finding out whether the state has a right to cure period for delinquent vehicle loans. If so a credit union should not use GPS tracking or starter interrupt devices until it FREEBORN S CREDIT UNION INDUSTRY TEAM o ers a full range of legal services to credit unions and credit union service organizations to address and manage the complex challenges facing the financial institutions industry. To account for the full range of business needs of credit unions Freeborn s Credit Union Industry Team delivers a broad range of legal services including Regulatory and Legal Compliance General Corporate Representation Commercial Finance Board Governance Real Estate Services Labor and Employment Vendor Contract Representation Intellectual Property Counsel Investments within ICUA and FCU Parameters Mergers Commercial Lending and Bankruptcy Insurance and Charter Conversions Risk Management Send an email to CreditUnionsCommittee to subscribe to our legal newsletter. CHICAGO 311 South Wacker Drive Suite 3000 Chicago IL 60606 (312) 360-6000 (312) 360-6520 fax 31 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M THE LAW TAB has complied with the applicable right to cure notice and time period. In addition to the right to cure considerations various states have enacted specific legislation dealing with the use of GPS tracking and starter interrupt devices by lenders. Some states like Connecticut mentioned above have set a separate process for electronic repossessions which includes notices and timeframes for the credit union to comply with. Others such as Wisconsin have banned one or both of the devices altogether. (Wisconsin has banned starter interrupt devices through a letter issued by the state regulator.) GPS tracking and starter interrupt devices fall in with a host of new technologies credit unions are using in their day-to-day operations. Like those additional technologies there are many issues to face and unintended consequences to avoid. Brad R. Bergmooser is Senior Counsel at Freeborn & Peters LLP and a former Assistant General Counsel for Illinois Credit System. He is a member of the firm s Corporate Practice Group and Credit Union Industry Team and concentrates his practice on matters involving credit unions and other financial institutions. He can be reached at bbergmooser Adopt and Implement a Policy Before using GPS tracking or starter interrupt devices the credit union should consider adopting a board-approved policy covering which credit qualifications will subject members to electronic repossession when and how the devices will be used and which credit union employees will have access to the data from the GPS device. Setting definitive standards such as credit scores or debt-toincome ratios is important in keeping an objective process for determining which borrowers will be subject to GPS tracking and starter interrupt devices. Indirect forms of discrimination or disparate impact play a role in electronic repossessions in the same manner as other lending practices so following set protocol without regard to specific facts with each borrower becomes pivotal in evidencing the credit union s equal treatment of all members. The credit union will need to understand how each device works and the vendor should remain liable for any malfunctions. With regard to starter interrupt devices pick a product that will not cause the vehicle to stop during operation and perhaps one that will provide a warning prior to immobilizing the vehicle. The concern with GPS tracking includes the potentially private information it creates so credit unions should limit access to GPS data and set very brief record retention periods for it. It could be argued that the location of the vehicle provided by the GPS device should be private member information so it is a good idea to limit access to this data. The credit union s policy can cover which employees need and are allowed access as well as how the information will be stored and deleted. 32 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M STRATEGIC PLANNING BY MARVIN C. UMHOLTZ TAB 2016 Strategic Tipping Point CFPB s Mission vs. CU Business Model What are your credit union s strategic tipping points When planning for 2016 it behooves CUs to anticipate changes that will dramatically affect their operational strategies. Learn more about what could be putting the relationshipbased strategic business model of your credit union in jeopardy and how to overcome such a potentiality. mong the external factors that are often discussed in the strategic planning process are those typically reviewed during a classic environmental scan geopolitical economic demographic legislative regulatory political competitive and the always-evolving customer expectations. Unlike in many past years while planning for 2016 and beyond credit union leaders are inundated by major external factors about which they have limited control. Key strategic wild cards and monkey wrenches as well as the need to identify their associated strategic implications for the credit union are among the external factors that need to be strategically considered. The identification and discussion of these external factors should be performed in parallel with but not be allowed to paralyze the credit union s internal strategic appraisal and the internal development of its strategic and operational plans for 2016. A Contingency Planning for 2016 s Inevitable Strategic Tipping Points A strategic tipping point is a convergence of environmental factors or events that significantly impacts on a credit union s strategic business plan an environmental change that tips the strategy in a contingent direction. Strategic tipping points also go by other names like strategic inflection points strategic crossroads or critical junctures. During the 2016 strategic planning process credit union officials should anticipate that one or more of these strategic tipping points both individually and collectively will dramatically affect each of their strategic and operational plans especially during the near term. Since the 2008 financial crisis and throughout the tepid economic recovery most credit union leaders found themselves prisoners of uncontrolled events and they remain deeply uncertain about how all of it will play out. It s been a new era for the credit union industry and strategic analysts believe that going forward few of the old ways of doing business will work as they once did. That belief logically calls for a reassessment of strategy. A highly-likely source for tipping points affecting 2016 strategic and operational plans would be the Consumer Financial Protection Bureau (CFPB) the National Credit Union Administration (NCUA) and the other federal regulators that are contributing to the cumulative regulatory burden facing a credit union. While attempting to draft member-centric strategic and operational plans for 2016 implementation a credit union s leaders must especially consider the CFPB s self-perceived mission. To many credit union leaders the CFPB is a puzzling whirlwind of rulemakings that make no traditional sense. Yet the CFPB s continued supervisory rulemaking and law enforcement influence on a credit union s operating environment has significantly altered perhaps even upended the credit union s traditional business model. 33 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M STRATEGIC PLANNING CFPB s Compliance-Driven Culture vs. Relationship-Based CU Business Model For relationship-based financial institutions like most credit unions the CFPB is a strategic and operational enigma. Historically each credit union s management executives staff and even its customers its members saw the institution as an evolving organization that had steadfastly been there for its members and communities. This held true even as financial services and products changed dramatically and as the members themselves proceeded through the various stages of their lives. It was a holistic approach founded on trust on a strong commitment to customized service and on institutional identity as reflected inwardly by the organizational culture and outwardly as a commitment to the communities it served. However as revealed in a speech delivered on February 18 2015 by then Deputy Director of the CFPB Steven Antonakes the federal agency s approach to the financial services marketplace is completely 180 degrees opposite razor-focus on compliance management systems and financial product lines. In that speech the CFPB Deputy Director said There are two key distinctions to how we approach our work. First given our consumerprotection mandate we focus on risks to consumers rather than risks to institutions. This drives our strong focus on consumer compliance management systems to ensure that regulated institutions adapt their controls to their business strategies and operational complexity. Second we conduct our examinations by product line rather than [taking] an institution-centric approach. Accordingly we assess the likely risk to consumers in all product lines at all stages of a product s lifecycle and across wide swaths of the entire consumer financial marketplace. Our sole focus on consumer protection along with our footprint in both the bank and nonbank space makes the Bureau unique among federal regulators. There are many relationship-based credit union officials who wish that unique federal agency would cease and desist with its relentless compliance-driven rulemaking. The CFPB s Deputy Director also said We are hopeful that our new approach will solidify an incentive system that rewards strong compliance and appropriately identifies those who violate the law regardless of size charter type or industry. We 34 C R E D I T U N I O N B U S I N E S S believe our risk-based and institutional product-line-oriented approach to supervision represents a significant step forward for consumer protection regulation. We think our careful and reasoned approach to taking corrective action will result in consistency for industry and fairness for consumers. And we are hopeful that all of this will reshape markets in consumers and businesses interests in the years to come. The federal agency s senior leadership is misguided and wrong-headed in that belief. The CFPB s complex and costly compliance-driven supervisory culture is anathema to the historically valuable credit union relationship-based business model. Worst-Case Scenario CFPB Kills Off the 5Cs of Lending The CFPB s rulemaking also exhibits the same consistently damaging approach as has been demonstrated in the federal agency s supervisory and examination program. There exists no differentiation between one financial product and service provider or another. To the CFPB a credit union might as well be merely a shopping cart filled with these CFPB-defined financial products and services. And unless the shopping cart has a complex compliance management system that can prove to the CFPB that no laws or rules are violated and that every consumer complaint gets resolved then woe be unto that shopping cart. Strategically and operationally credit union strategic plans that are embedded with the relationship-based business model will need extraordinary armor plating to withstand the CFPB s ongoing assault. Credit unions are also historically linked with the relationship-lending model where they know the member S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M TAB STRATEGIC PLANNING families and businesses they serve. Credit union officials are willing to stand by these borrowers in bad times based upon their knowledge of each borrower s character. Credit unions distinguish themselves by relying heavily on these personal and community relationships. Most credit unions keep their focus on the traditional five fundamental C s of lending character credit capacity collateral and capital. The CFPB intends to change all of the rules for lending credit reporting and debt collection. Indeed the CFPB s actions have placed the 5Cs of lending on the endangered species list. The CFPB s leadership sees a major part of its mission to be remaking the financial products and services markets especially for lending. Operationally credit unions have already experienced the impact of the CFPB s rulemaking on remittances and mortgage lending. The CFPB has even more plans to impose compliance burdens for expanded Home Mortgage Disclosure Act data collection and reporting for detailed small business lending data collection and reporting and for minority business lending data collection and reporting. And by October 3 2016 all consumer credit providers must be in compliance with the Department of Defense s final Military Lending Act rule that was developed in partnership with the CFPB. By the mandatory compliance date a credit union will be required to make major changes in the way it grants credit to all consumers not just active-duty military personnel and their dependents. If the CFPB s compliance-driven burden gets any worse for a credit union the relationship-based credit union model will implode. And it will be a credit union s members who come from all walks of life who live in all parts of the community and who rely on that relationship who will feel that loss the most. Thousands of Credit Unions Are in Strategic Jeopardy There are other external factors that suggest that credit union consolidations will be accelerated. Culprit number one is the already-identified crushing regulatory burden and the practical impossibility that smaller credit unions have the capacity to comply. That same crushing regulatory burden is also sounding a solemn funeral dirge for the nation s thousands of smaller credit unions. The cumulative weight of trickledown regulations and mismatched examiner-recommended best practices has taken a huge toll on all relationship-based federally insured credit unions but smaller credit unions suffer disproportionately from the burdens. The relationship-based strategic business model is in jeopardy. Earlier in 2015 the NCUA Board adopted its 2015 2016 Annual Performance Plan. The NCUA Performance Plan ends with an Appendix C External Factors 2015 and 2016 that included a section sub-headed Small Credit Union Challenges and the Future Composition of the Credit Union System. It said Small credit unions face challenges to their long-term viability for a variety of reasons including weak earnings declining membership high loan delinquencies and elevated non-interest expenses that reflect limited operational economies of scale. So in addition to the compliance burdens the NCUA was suggesting that thousands of credit unions would be facing operational and financial challenges. The likelihood that even one of them was sufficiently resource rich to cope with all of the strategic and operational challenges would be extremely low. The NCUA document also said One result of these challenges has been a trend toward consolidation primarily driven by the acquisition of underperforming small credit unions by their larger peers. If current trends persist over the next decade there will be fewer credit unions in operation and those that remain will be considerably larger. As credit unions grow they tend to become more complex providing a wider array of products and additional services. Such complexity can be beneficial when it addresses members needs and leads to increased diversification in [a] credit union s assets. However that increased scope often requires additional expertise and resources to properly oversee the expanded operations with implications for credit union resources and management. In addition larger credit unions pose a greater risk to the NCUSIF and require more specialized examiner resources. Thus the trend toward consolidation and complexity has implications not only for the credit unions themselves but also for NCUA resources and management initiatives. In addition to the CFPB s heavy-handed impact on federally insured credit unions 2016 35 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M 35 STRATEGIC PLANNING insights An instance of capturing the true nature of a thing. strategic and operational plans the NCUA will be ramping things up and generating potential strategic tipping points as well. CU Business Model Hit by a Super-Charged Bolt of Lightning The underlying theme permeating strategic and operational planning for 2016 is that there is more going on in the current external-factor environment that has impacted upon the business of running a credit union than has been focused upon by most credit union officials despite their great efforts and good intentions. And important developments that could dramatically affect the relationship-based business model of credit unions have been occurring on a daily basis with many more already in the pipeline. An abundance of potential strategic tipping points are swirling around a credit union s 2016 strategic and operational planning process. But having served a long time as a strategic advisor I ve learned that people are only interested in what they are interested in when they are interested in it. If credit union officials allow themselves to be too distracted by their internal affairs or by the crisis of the day they won t see the dramatic strategic vectors that will hit their business model like a super-charged bolt of lightning. And there are also those strategic risks about which one is currently unaware that should keep one awake at night. So the best advice is to avoid the navel-gazing and myopicvisioning limited by yesterday s strategic thinking. Take a reality check take a deep breath and take the next step forward no matter how scary. Marvin Umholtz is President and CEO of Umholtz Strategic Planning & Consulting Services based in Olympia Washington. He is a 39-year credit union industry veteran who has held many leadership positions with credit union organizations and financial services industry vendors. A former association executive and lobbyist he candidly shares his credit union industry knowledge and analysis with public policymakers financial industry executives and vendor companies. Umholtz also writes and distributes CU Strategic Hot Topics a clients and colleagues newsletter that analyzes the actions of the National Credit Union Administration (NCUA) Congress the Consumer Financial Protection Bureau (CFPB) and the Federal Reserve as well as the lagging economy uncertainties in financial markets divisive partisan politics and the growing conflict about the 36 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M DIRECTOR EDUCATION BY DENNIS CHILD Credit Union Board Members Must Be in a Constant State of Learning Another in a Series of Articles on Board Responsibilities and Expectations In a continuing series CUB takes a closer look at regulation 701.4 General authorities and duties of federal credit union directors. Listen in as we break down the seven major points covered by this regulation how they impact your credit union and what steps your CU board must take to meet the regulation s expectations. n previous articles I have written that credit union boards of directors are under much greater scrutiny than several years ago. The National Credit Union Administration (NCUA) expects individuals serving on federal credit union boards to serve under greater standards than in the past. Whether they are compensated or not board members will be held to high levels of responsibility by NCUA and therefore they would be wise to pursue a constant state of learning. A review of issues I raised in former articles on this subject is in order. Credit union board members expectations can be found in CODE OF FEDERAL REGULATIONS Title 12--BANKS AND BANKING PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS 701.4 General authorities and duties of federal credit union directors. Credit union board members managers auditors and supervisory committee members would be wise to review this regulation and become familiar with its content. Let s review the major points of this regulation Point 1 A board s responsibilities are non-delegable. This section of the regulation makes it clear that board members cannot delegate or defer their responsibilities and expectations to any other entity. C R E D I T U N I O N B U S I N E S S I Point 2 The best interests of the membership as a whole should be served. Every director must carry out his or her duties in good faith in a manner that such director reasonably believes to be in the best interest of the membership (as a whole) and in a way any prudent person would use under similar circumstances. Point 3 Discrimination for or against individuals is prohibited. Directors must administer the affairs of the credit union fairly and impartially without discrimination in favor of or against any particular member. Point 4 Directors must become proficient within six months. Directors are expected within six months of election or appointment to have a working knowledge of basic finance and accounting practices. This includes the ability to read and understand the credit union s balance sheet and income statement well enough to know critical questions and points that should be addressed with management and internal external auditors. Point 5 A working knowledge of regulations is required. Directors are expected to have a working knowledge of the Federal Credit Union Act applicable law and sound business practices. Point 6 Directors can rely on experts to help them carry out their duties. 37 S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M DIRECTOR EDUCATION Directors are expected to retain at the expense of the credit union staff counsel accountants advisors etc. necessary to effectively carry out their duties. Point 7 Directors can rely on information from professionals who are expert in their respective fields. In carrying out his or her duties a director may rely on information from one or more employees legal counsel independent public accountants or other persons retained by the credit union and reasonably believed to be reliable competent and within each person s skill level and expertise. To meet the expectations described in regulation 701.4 as referred to above boards should make sure they have established minimal training and competency-level expectations for each director. To help individual board members meet minimal competencylevel expectations as part of their ongoing training boards should provide courses that improve individual board member skills in areas that include Basic financial literacy Financial analysis Effective leadership skills Strategic planning Applicable federal and state regulations Development of regulatory-compliant policies Interest rate risk and asset liability management monitoring and control Capital preservation Risk management To assure that consistent and timely training takes place for board members managers and boards need to take the following steps 1- Establish minimal competency-level expectations. 2- Determine training that needs to be in place to help board members meet expectations. 3- Establish a training timeline. 4- Line up resources to provide education and training. 5- Provide training as established in the timeline. 6- Establish a reasonable evaluation system to determine if competency expectations are being met. 7- Determine competency-level shortcomings and return to Step 2. 38 C R E D I T U N I O N B U S I N E S S Training and education for credit union employees board members and committee members are of such importance that this is not the area to cut costs or go cheap. Credit unions need to be sure they have set aside a reasonable part of their operating budget toward critical education. Remember it might be that members of credit union boards of directors are not compensated for serving but they are still going to be held to high standards and expectations by regulators and credit union members. Meeting these standards and expectations requires setting competency objectives and then committing to ongoing education and training. Dennis Child is strategic partner with VirtualCorps and TCT Risk Solutions LLC. VirtualCorps and TCT Risk Solutions LLC provide training and consulting services whose specialties include training education and advisory services for credit unions and their boards of directors. S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING BY RYAL TAYLOE nCINO Creating a Better Member Experience through Cross-Selling Still thinking of cross-selling as a pushy tactic Your members might not be in agreement. In fact many of today s CU members are viewing cross-selling as very desirable proof that their needs are being anticipated. Discover why cross-sales are vitally important to your credit union and how to make such efforts more effective. Cross-selling is the practice of selling or suggesting complementary products. While many people consider crossselling a negative or predatory practice if done effectively it can actually help your credit union create a better member experience. Think about it If you could effectively provide additional products and services that your members want when they want them you would not only improve your bottom line. You would also change the whole dynamic of your relationship with each member by showing your ability to anticipate his or her needs. Given the way your members interact with anticipatory technology like Google Apple and Amazon in their everyday lives it s not surprising more and more members expect their credit union to have the ability to similarly predict their needs. Further the best opportunity for growth often lies in a credit union s existing membership. Driving growth organically among an existing member base is more cost effective than acquiring new members. What s more it fosters a culture geared toward creating great member experiences. For these reasons the ability to cross-sell products is vitally important to credit unions. According to a 2013 Gallup Survey which surveyed 9 000 financial services customers one in every five individuals opened a new account or signed up for a new service from their financial institution during the previous six months. Gallup also found that those individuals who are fully engaged with a financial institution were much more likely to buy an additional product than those who are just satisfied. For example while less than 45 percent of satisfied customers surveyed by Gallup said they would consider their bank or credit union the next time they needed a product or service that consideration increased to 83 percent among customers who were both satisfied and engaged. These latter members are more likely to open a new account add ancillary products and services and or obtain planning advice than those who are merely satisfied. In other words fully engaged members are very open to the cross-sell. Once your credit union understands the importance of cross-selling and is ready to take the next step Gallup offers 39 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING the following tips to making your cross-sell marketing program more effective 1. Identify the most engaged members (accounts held transactions made etc.) and review the products already held with your institution. 2. Model the best relationships as the foundation for building similar relationships with less engaged households. 3. Make product recommendations based on event triggers account ownership trends market changes etc. Increase insight gathering from members to improve this process. 4. Make sure marketing offers are customized based on the member relationship regardless of the channel being used for marketing. Provide flexibility to employees and personalize all marketing communication. 5. Leverage analytics on previous behaviors at the member household level to improve targeting timing and offer selection. When it comes to identifying the most engaged members and reviewing their accounts credit unions can utilize today s technology to help equip member service representatives (MSRs) with visibility into each member s financial profile. Such a perspective will allow them to quickly and easily see a global view of the relationship a member has with an institution. This same technology can also help improve targeting timing and offer selection ( 5). Instead of simply processing transactions answering questions and resetting passwords front-line software can be increasingly valuable to tellers and MSRs. More specifically its data can be used to prompt them to offer specific products and services to meet members needs. This includes notifications if a member is suitable for certain products creating lists of members who are not actively using a service and even composing scripts for employees to help make offers to members more effectively whether they are physically in the branch on the phone exchanging emails or interacting via social media ( 4). SAFE Credit Union a 2.1 billion credit union headquartered in Sacramento Calif. is one institution that has successfully used technology to enhance the experience of its more than 180 000 members. Although the credit union recently celebrated its 75th anniversary SAFE continues to evolve by embracing modern technology and implementing online and mobile solutions. By using cloud-based technology to manage member data and 40 C R E D I T U N I O N B U S I N E S S relationships and to anticipate members needs SAFE is able to effectively target its members with the right financial products and services at the right time. As CEO Henry Wirz explains When you know your member(s) well and you can anticipate what they need and actually be with them at the moment of inspiration and be responsive that s a great experience. SAFE is not alone in this thinking. According to The Financial Brand in 2014 more than 50 percent of financial institutions surveyed indicated that Data Analytics Big Data are becoming essential in successfully cross-selling and meeting members needs. Leveraging technology that provides this on-demand information enables tellers and MSRs to make informed decisions about what products could enhance a member s banking experience or best meet his or her needs. Cross-selling lending products can prove to be extremely complex especially as it relates to the fast-growing category of business loans which are not as straightforward and simple to underwrite as consumer loans. For many credit unions handling business loans can be considered as much an art as a science. The arduous process of analyzing business credit requires the completion of an incredible volume of financial information and credit checks. It is typically accompanied by a lengthy underwriting and approval process to look at a variety of indicators that can be slightly different for each credit decision. Often it is difficult to track down all the necessary information needed to make a credit decision due to manual processes and disparate software systems housing the information. As a result credit decisions are prolonged. To effectively cross-sell the appropriate loan products at the appropriate time particularly for member business loans automatic decisioning tools are becoming increasingly valuable. Auto-decisioning can also help credit unions gain and retain business when used as a preapproval method. It is critical for the institution to aggregate information to suggest products or services to members at the right time. For instance think about a member who does not have a credit card. What if your teller handling a transaction for that member could tell her that she has already been preapproved with a specific credit limit and that completing the necessary paperwork would take her no additional time Just e-sign the form right there on the spot and the transaction can be finalized. Take that one step further. A member who also has his business account with the credit 2 0 1 5 C U B U S I N E S S . C O M S E P T E M B E R MEMBER BUSINESS LENDING TAB union may be a good candidate for a 100 000 line of credit (LOC). Imagine saying to that member We can have that LOC available for you today and at a tenth of the rate of an alternative lender. In today s competitive market cross-selling can make a huge difference to a credit union s bottom line and more importantly it can transform the member experience. Credit unions that do not invest in tools to help them compete risk losing business to emerging alternative lenders that promise they can turn around a business loan decision in as little as one day. Despite more players entering the arena credit unions are poised to become the lender of choice most have the deposit volumes to support offering more competitive rates than any other type of lender. By accelerating the decision-making process anticipating members needs and offering them the right products and services at the right time cross-selling can help your credit union create better member experiences. Are you ready to delight your members Ryal Tayloe is vice president of credit unions for Wilmington N.C.-based nCino the leader in cloud-based operating solutions for the financial services industry. Through its flagship operating system nCino leverages the power of to provide credit unions and other financial institutions with superior transparency and clarity into their existing loan production pipelines portfolios and operating efficiencies across all business lines resulting in increased profitability productivity gains and regulatory compliance. For more information visit or connect with the company on LinkedIn and Twitter nCino. The 1 Solution for Member Business Lending 41 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M BRANCH TAB BUSINESS HERE BY MEREDITH NAME HERE BY AUTHOR DEEN FMSI It s Not All About Mobile and Online Performance-Based Commissions Drive CU Efficiencies If your credit union is considering going teller-less in an effort to improve efficiency you may be on entirely the wrong track. Studies show that incentivizing your front-line employees is what s really propelling profits. Find out why the teller is still a CU s driving force. t s no secret that an uncertain economy has financial institutions taking a hard look at operating expenses and the teller line has certainly come under scrutiny. A number of credit unions are introducing teller-less branches and they re ramping up their mobile and online efforts to drive efficiencies. Those kinds of measures are important but they may not be enough. Properly incentivizing frontline employees with performance-based commissions too can significantly impact the bottom line driving up staff performance and cross-sales that benefit members and the CU. In fact FMSI studies show the strong cost benefit of incentivizing tellers. Through analysis of over 15 million teller transactions taking place at over 2 200 branches FMSI has developed a side-by-side comparison of those institutions utilizing an incentive program and those that do not. Our latest findings Those banks and credit unions that provide incentives have an average labor cost per transaction that is 14 percent lower than their non-incented counterparts. More about that later. So better efficiencies are not all about the best mobile app and online banking site. And for those who think the branch is going away the 2015 FMSI Teller Line Study shows that branches are staying around evolving into centers for trusted advice and sales. In this new role the study shows branches will deliver what FMSI calls higher-quality interactions that lead to a greater share of members wallets. I Tellers Often Overlooked As important as the front line is today and in the future and despite being the face of the institution tellers are often overlooked as the CU invests its dollars and energy in emerging areas like mobile. True incenting and motivating tellers can be challenging but as I said formal programs can lead to big performance increases and are worth the effort. Just what are teller productivity incentives They are variable compensation programs utilized by banks and credit unions to drive desirable behavior on the teller line. Typically the unit of measure tied to incentive goals and payouts is the number of transactions carried out in a processing hour. Goals can be set for just teams just individuals or both. In many cases institutions also tie other incentive metrics such as service accuracy and referral metrics to the productivity goals in order to create a balanced approach. As an industry expert in teller productivity FMSI recently completed a study Incentive Pay & Branch Culture that focuses on the effectiveness of incentives specifically relating to processing teller transactions. Both the intangibles such as employee morale and the tangibles like dollar savings are thoroughly covered. Report Metrics A key metric in the report is transactions per hour (TPH) which is the total monetary transaction volume as reported by the core processor divided by the total number of processing hours. Processing hours are the times in which a teller performs at least 2 0 1 5 C U B U S I N E S S . C O M 42 C R E D I T U N I O N B U S I N E S S S E P T E M B E R BRANCH BUSINESS one accountholder-facing transaction measured in 15-minute increments rather than payroll hours. If a teller performs a transaction at 8 09 a.m. for example and then does not process another transaction until 9 57 a.m. only two fifteen-minute wall clock periods would qualify as processing hours even though two payroll hours passed. At an average of 17.6 transactions per hour the financial institutions in this study that are utilizing an incentive pay program are 11 percent more productive than those FIs that do not employ an incentive program. One of the factors that may contribute to this double-digit difference is the increased focus by all employees on the workforce optimization initiative caused by a quantifiable vested interest in the form of incentive pay. FIs have reported paying up to 200 extra per month to topperforming tellers. This type of variable compensation has motivated the tellers and branch supervisors alike to improve their productivity above and beyond their industry peers. Another important metric the report addresses is labor cost per transaction which is the average labor expense per transaction on the teller line. This metric does not include overhead incentive costs and other non-payroll expenses in its calculation. To arrive at this number you divide the hourly pay rate by the TPH. The FIs in this study that utilize an incentive pay program had an average labor cost per transaction of 0.86 which was 14 percent less than those FIs that did not employ an incentive program. The labor cost per transaction metric is mostly impacted by properly aligning the right number of tellers during the right times. Those institutions that excel at this alignment are typically following transaction volume forecasts through scheduling engines provided by workforce optimization companies like FMSI. This new staffing approach requires focus by tellers 43 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M BRANCH BUSINESS TAB branch managers and senior-level management. The 14 percent difference indicates that this focus has a greater intensity for those institutions on the incentive pay program. Front Line Worth Investment So both our studies and credit unions that use front-line programs show that properly incentivizing front-line employees with performance-based commissions not only increases the number of transactions per hour FIs can handle and lowers labor costs but it also improves cross-sales and member satisfaction. As banks and credit unions tighten their belts and look for savings opportunities they should consider how investing in the front line boosts the bottom line. Meredith Deen is the Chief Operating Officer of FMSI. FMSI provides easyto-use yet sophisticated business intelligence and performance management systems that facilitate efficient staff scheduling and systematic lobby management of the branch. She can be reached at meredithd For more information visit or call (877) 887-3022. Case Studies Let s look at some examples of credit unions benefitting from incentive pay programs. In Portsmouth N.H. the 1 billion in assets Northeast Credit Union (NCU) uses FMSI s Individual Incentive Pay Plan for tellers and has markedly improved both transactions per hour (20.8) and labor costs per transaction ( 0.81) numbers that rank highly among institutions reporting front-line performance. At NCU teller supervisors get the following monthly payout for their team s TPH-achieved goal performance 75 if 90 percent 100 if 100 percent to 119 percent 120 if 120 percent plus among other bonuses. The nine-office credit union attributes the results in part to changing employees outlook on what they do every day. At one point our tellers would get frustrated at longer lines and now they see these lines as dollar signs said Cheryl Nichols AVP of branch administration at Northeast. The process works great. I am very confident that our front-line staff is much more attentive because of the incentive plan. Noting that tellers are the most important position in the CU Arsenal Credit Union in Arnold Mo. with 212 million in assets employed FMSI s Individual and Team Incentive Pay Plan for tellers and saw TPH increase to 19.4 and labor cost per transaction sink to 0.63. Arsenal tellers typically earn 50 to 70 extra per month in incentive dollars and on average 90 percent of the tellers earn some sort of incentive on a monthly basis. The teller position is the most important one in the organization they are the face of the credit union said Jean Capriglione AVP of member services at Arsenal. The incentive plan gives the recognition to our tellers they deserve and it significantly boosts morale and most importantly it keeps our workforce optimization efforts in the forefront of everybody s mind. In many cases our tellers are excited to process more transactions. 44 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 5 C U B U S I N E S S . C O M 44 LIMITED TIME OFFER Introductory Rebate mobile Capable of moving or being moved readily. So are you Your members are. Your future members are. And so are your competitors. As the leading CUSO PSCU can move you forward in the way of mobile delivery. That means putting you in all the places your members are and helping you outpace the competition on the road ahead. mobile 888.918.7357