It’s been four years since the onset of the global pandemic and we are still feeling the economic whiplash. The result? A heightened regulatory environment around lending practices.
Financial stability for borrowers has been, well, unstable, moving regulatory bodies (like the CFPB) to crack down on lending practices. The record low interest rates penduluming to near-record highs have resulted in a regulatory environment that is highly borrower sensitive.
Recession rumors have been bubbling since the pandemic. Every year removed from the pandemic brings new challenges and more questions like, “Will a full-blown recession hit in 2024?”
Only time will tell.
Will we see a recession in 2024?
Maybe. Maybe not.
Instead, let’s ask, “How do we prepare for the next recession?”
Rather than debating over when the next one will hit, focus on being prepared for the peaks and valleys that the economy brings (because, inevitably there will be both).
The (Not So) Great Recession
Recessions historically bring rises in unemployment, decline in income, and two consecutive quarters of negative gross domestic product growth (GDP).
Since World War II, the United States has made its way in and out of 13 recessions. Still, it’s The Great Recession that sticks in the minds of most Americans as the subprime mortgage crisis contributed to the longest and most catastrophic economic downturn since the Great Depression, following a housing market boom just a couple of years prior.
The path to a recession starts out similar, however, the lack of lender/lendee accountability that helped lead to The Great Recession sets it apart from others.
In 2008, loan writing guidelines were very liberal, making it easier for almost anyone to get approved. Some of the guidelines that were followed included:
● Using stated income and assets
● Not verifying employment
● Accepting low credit scores and high debt ratio limits
● Allowing interest-only loans
● Allowing negative amortization
● Stated property values inflated
The looseness in underwriting standards impacted the housing market specifically, leading to an abundance of fraud, as well as putting up to 25% of homeowners in negative equity situations.
Over the last 15 years, the financial services industry has learned some valuable lessons, and
have ultimately impacted how we react and respond to future recessions.
3 Great Challenges for Credit Unions to Overcome
Credit unions and banks need strategies and plans in place to be part of the solution to these challenges.
1. The Great Resignation
Unemployment is reaching low and reasonable levels. Even though the job market is unstable, employees are willing to make a change and leave a job that doesn’t fit their personal and professional goals.
For employee retention, your people need to be coached. Managers won’t thrive on promotions alone - they need leadership skills. Employees need soft skills to succeed in their roles and grow into new ones. Financial institutions of all sizes should consider how they coach their employees for success.
2. The Great Transformation
What’s something financial institutions have that they didn’t in past recessions?
Data.
Data provides both the ground and 10,000 foot view, giving lenders higher navigability of credit scoring, compliance, and benchmarking.
A transformation of digital transformation is inevitable. Don’t miss out simply by not having the right data and analytics software.
3. The Great Refinance
With rate cuts on the horizon, many drivers and homeowners will explore lowering their monthly payments. This will likely bring a large influx of refinances. This is great for growth - so long as you maintain firm and fair underwriting standards that mitigate risk while ensuring that borrowers have access to credit.
A surge in refinances may also bring a wave of new indirect auto loans. With these indirect loans, it’s crucial that credit unions are clear on who is responsible for the GAP waivers and any other VPP refunds. Don’t duplicate efforts and ensure that ancillary product contracts are buttoned up.
Are You Recession Ready?
If we can thank The Great Recession for anything, it’s the importance of lending guidelines and being prepared for the unexpected. Today, lending is less susceptible to fraud, thanks to The Great Recession. Now we see a regulated industry that focuses on maintaining a conservative approach to safeguard against future economic crashes.
Recessions may come and go, but learning and growing from previous ones can help mitigate the damage – turning what used to be a catastrophic crisis into more of a regulated decline.