1.26.2016 What Are Credit Unions’ Top Legislative Priorities This Year?

On January 4, the National Association of Federal Credit Unions (NAFCU) sent a letter to the leaders of the Senate and the House of Representatives with a list of their top legislative priorities in 2016 for the nation’s credit unions.

The letter pointed out that member-owned, not-for-profit credit unions provide personal and small business financial service products to more than 101 million Americans. The top 11 legislative priorities for NAFCU this year are:

  1. Preserve the credit union tax exemption — Eliminating this tax exemption would shrink U.S. GDP and cost 150,000 jobs annually while resulting in a net loss of federal government revenue, according to NAFCU. This is because the cumulative benefit provided by credit unions to the greater U.S. economy is more than $17 billion, which is far greater than any revenue that would be generated by eliminating the exemption.
  2. Provide regulatory relief — Last year, NAFCU released an updated five-point plan for credit union relief from the glut of financial institution regulations due to financial reform — especially CFPB rulemaking. As a result of the cost and complexity of this regulatory onslaught, nearly 1,300 credit unions have closed since the second quarter of 2010 — more than 17 percent of all credit unions. NAFCU urged Congress to make regulatory relief a top priority this year.
  3. Support the Data Security Act — NAFCU strongly supports the Data Security Act of 2015, which would recognize credit unions’ adherence to the standards set by the Gramm-Leach-Bliley Act for meeting criteria for keeping consumers’ personal information safe.
  4. Housing finance reform — NAFCU believes it’s vital that credit unions continue to have unfettered access to the secondary mortgage market and that any Fannie Mae and Freddie Mac reforms emphasize fair pricing that reflects loan quality, rather than quantity.
  5. Support the field of membership rule — Last November, the NCUA proposed a rule that seeks to provide regulatory relief for all charter types. NAFCU supports this proposed rule and will submit official comments, and it urges Congress to support the rule as well.
  6. Reform capital reform/risk-based capital rules — NAFCU has consistently opposed the NCUA’s risk-based capital rules — which were approved last October and are set to take effect in 2019 — due to the regulatory burden and costs it will impose. While NAFCU has worked steadfastly to try to make a bad rule better, it believes legislative reforms are necessary and urges Congress to initiate these reforms.
  7. Increase in member business lending asset cap — NAFCU believes that the arbitrary 12.25% asset cap on member business lending (MBL) is severely outdated and should be increased. It would also like to see Congress increase the de minimis exclusion to exempt additional loans and consider exemptions for veterans applying for small business loans.
  8. Protect responsible overdraft protection programs — Credit unions are known for working with their members to prevent abuse of overdraft protection programs. NAFCU is staying in close contact with the CFPB to monitor its timeframe for addressing overdraft protection on its rulemaking agenda.
  9. Ensure an effective payments solution — Last May, NAFCU joined two new task forces formed to modernize the U.S. payments system — the Faster Payments Task Force and the Secure Payments Task Force — with the goal of helping ensure that any new payments system is cost-effective, operationally effective and scalable for all credit unions.
  10. Seek fairness under the FCC’s ruling on autodialing — NAFCU is concerned that the FCC’s declaratory ruling issued last July that clarified its interpretation of the Telephone Consumer Protection Act will not allow credit unions to engage in time-sensitive member communications about identity theft and data breaches. It urges Congress to monitor efforts to pursue a fair result of this for credit unions.
  11. Expand regulations to online lenders — NAFCU believes that online market lenders should be required to meet basic consumer protection requirements (like the Truth in Lending Act), loan underwriting standards and applicable state usury laws. It also urges Congress and regulators to modernize existing laws and regulations on traditional financial institutions to reflect the growth of online marketplace lenders.

We’re interested in hearing from you. What do you think about NAFCU’s legislative priorities for 2016? Send me an email at steven@lendtrade.com.

1.19.2016 How Auto Loans Are Bringing in More New Credit Union Customers

As I noted in a recent article, auto sales set a new record last year, hitting 17.5 million. This is obviously good news for automobile manufacturers and dealerships, but it’s also good news for credit unions.

In an interview recently published on cuinsight.com, the Credit Union National Association’s Chief Economist and Chief Policy Officer Bill Hampel pointed out that up to 40 percent of new credit union members are coming by way of auto loans. “Auto loan customers started coming back to credit unions two years ago, and now they’re coming back with a vengeance,” Hampel said in the interview.

More Than a Loan

According to Hampel, a higher proportion of new credit union members are joining via the car loan route than ever before. “When a car buyer gets a credit union loan at the dealership, they usually think they’re just getting a car loan — they don’t realize they’re also joining a credit union,” he said during the interview. “It’s up to the credit union to market to these new members to try and get them to use more credit union services.”

Indeed, this 40 percent number can be viewed as both a positive and a negative. It’s good that credit unions are growing their membership through car loans; however, these new members tend to be less permanent if they don’t utilize other credit union products and services.

Hampel said that credit unions should strive to get at least 10 percent of new members who are joining via an indirect auto loan to use additional products and services. “This takes a lot of work,” he said. “But at least it’s another opportunity to market directly to these members.”

One idea he shared was to send these indirect auto loan members a notice a couple of months after they’ve bought the car telling them ‘you thought you just bought a car, but you also bought a credit union.’ He also suggested using data sources to do product-specific marketing to these new members.

The large percentage of new car loan members isn’t even the best part of this story, Hampel noted. These new car loans are also good for credit union balance sheets since they diversify their portfolios beyond mortgages and other types of consumer loans.

Looking Ahead

Hampel said he expects the car loan new member boom to continue for at least two to three more years. Here’s why:

A lot of people put off buying new cars during the recession. In fact, new car sales were down about 20 million between 2008 and 2012, said Hampel. Put another way, more than a full year’s worth of sales were lost during this time. So there’s still a lot of pent-up demand among car buyers. Also, the average age of cars on the road is now more than 11 years. “There will be a lot of tail wind for car sales over the next couple of years,” Hampel said.

He pointed out that an improving economy and employment situation should also keep demand for new cars strong. “Credit unions should take advantage of these factors and make hay while the sun shines,” Hampel said during the interview.

What About Interest Rates?

Of course, one big question on everyone’s mind is what will be the impact of rising interest rates on consumer lending, including auto loans? Hampel noted that when the Fed last went on a rate-rising campaign in 2004, it raised rates a quarter of a point for eight straight meetings.

He thinks the Fed will be more measured this time around, maybe raising rates every other meeting. This would bring the federal funds rate up to 1.25% by this time next year, which still should not be a big impediment to buying a vehicle for most people.

We’re interested in hearing from you. What do you think about the large percentage of new credit union members who are joining via the car loan route? Send me an email at steven@lendtrade.com.

1.13.2016 How the Fed Rate Hike Could Affect the Housing and Auto Industries

In case you haven’t heard, the Federal Reserve finally pulled the trigger on an interest rate hike in December, raising the benchmark federal funds rate by a quarter of a percentage point. The rate hike wasn’t a big surprise, as most economists and Fed watchers had been expecting it for some time.

The big question now is how rising interest rates — and not just the recent quarter-point raise but additional hikes the Fed will probably initiate over the next few years — will affect the economy? In particular, how will they impact the housing and automobile industries?

Effect on Mortgage Rates

The housing industry, of course, has been one of the main benefactors of low interest rates. Existing home sales in the U.S. plunged to around 3.5 million in 2010 as the effects of the real estate crash gripped the market. With the Fed cutting rates drastically, sales rebounded to 4.6 million in 2011 and 5.7 million last year — the highest level since early 2007.

So far, the Fed’s quarter-point rate hike hasn’t had a material impact on long-term mortgage rates. On January 13, the interest rate on a 30-year fixed rate mortgage remained below 4% at 3.83%. One reason for this is the fact that mortgage interest rates are based on the 10-year Treasury note, not the federal funds rate. This rate doesn’t tend to rise as fast when short-term rates are climbing.

Moving forward, if the Fed continues raising the federal funds rate by one percentage point per year, as it has said it intends to do, this will eventually affect mortgage rates — but still not by very much. According to Fannie Mae’s chief economist Doug Duncan, the 30-year fixed mortgage rate will rise to about 4.1% if the Fed embarks on this path. On a $225,000 mortgage, this would raise the monthly payment by just $26.

While he doesn’t expect Fed rate increases to have much of an impact on the housing industry, Duncan does forecast a slowing pace of home sales this year due to supply shortages, which he believes will push home prices up by about 5 percent this year. He is forecasting an annual increase in home sales of 4 percent in 2016, down from the blistering 8 percent last year.

Effect on Auto Loan Rates

Last year was a bonanza for auto manufacturers and dealerships, with sales hitting 17.5 million — a new record, topping the 17.4 million vehicles that were sold in 2000. So will rising interest rates put a damper on auto sales this year?

Again, the answer is probably not. Even a one percentage point rate rise this year would mean just a $16 a month increase in the payment on a $25,000 car loan. This won’t deter many people from buying a car, though it might prompt them to shop for a less expensive vehicle.

In fact, given that the average car on the road today is 11½ years old, 2016 could be another banner year for auto sales as consumers look to replace aging vehicles. Another year of low gas prices, which most energy analysts are forecasting, could also be positive for the auto industry — especially makers and sellers of gas-guzzling SUVs and trucks.

We’re interested in hearing from you. What do you think the impact of rising rates on the housing and auto industries will be? Send me an email at steven@lendtrade.com.

1.5.2016 More New Households Spells Good News for Housing Industry

The U.S. housing industry has been struggling to regain its footing ever since it got walloped during and immediately after the financial crisis and Great Recession. However, there’s finally some good news with regard to a statistic that’s often a leading indicator of a healthy housing market: household formation.

The pace of new household formation has been lagging behind historical norms for at least the past eight years. But during the first half of 2015, the number of new households formed grew by 1.7 million compared to the first half of 2014. This was the largest growth in new household formation during the first half of the year since 2005, when 2.1 million new households were formed.

In comparison, during the depths of the recession, only 400,000 new households were formed during the first six month of 2008. As recently as 2014, only 700,000 new households were formed during the first six months of the year, so the 2015 number represents a drastic improvement in this key housing indicator.

New Households = More Housing Demand

Not surprisingly, the more new households are being formed, the greater the demand for housing. Young people forming new households typically buy starter homes while those in starter homes move up to more expensive houses. The impact moves all the way up the housing food chain, but it all starts with new household formation: When this stalls, it impacts the entire housing market.

During and after the recession, many young people who should have been forming new households had to move in with parents or live with roommates due to their inability to land a good job or the loss of a job. As a result, the rate of new household formation at this time fell to the lowest level since the end of World War II.

From a historical perspective, annual household growth averaged around 2 percent between the mid-1960s and the early-1980s. During this time, baby boomers were in their prime household formation age. Starting in 1990, though, the rate of household formation dropped in half through the mid-2000s as the much-smaller Generations X and Y entered their prime household formation age.

Improving Economy and Job Growth

So what’s behind the recent rise in new household formation? The improving economy and job growth, primarily. In the report announcing the encouraging household formation numbers, CoreLogic Chief Economist Frank Nothaft stated: “As the job market has improved, many Millennials now have the financial independence to form their own household.”

Looking ahead, Nothaft said he expects that the pent-up desire of young workers to live on their own will sustain average annual household growth of about 1.2 million for the next several years. This jibes with total projected growth in new households by the Joint Center for Housing Studies at Harvard University of between 11 million and 13 million over the next 10 years.

Immigration is a big factor in this projected growth. “Immigrants have helped to support the housing recovery by forming households, renting or buying homes, and thus supporting home values in many hard-hit housing markets,” said Nothaft. “With household formation now rising among the native-born population, the higher level of formations may provide the catalyst for more substantive gains in new home construction in the coming year, aiding the overall housing recovery.”

One out of every five immigrants entering the U.S. lives in California, and half of them are from Asia, according to the U.S. Department of Homeland Security. In fact, Asia accounts for the largest number of legal immigrants coming to the U.S. over the past decade.

Home Sales Soar, Then Plummet

Perhaps reflecting the household formation figures, the annual rate for existing home sales hit 5.59 million last July, the highest pace since early 2007. However, this fell off drastically in November to 4.76 million — a drop-off many experts have attributed to the recent implementation of the CFPB’s TILA-RESPA Integrated Disclosure rule, or TRID.

The rate was projected to rise to 4.95 million in December and then recover early this year as the effects of the TRID implementation wear off.

“We could end up seeing home sales bounce back from the November low by early 2016,” said Auction.com Chief Economist Peter Muoio. He pointed to positive underlying fundamentals like a healthy job market, wage gains and improved consumer confidence that typically lead to higher home sales to support the projection.

We’re interested in hearing from you. What are your thoughts about the positive household formation numbers? Send me an email at steven@lendtrade.com.