How Credit Unions Can Navigate Lending Hardships

Credit unions and other community lenders are navigating lending challenges ranging from tight liquidity to declining loan performance. In addition, the Credit Card Competition Act could present new challenges when it comes to fee income. With all this in mind, it’s become more important than ever for credit unions to find ways to survive hardship and diversify income so they can thrive.

Host Sarah Snell Cooke recently talked with the CEO of Constant AI, Catherine York Powers, about how the company is helping community lenders with hardship relief and how the role of automation on the back end of the loan origination process is just as important as the front end. Constant AI helps drive noninterest income (not with overdrafts but value-driven services, like GAP) create efficiencies and improve collections. Watch the video! —>

Read the full transcript:

Disclosure: Transcript is automatically generated

Sarah Cooke 00:45
Hello and welcome everybody. This is Sarah Snell Cooke with The Credit Union Connection. I'm

here today with Catherine York Powers. Welcome.

Catherine York Powers 00:53 Thank you for having me.

Sarah Cooke 00:55

absolutely So Catherine, give us a little your background and tell us about Constant and what just a, you know, high level what you're doing for community financial institutions, including credit unions, of course?

Catherine York Powers 01:07

Yeah, absolutely. So in 2015 we started Constant as a home improvement lender. And we'd actually built software back then to originate loans in, you know, two to three minutes, making it very easy on the front end for borrowers to be funded. And we were servicing all of those loans. They were coming in from 33 states. And what we realized was that the servicing side of it was so cumbersome, so expensive, and so people-focused that we needed to look for ways to automate those processes, like we had done on the front end. So this version of Constant was born where we have a platform where we're automating most of those loan operations efforts that happen in the back office, and then we're leveraging those to help drive new revenue as well.

Sarah Cooke 02:00

Yeah, always important, but especially now. You've got difficulties with lending. You've got Washington, like, taking away all the non-interest income, the alleged junk fees, and so, yeah, everybody who's a, you know, a small lender is, is kind of struggling in that area as far as generating new revenue. But first, I want to back up a little to, as I started to say, the lending right now is challenged, and those loans that have been made have, some of them are becoming challenged. What are you seeing in the environment that might give a little hope on that end?

Catherine York Powers 02:42

Yeah, you know, it's really interesting. So in addition to the credit unions and regional banks that we serve today, we're also talking to lots of folks that are prospects of ours, and the outlook is actually mixed. We, it's interesting. We're hearing a lot about liquidity concerns, not a surprise. But then sometimes we're talking about how we're generating revenue, and folks will say, Well, hey, we're fine on the liquidity front. So it's really interesting to see how the, how the lending environment today is impacting community financial institutions, and what they've done to both prepare for that in the past 12 months, in anticipation of everything slowing down and some that took a little bit more risk, right? We're seeing a lot of auto loans in particular that were originated post-Covid starting to go bad. You're seeing a lot more loan sales in the market, like I saw one yesterday with Space Coast. But there are, there's plenty of that activity happening as well. I think the common theme right now, especially for CEOs and CFOs, is to look for ways to diversify revenue and create more efficiencies, and that's not obviously just about what we do, but I think that's just the general message right now, because loans are starting to go bad, you are getting or seeing a lot more requests for hardship relief, and you have to serve those members and make sure that they have the help and support that they need. But on the other side, you have to find ways to generate revenue. And so if liquidity is a concern, and originating new loans is not the focus right now, if you're just supporting runoff basically, then you have to look for fee income. And with the CFPB [and] NCUA's focused on overdraft fees and NSFs, it's made that really difficult, because that's been a big source of fee income for a lot of credit unions. So you're seeing a focus on just diversification of income in general. Mm, hmm.

Sarah Cooke 04:58

Yeah. And. To your point, they have to look at that even, you know, there's the Credit Card Act that, or Credit Card Competition Act that is looking is, to cut interchange even farther. So lots of different ways credit unions could be losing income. So obviously, ultra important to to be diversifying the revenue streams. And then the other thing is too, because I think you all also do collections. What are you seeing on that front? How is that going as far as productivity among the your clients?

Catherine York Powers 05:31

Yeah, it's interesting. We, our platform helps to automate a whole range of loan operations efforts. And while we don't look at ourselves as really a collections shop, we are focusing on hardship relief in general. So how do we keep people out of collections? And so part of that is just making sure that hardship relief is available in digital banking. And so when we're talking to folks, we're saying, look, it doesn't matter whether you're using our platform or somebody else's the idea of making sure that hardship relief is front and center, that members know how to find that relief and access it quickly and get a response back from the credit union quickly is really important, because a lot of times that can take 30 to 45 days and they're rolling into the next bucket, and that's not good for anyone. It hurts retention as well. So we are starting to see this is not news to anyone. Your delinquency is definitely rising. But our focus in, while we do, you know, payment plans and other things in an automated way, our focus really is on that hardship relief and mimicking the conversation that a member would have in a branch, right? In a branch office. So why are you here today? You know, what is your hardship? Is it long term or short term? And depending on what that is, they may go down different paths, versus just saying, hey, all these people have hardship relief. Give them a, you know, one month deferment. You don't know that that's actually curing the issue. So we are very outspoken about this, and have been at a bunch of conferences just talking about, like, let's help members stay out of collections. And sometimes that means a change of policy. The one thing that I hear consistently is that when members are asking for hardship relief, we make it difficult for them to not just find out what programs are available, but then they have to write an essay as to what's happening in their life. Literally, a written essay. Don't know what the ADA workaround is for that, and they have to, know, share their expenses, be asked about why they're spending money on certain things, and on the other hand, when we're lending money, we can provide, you know, credit, say, $50,000 in in credit on stated income. So it's just a matter of changing the credit policies and making sure that that help is available and can be done quickly.

Sarah Cooke 08:06
Yeah, that's interesting you bring up the policies too. What are some of the more common kind

of sticking points among the policies of the community lenders?

Catherine York Powers 08:16

Yeah, I think, I think the when we talk about, if you're just asking about hardship relief, and on the collection side, I think that community financial institutions have done this the same way for, you know, 20, 30, 40, years. Obviously there was a big change when we had the last major recession, but a lot of those changes were around mortgages, and really when you saw the appearance of full loan modifications and so forth, but it's still really hard to access that relief. So when somebody applies for credit, the reason that's been automated is because credit unions have put situations into different buckets, and when you put them into buckets, you can build policies around them, and then you can automate that, and there's no reason you can't do that for hardship relief as well, right? There's short term issues, there are long term issues, and there are policies that support those, and there are a number of questions that can be asked to make sure that that you're putting the member in the right bucket, and that can be automated as well. We're just not seeing that, and that's across a vast majority of community financial institutions. So we're helping with that policy development. That's just something we do for free. Like, let me help you with your policies, whether you automate them or not. But once you do that, you can automate it in the very same way that you do when issuing credit. And

Sarah Cooke 09:51

that's another point too, the automation that's I mean, creating the efficiencies on the back end, it's less sexy than making loans or now, you know, bringing in deposits or whatever, but it's certainly something that it helps credit unions, in particular, I think return the best, the best to their members, the best for their members' investment, because that's what they're here for, is to serve the members and give them the best return. So, as far as automation is concerned, how do you feel? What would you what grade would you give the credit union community?

Catherine York Powers 10:28

On the front end, origination, I think it's pretty high, right? So there are a number of companies that provide those services on the back end. I think it's pretty low. Now we still talk to folks, skip-a-pay, let's just use that workflow. It's really common across the credit union space, and you know, small community financial institutions as well, but really known in the credit union space, a couple of digital banking platforms have automated and brought that automated, that workflow, and brought that into digital banking. But for, you know, those cases that are plain vanilla, right, no exceptions, that should be something I think that is fully automated. It's, it's not easy to do, because it can be up to, you know, 12 to 13 steps in the back office. It can touch two people. The rules that drive that can, you know, run anywhere between 10 to 13 rules. But again, it's just a matter of deciding that you want to make that process efficient. So some of that is making sure that your lending team is not just focusing on how to automate origination and bring new loans in, but you have to focus the attention and be or make that a priority. And when you have that leadership, then you make decisions like automating those kinds of workflows. And it's not enough to automate it, right? So you can make your team's life better, but the whole point is to make your members life better as well, right? So you've got to bring that into digital banking. That's where they are. They're on their mobile devices. So like with Constant, whether it's a due date change or a payment skip or even hardship relief and deferments, loan modifications, etc, it's just a matter of seeing that tile and digital banking, clicking on it, going through a handful of steps, and the relief option has been provided, and it's totally updated in the core system. We believe that that's not only helpful for the member, but it's also helpful helpful to staff as well. I don't know anybody that joined the credit union to, you know, push buttons and process stuff all day long. It's not anyone's dream. Nope.

Sarah Cooke 12:43

No, 100% agree. The but, and it is an area, I feel like, and you kind of said too, it just doesn't get the attention on the back end, the back office technologies that we are so excited to serve our members on the front end with. You know where they that's kind of where the attention ends up lying, but we do have to give our employees the best experience ever, too, because they're also a member. And I think the, it also behooves credits, because it would, if my job's easier and I don't have to be staring there, filling, making sure all the fields are filled out in a form or whatever, I can have more energy and more drive to go and serve those members. And so I feel like it's, you know, it feeds the front end as well. When you it's

Catherine York Powers 13:31

a huge that is a major point for us when we talk to folks. So, you know, efficiencies, driving efficiencies helps the bottom line. The members are happy because they can access these workflows and their support online. But your back office team, if they're not processing these things in the core all day long, then you can cross train them to help solve really complex issues that come in the door from members. So you're actually helping members more by helping your team. I think it's really, a really important point. And you you know, you said, you know that the focus is usually on the front end. And I'll be very honest with you, you know, the conversation about efficiency is always important. If you look at all the surveys and Jack Henry just came up with their their new study, and efficiency is always, improving efficiency always ranks really high. But when the rubber meets the road and making that financial decision or going into strategic planning or prioritization meetings, it always ends up second or third, like the servicing teams, the collection teams are always so frustrated, because I think what you know, providing technology to them always takes the back seat to anything that is driving new fee income, driving interest income, and that's one of the reasons why we rolled up income builder. Because now that we have people in digital banking, members in digital banking, that are accessing these workflows, we found a way to convert them into fee and interest income, because we understand that we have to come in and solve both of those things. Mm, hmm, and you have

Sarah Cooke 15:11

to lay that foundation for the front end to work properly. You know, you have to lay that back end foundation, I feel like. But you also mentioned earning new fee income. Tell us, tell me a little bit more about that.

Catherine York Powers 15:23

Yeah, so if we think about loan protection products, for example, so guaranteed asset protection, extended warranty, debt protection, those are the kinds of products that are normally sold at origination, which is a moment in time, right? But then credit unions are with those members for, you know, one, two, you know, maybe five years, depending on the loan type. However, there is not usually an automated way to continuously offer those safety nets. And they really are safety nets right when it comes to payment protection or protection in the case of theft or total loss and, and there's just not usually a program in place. Now, if a if a member happens to see that these products are offered online, they can call a loan officer, and somebody will probably have the the training to offer it. And every once in a while, we have talked to a couple of credit unions recently that have formalized the program where they're making outbound calls or sending emails. But in general, there is not an automated way to offer these products. And when we talk about penetration of these products into credit, sorry, into members that have loans, it's pretty low, right? We're hearing anything from single digits to, I think the highest we've heard is 40% which is an outlier. And you know, from a, from a member perspective, getting access to those safety nets throughout the life of their loan is important, from a credit union perspective, that fee income is so critical, especially if you're looking to replace the lost fee income from NSFs and overdraft fees and the fact they're usually a lot higher on a per transaction basis. So we found a way to leverage, for example, an automated skip-a-pay into an opportunity to provide that offer. So one example would be, we always ask why someone's skipping a payment, and that's not usually typical, but one of the options is higher vehicle expenses. So if somebody says that, that's an opportunity to offer them an extended warranty or debt protection. And we can see in the core, because we're connected to a bunch of fields. In the core, we can see which product they have or don't have, and we're only going to offer them the one that one the credit union wants us to offer, and two that they don't already have, and it's tied to their answers to those questions. So that's how we're showing up today, and I think that that helps credit union executives not just see the the benefit of the efficiencies that we're driving, but also the the fee and interest income as well. Yeah,

Sarah Cooke 18:43

So I think the common, the common knowledge right now is that the Fed plans to reduce rates at least once this year, and we're looking at possibly three next year, and this may help get consumers back on the ball with lending or borrowing. And so there, there's obviously this, while we of course have current income, interest income, we're also looking at even potentially more lending, more interest income going forward. So can you talk a little bit about that as well?

Catherine York Powers 19:41

Yeah. I mean, I think those financial institutions that have liquidity are going to be really happy. But no matter what, there is going to be the need to have programs in place to retain members, because as rates start to come down, and we, who knows, but I suspect that they won't come down a lot this year, but now is the time to prepare for that. Because, I mean, we all have loans. I have an auto loan. I've got, you know, other mortgage, etc, and when rates start coming down, what's the first thing you start thinking about? It's refinancing. And lo and behold, I'm going to get hit up with offers from all over the place, whether it's from large banks, or, you know, organizations like SoFi and others. So now is the time to plan for that. And I know that the you know, credit union teams are tackling and blocking right now when it comes to collections and higher delinquencies, but if you don't prepare now for retaining those members and having programs in place, it's going to be hard to play catch up. So one example of how we're helping with that is when a member requests a payoff quote, typically, they're calling the credit union and somebody is, you know, making sure that it's on letterhead and all of the fees and per diems and everything are there, and then they're sending that document to the member. And what we do online is we ask once again, why are you here? Are you selling? Are you refinancing? So just by asking that simple question, you can tie them to the right offer at the end. So obviously we're giving them the payoff quote on letterhead, which is needed if they're selling or trading their vehicle in, but afterward, if they say they're refinancing, we can do one of two things. We can show an in-house refi offer, or we can modify the loan so we can extend the term, lower the payment, and keep them in that loan. And that's a really important retention strategy and some credit unions may do this if the member walks into the branch that, that work to implement that loan modification, it has multiple steps to it, and there has to be a policy in place to support that by, but by automating that, you know that 100% of the time that a member is asking for a payoff quote and they say that they're refinancing, they're always getting an offer. It's not by chance. It's not if there are lines in the branch or there's a bunch of folks in the queue in the call center, 100% of the time. If they're selling, you can do the same thing, right? We can provide an in-house offer for their new vehicle, and one of the answers that's available is that, I'm experiencing a hardship. You can also send them down the path to get hardship relief, if they just are looking to see what they may owe. So again, we're mimicking the conversation that they're probably having in the branch office and making sure that if they are current and they are selling and they're refinancing, that they're, they're always going to get that offer, and that helps with interest income, but also really important right now, member retention,

Sarah Cooke 22:56

absolutely I agree that's interesting, because as a recovering reporter, you kind of always, why is the big question, is the most important question you ask is, why does this matter? Why do you need it? And so not only does that, you know, show interest in the member, like you said, kind of the retention idea, but also furthering the retention, so I would suspect what is the personalization of it, not personalization as you slap somebody's name in an email, but I'm actually curious as to why you're doing this, and that sends you down a different path than, like you said, the one-time skip-a-pay or whatever it is, where you just blanket apply or blanket offer it to everybody. So it creates that personalization that everybody talks about right now.

Catherine York Powers 23:45

And so, I understand that, Sarah, that's a really good point, because I think personalization has turned into, you know, making sure it says "Hi, first name," and your first name goes in there, but then it's a very bland message, and it's, it's one-to-many marketing this is, this is more like triggered marketing, right? So based on actions that members are taking or the status of their loan, it is triggering the right, either relief option, if it's hardship relief and or offer for a loan protection product, or refi offer or something else, and the way our platform works is that, because we're connected to over 130 data points in in the core system, credit unions can set rules, and then once the member actually meets those requirements, or their loan status meets those, that requirement, we can also push an offer for something, and again, it's based on what's happening in that member's life, what's happening with their loan, as opposed to just randomly sending emails. And if you're like me, I literally, I was off on vacation last week, and I came back to three pages of emails. I wasn't completely offline, but three pages of emails, and the vast majority of them are like, you know, "Hey, first name," and then just delete, delete, delete, delete. Email, the email channel is flooded, SMS channel is flooded now, so you have to be really intentional.

Sarah Cooke 25:12

Mm, hmm, yeah. So all right, I am going to, I always end this with the final thoughts as we get to wrap up here, so you are welcome to provide your last minute tips and strategies that credit unions can use to succeed and serve their members.

Catherine York Powers 25:33

Yeah, I think the biggest thing is we, and everyone talks about this, but we have to meet members where they are right? Members are people, and we are people who are consistent, consistently on our devices. And credit unions have spent a lot of money and time on implementing their digital banking platforms, making sure that they're mobile first and accessible to members, but expanding on what's available inside of digital banking on those mobile devices is so critical, and loan operations takes into consideration a ton of different workflows. I just talked about a couple today, but there's changing a due date, there are a whole range of them, and all of them are offline, and there's no reason that it has to be that way. This is what we specialize in, and I think, and there are others as well, but I think credit unions should lean into moving as much online as possible, to not just give relief to their staff members, but also make sure that we're meeting members where they are, and making sure that those interactions are very personal, and that they're receiving the the help that they need if they are struggling financially and looking for ways to provide products that are supportive of what members are looking for, and many of those can lead to fee and interest income opportunities.

Sarah Cooke 26:59
Awesome. Thank you so much, Catherine, appreciate you being with us today.

Catherine York Powers 27:02
My pleasure. Yeah, thank you for having me. Really appreciate it.