By Ray Birch
TAMPA—The Federal Reserve’s recent rate cut is an opportunity for credit unions–but they need to act or risking losing members to other FIs that recognize how consumers are shopping around, according to one person.
Lou Grilli, AVP of product development and thought leadership at Trellance, reminded that when the Fed cut rates by a quarter-point in July it was the first such move in a decade.
“That certainly has caught consumers’ attention,” said Grilli. “People who are reading the news or looking at interest rates for auto loans or credit cards are seeing rates moving down. So if you're not doing something for your members to help them out, then they are going to look elsewhere. I know that several people I work with are asking if it’s time now to refinance their mortgage or look for a lower car loan rate.”
The Need for Data
But to make any moves without relying heavily on the credit union’s member data is a big mistake, said Grilli.
“You need to use your data to drive all of the decisions you are making around moves regarding the rate reduction,” he said. “This rate drop is an excellent opportunity for credit unions to leverage the data they have on their members to help improve their lives.”
Grilli pointed to several loan products credit unions should be looking at now, none of which is more important to CUs than auto loans.
“Here is where data analytics really shines,” said Grilli. “Correlating credit bureau data, including credit score and open trade lines, with underwriting criteria, the credit union can search for members who have auto loans with other financial institutions, and customize offers, based on underwriting thresholds to incent those members to refinance.”
Don’t Forget Compliance
Grilli explained such a data search will take some setting up and further requires working closely with compliance staff.
“What about those members who already have an auto loan with you? Those members may already be out looking for a better deal,” said Grilli. “Preempt them by offering to reset their loan terms, taking advantage of lower interest rates as well as longer terms to reduce their monthly payment. This will bring more value to the member and in turn the credit union.”
With mortgage refi’s, Grilli recommended using member data along with third-party data showing current market housing values to come up with a unique member offer.
‘Imagine’ This
“Imagine getting a personalized note from your credit union stating something like: ‘Although you bought your house for $175,000 in 2015, it looks like your house is now worth $190,000. Given your great credit history, we’d like to offer you a lower interest mortgage rate, with the ability to pull some of your hard-earned equity out of your house for you to use on what’s important to you—paying down student loans, remodeling, or buying a new car.’ Your members expect their credit union to act in their best interest. Use your data to make that happen.
Grilli also believes CUs should consider rate resets for their variable rate credit card holders.
Lou Grilli
“Chances are, your credit card holding members have not had their rates reset since initial issuance. But credit card rates were set based on specific circumstances, such as current prime rate and current credit score, two items which change over time,” noted Grilli. “Leveraging the credit card data—from the provider or your data management tool—you can analyze your cardholders for a potential rate increase/decrease due to change in credit score.”
‘Great Time for Review’
He suggested using the CU’s underwriting criteria to automate credit term adjustments, generate member communication and coordinate change with the processor.
“This is also a great time to review member spend trends, the rate change plus spend behavior may lead to other insights about the member and their needs, possibly generating other ways to deepen the member relationship,” said Grilli.
But some of the resets won’t be positive for the members whose credit scores have dropped, said Grilli, reminding that if rates are reset they have to be reset across the board to comply with card rules.
“If some members have their rates increased, the credit union should call them, explain why the change is happening, discuss what lowered their credit score, and share advice and give assistance to get them back on track,” he said.
About Charge-Offs
Grilli pointed out that as rates go down, charge-offs typically decrease.
“There are a couple of factors driving this correlation: lower unemployment means more people can make on-time payments. Lower interest rates on variable-rate revolving credit balances and variable-rate HELOCs make paying down debt easier when more of the monthly payment goes toward the principal. Re-evaluating underwriting criteria in this new environment, coupled with evaluating the members’ needs and changing financial condition, can create impactful marketing campaigns to promote revised or new loan products to your existing, and potential new members,” he explained. “If Federal Reserve Bank of St. Louis President James Bullard is correct in his prediction that the Fed will reduce rates one more time this year, taking the time to build your lower-rate member engagement strategy is critical to success.”