Credit Union Compliance Financial institutions face a growing pressure to compete for revenues, which are generated by making loans to customers. The market for these loans is tight, so many lenders face tough decisions about how to navigate the various changes in regulations without losing consumer confidence. Because of tough conditions in the lending market, there is an increased reliance on debt collection agencies to assist in the management of loans.
Using these services can mitigate the high levels of risk that are associated with borrowers that do not have an ideal credit history.
Additional Obstacles for Lenders
Financing options for cars, homes and other expenses are expanding. There is now a variety of parties that can offer credit to customers regardless of their credit score. In addition, there is now an extreme amount of pressure on lenders to remain competitive.
In this changing landscape, traditional banks may find themselves competing with third-party lending companies for a shrinking market of qualified borrowers. Other competitors include auto dealers who provide in-house financing as well as community lenders including credit unions. Within this context, the rules for underwriting loans also changed dramatically. For example, the Dodd-Frank act increased the burden on lenders, and this created a situation where the prospects of high returns on loans are diminished substantially.
Intensifying Competition for Loans
There are various ways lenders can respond to these changing and uncertain circumstances. One of the ways lenders react is to increase the competition with each other to provide attractive terms to customers. This includes lowering the interest rates on loans, but it can also involve adjusting the requirements needed to receive a loan. Customers with a low credit score or bad credit history may end up qualifying for a loan that would be unavailable to them in the past. As a result of this competitive market, many borrowers will shop around for the best terms and conditions. This adds another layer of pressure to financial institutions who may be competing for survival in a tightening market.
Studies conducted by the Harvard Business School reveal a trend in community lending that affects over half of small businesses who receive loans. Commercial realtors also rely heavily on community banks to underwrite their loans. These two markets comprise approximately half of the loans made within the local area, and this has an extremely powerful effect on the local economy. Changes in lending standards since the 2009 economic crisis have affected the entire lending industry in dramatic ways that were previously considered impossible. For example, consumers seeking auto or mortgage loans can now demand lower qualifying requirements regardless of credit history.
Effects on Regulatory Agencies
There has been a ripple effect in the world of financial regulation as a result of these changes. For example, the Office of the Comptroller of the Currency, or OCC, closely monitors the lending industry. Changes in the criteria for issuing loans for cars or homes can trigger a response in the periodic report issued by that organization. Concerns about subprime lending practices are now widely cited. However, this also raises issues of jurisdiction.
Currently, only banks are subjected to federal regulatory authorities. This situation allows a variety of competitors to affect the lending market as a whole. Financial institutions that are not involved with federal regulatory authorities can adopt internal practices to offset the effects of this crisis-prone lending environment. Examples include adopting best practices for internal controls, utilizing robust software for tracking and automation of the debt-collection process. These internal reforms should be combined with customer interaction methods known to increase the quantity and frequency of payments. Financial institutions can improve their profitability using these methods, even under the most challenging external conditions.
Article Sources:
http://www.ibshome.com/articles/how-banks-increase-loan-volume-and-minimize-risk.php
http://www.hbs.edu/faculty/Publication%20Files/17-042_30393d52-3c61-41cb-a78a-ebbe3e040e55.pdf
https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2017Q1.pdf
