Economic Waves in Motion: Understanding Rising Lender Risk

Examining the Ongoing Ripple Effect of Supply Chain Disruption, Inflation, and Interest Rates Picture the economy as a large lake, with all the economic players and stakeholders being boats on the water. Back in 2020, Covid-19 was the reckless jerk in the speedboat who just ripped across the water without regard to anything or anyone else. Anyone who’s been a recipient of the aftermath of reckless speedboat guy knows there will be many waves that follow in his wake. Depending on your distance and the size of your own boat, these waves may threaten to swamp your craft or they may just be mild ripples in the normally calm water (hey, it’s my analogy). In addition, the direction your boat is situated, or your vector should you be underway, will also change the way your boat experiences the wake. All that is to say that there isn’t a one-size-fits-all answer to how you will be affected by the waves. In our economy, just like on the water, major disruptions are not over right after the trouble has passed by. In our current “economic lake,” there are three distinct waves that have been created by the “speedboat” of our global pandemic. Wave One – Supply Chain Disruption With the onset of Covid-19 and the shutting down of manufacturing and limiting of on-site work to “essential” personnel, the auto market changed quickly. We went from a market where car manufacturers and dealers were begging the public to buy their inventory through heavily discounted prices to a situation where the prolonged chip shortage and lack of manufacturing created empty lots and not enough vehicles to go around. As any good student of economics can tell you, the lack of supply and the excess of demand leads to higher prices. Credit unions outperformed other financial institutions in this market, and while new car loans were a bit more scarce, the higher prices of used cars more than made up for the difference. But another ripple caused by Wave One is what car manufacturers were doing with the limited supply of chips they did have. They focused production on their high-end, higher-margin vehicles, which made them a lot of money. Unfortunately, as a result it created a market gap where literally (literally) millions of low-cost vehicles that would have otherwise been manufactured simply don’t exist today. The impact of this missing category has just now begun to be felt in the used car market. Low-cost vehicles that we would now expect to see being traded in for new cars are just not widely available in the used car market. Those that do exist move at a high speed, staying on the market in some cases only hours. What’s a used car buyer to do? They must wait for those nicer, high-end cars to hit the market at a price they can afford, which may mean another year or two before buying. In addition, the buyer who purchased that high-end car during the pandemic is likely to hang on to it a year or two longer to get more value from the price they paid. Manufacturers are slowly bringing back production of low-cost vehicles, but it will be years before this wave and the following ripples work their way through the economic landscape (waterscape?). Wave Two – Inflation As stimulus money inflated bank accounts and drove down consumer debt, and as businesses closed or limited hours, people had money to buy goods and services but limited places to spend it. More money chasing goods and services created a perfect environment for inflation to start to spiral. Groceries, energy, and cars all took significant jumps — and housing prices, especially, escalated steeply. During the height of the run-up, in many places, when selling a house it was not uncommon to get multiple cash offers for significantly more than list price in a matter of days. Renters also felt (and still feel) the bite of inflation as their leases renew at significantly higher rates. As inflation continues to be an issue, many households have moved from having to decide how to spend their extra dollars to instead having to decide which bills will get those dollars. As a result, lenders are back in the full swing of collections as delinquencies rise. Unfortunately for lenders, an increasing delinquency rate can move quickly into increased charge-offs. The inflation wave is just now being felt in the lender space and the expectation is that 2023-2024 will be challenging to the bottom lines of many lenders. Staffing shortages combined with salary inflation, combined with more demand for repossession, skip tracing, and remarketing services than market supply currently provides, leads to anecdotal stories of lenders spending extra money to have their vehicles bumped in priority so they won’t be left out. It doesn’t take long for all of these forces to combine to create a new higher price point for everyone — and so inflation continues. Wave Three – Interest Rates In the bid to combat inflation, the Federal Reserve has continued to raise interest rates. Rates climbed steeply from 3.25% to (at the time of this writing) 8.00% in the space of less than a year. While the rate of increase has started to taper off, the impact is undeniably being felt in many areas. In the housing market, lending has cooled significantly as: Refinance activity has virtually dried up. Inflated home prices plus significantly higher mortgage rates have priced many buyers out of the market altogether. Similarly, in the auto market: Buyers who would normally trade in their vehicles for a new one are looking at either a huge increase in the monthly payment amount or a one- to two-year extended term on the note. Many of those buyers are deciding to hang on the vehicle they have. For those borrowers who do take the plunge, even small changes in their economic reality could lead to delinquencies, defaults and repossessions — making the risk much higher for their lenders. Historically, the labor market has to tighten significantly in order to rein in inflation. That hasn’t happened yet. The Fed is being cautious in an attempt to not make that a reality, but it remains to be seen. The impact of this wave has shifted the water line, but stay tuned for more turbulence. Naturally, all boats aren’t the same size, the same design, or heading in the same direction. Each lender has to examine their own unique boat to determine the best way to position it to ride out the waves and hopefully return to calmer waters — at least until the next jerk in a speedboat comes along to stir things up. For a personalized consultation regarding ways we can help your financial institution ride out this storm with reduced risk, reduced charge-offs, and greater peace of mind, contact our CPI experts.

Rising Auto Delinquencies, Higher Charge-Off Risk, and What You Can Do to Protect Your Loan Portfolio

Celebrating women’s achievements, forging women’s empowerment, and building workplaces where women thrive.

State National's Retreat Where Female Finance Executives Go to Network and Learn A 2021 report from CUNA indicated that 51% of CEOs at credit unions and 33% of credit union board members are female. Many organizations speak at length about the value of empowering and providing opportunities to women — yet this recognition must be met with action. For example, Kim Sponem, CEO of Summit Credit Union, took action by starting The Red Shoes initiative. Filene Research Institute actively creates research reports about women in credit union leadership. These are just two of many examples across the credit union industry. Missions like these are an important part of transforming the narrative of women and finance. State National Companies also recognizes the unique leadership traits and skillsets that female leaders bring to the financial services industry. To celebrate those traits and provide women leaders from across the country the opportunity to build relationships with their peers, we created our own initiative — an annual event called the Female Executive Networking (FEN) Retreat. Why a Retreat Specifically for Female Executives? The goal of this annual retreat is multifold: Provide valuable, meaningful, and actionable education, information, and resources to senior credit unions and financial institutions executives that they can use to move their organizations forward. Create a forum for financial institution leaders from across the country to share best practices regarding leadership, retention, business growth, and operational excellence. Provide a rich and rewarding experience that organically allows connections and relationships to grow. Empower and inspire attendees to return to their financial institutions re-energized, with new ideas for accelerating the growth of their organizations. With these goals in mind, we launched our first FEN retreat in early 2020. And, oh, how critical it was for the female leaders who participated in this first event to achieve these goals — because at the time we didn’t realize were heading home to nearly two years of quarantine and isolation! A Most Welcome Return In 2021, after waiting 18 months from our launch date, we were more than eager to resume some sense of normalcy and held our second FEN Retreat. That year’s event featured Terri Trespicio, speaker, coach, and best-selling author of Unfollow Your Passion, as our keynote speaker and workshop leader. This year, our 2022 keynote workshop, titled How Macroeconomic Conditions Will Affect Your Financial Institution, Your Customers, and Your Household, was led by Marlena Lee, Ph.D., Global Head of Investment Solutions at Dimensional Fund Advisors, and Mary Ellen Krueger, Director, Wealth Management and Partner at Aspiriant. Not only are these FEN retreats educational, inspirational, and just plain fun, we at State National are also proud of being a part of the movement to empower even more women to lead in moving the credit union mission forward. After all, studies show that more female executives in a C-suite role can improve both customer orientation and financial performance. That’s a win-win-win — for credit unions, for their members, and for women in financial leadership. If you are interested in learning more about State National’s Female Executive Networking retreat, please contact your State National Client Executive or Regional Vice President. Comments from FEN attendees:

CPI expert and Sr. Client Executive Kathy St. Clair shares her insights on how to educate borrowers about CPI and what to say if a borrower has questions about a CPI certificate placed on their loan. In Part 1, Equipping Your Staff, she shared the value of informing borrowers proactively and the multitude of resources and support State National has available to assist you. If you do not know what CPI is, we recommend first reading What Is Collateral Protection Insurance (CPI)? Borrower Questions Covered in This Article Will I receive a refund once I show proof of insurance? I submitted my insurance, but have not received a refund Can I keep CPI as my only car insurance if I want to? How do I rectify my insurance status? Can this insurance be refunded? While you can redirect a borrower to State National at any time to be helped by one of our friendly, highly trained team members, we want to share the answers to some common questions a borrower may ask so you and your staff feel prepared to answer anything. Borrower Questions: "Will I receive a CPI refund once I show proof of insurance?" "If I go out and get insurance, can I be refunded for what I have paid for CPI so far?" "Will I still have to pay a premium on my loan each month once I show proof of insurance?" Once State National receives proof of insurance, a refund is quickly processed and sent back to your financial institution. If the borrower had adequate insurance for the time period in question, a full refund will be issued. There may be a charge for any verified lapses in coverage. How quickly we can issue a refund will depend on the agreed-upon process, such as ACH or manual check. The refund is then posted to the borrower’s loan. In many cases, this can be done through an automated process, eliminating any manual administration for your staff. Along with quickly processing a refund, we send a notice to the borrower to let them know that their refund was processed. "I submitted my insurance — why haven’t I received a refund?" or "Why am I still receiving notices?" This is where InsurTrak can once again come to your aid. If InsurTrak indicates that we have sent a borrower an impairment notice, you can let them know that we did receive their insurance but that the information they sent us was not complete. Through our tracking, we are making sure the borrower provides full-coverage insurance, both comprehensive and collision, with you listed as lienholder. Making the borrower aware of this can help them understand what additional information they need to submit for quick rectification. "Is CPI considered insurance? I may want to keep CPI because it is cheaper and more convenient than my previous insurance." "Can I keep CPI as my only car insurance if I want to?" Some of our CPI partners have shared that borrowers occasionally ask about keeping their CPI insurance instead of purchasing their own auto insurance. A borrower should understand that CPI is not an equal alternative to car insurance they can buy on their own. By educating a borrower on what CPI is, you can deter them from keeping CPI. CPI is meant to cover only the cost financed by you as a lender — it is intended to protect your loan portfolio, not the borrower. While CPI provides comprehensive and collision coverage on the automobile, it does not cover the driver. CPI will not assist a borrower in covering any damages to another individual’s property. Most states also require drivers to carry liability insurance in case an accident occurs and there is another party or property damage involved. Not realizing the specifics of their insurance, a borrower with CPI coverage will sometimes return to their lender after an accident or other loss and ask for a copy of the policy. You can let them know that even though the insurance policy is mainly there to protect the lender, and excludes damages outside of their vehicle, if they have damage to their own car they can file a claim so that they will remain in good standing on their loan. If they are not delinquent by more than 45 days, we will accept a claim directly from the borrower to repair that collateral and get them back in the driver’s seat. Please encourage your borrowers to get and maintain their own insurance. "How do I rectify my insurance status?" "Can this insurance be refunded?" The quickest way a borrower can have a CPI certificate removed is to submit proof of insurance to their lienholder — your financial institution — or directly to State National. We use a variety of methods to collect borrowers’ insurance on your behalf, and we make it as simple as possible for them to comply. Options for borrowers to provide evidence of insurance include calling into our Contact Center, or mailing, emailing, or faxing their Declarations Page to our Service Center. But text and email notifications are the fastest and most convenient way for a borrower to provide us with insurance. Each text and email notification we issue includes a link that takes the borrower directly to our self-serve portal, MyLoanInsurance.com, where they can easily upload a copy of their insurance information. This portal features notice-specific videos walking borrowers through their solutions for verification. Alternately, they can choose to reply to the text or email with an image of their coverage details. Borrowers also have the option to provide us with their insurance company name and policy number, and we'll reach out for verification on their behalf. Our goal with this multichannel approach is to make it as easy as possible for borrowers to submit their information in the way that is most convenient for them. Informed Staff Deliver a Better Borrower Experience All staff members who handle loans at your institution should have a basic understanding of what collateral protection is doing for you and how it works. We offer ongoing training and resources to your staff members. Your staff should also understand the premise and benefits behind the product — mainly, that it is there to protect your financial institution against uninsured losses. Here are some additional resources to build your knowledge about CPI: Short State National Animated Company Explainer Video What Is Collateral Protection Insurance (CPI)? Understanding the Differences Between CPI, Blanket, and Self-Insurance Remember, your financial institution’s dedicated Client Executive is here to help you with any of your CPI questions or needs! To read the first article in this SNC Spotlight series, visit Part 1, Equipping Your Staff