Interest Rate Cuts Set to Reinvigorate Loan and Refi Activity in 2025...

Andrew Leventis

by Lisa Freeman
CUbroadcast Contributing Editor

With the Federal Reserve Board having lowered interest rates two meetings in a row and still more cuts expected to come, credit unions must be ready for an uptick in loans and refinancings even as already-tight liquidity may head out the door.
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“The lower rates will increase loan demand, especially in the mortgage refinancing market,” said Andrew Leventis, an economist at NCUA. “It should reinvigorate mortgage originations and spur demand a bit on the auto side, as well. But they shouldn’t expect a tidal wave of loan demand.”

Still, the hope is that this interest rate cycle will help shore up credit unions' lost marketshare to other originators in previous quarters, Leventis added.

“We had a couple of bad quarters in insured shares,” he continued. “With rising loan volumes and tepid growth in insured shares, there’s been worry about liquidity for the last few years,” Leventis said. “Deposits, of course, benefit from high CD rates, but as those rates come down, that will funnel down the cost of funds. All in all, this should be good for the economy, but credit unions still have some challenges ahead.”

Among them: delinquency rates. “I really hope those come down,”Leventis said. “Some of these, such as credit cards and auto loans, are above Great Recession numbers, but mortgages have held up better. As credit card rates come down a bit, things will be more affordable for those who have revolving credit.”

The big question, he suggested, is what will happen with hiring and wages. “It’s often a tale of two credit union members,” Leventis said. “Those who benefit from high CD rates, while a segment of the borrowing population has really struggled.”

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Curt Long

Credit unions may need to get creative about how they go about shoring up liquidity, noted Curt Long, an economist for America’s Credit Unions. “Liquidity is still so tight, and there’s only so much deposits can do in terms of funding loan growth,” he said. “Credit unions need to remember that we also need to protect deposits. Households got used to the higher rate environment and will now look to lock in deposit rates.”

On the lending side, Long said, the new rate environment should give credit unions a chance to shine and tell the CU story, particularly right after a Fed cut. “When interest rates are top of mind, that’s a great opportunity for credit unions to show they have the best rates around. It’s time to plant your flag.”

Something credit unions will need to keep a keen eye on is proper staffing levels. “As loan demand rises, credit unions may need to seek to hire staff to meet that demand,” Long noted.

Alternatively, they may want to look at other ways to meet that demand, be it improved technology or partnering with CUSOs or other third parties, suggested one credit union executive.

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Jeremy Pinard

“Credit unions must become uber efficient,” said Jeremy Pinard, Chief Lending and Payments Officer at $3.1 billion Vantage West Credit Union, Tuscon, Ariz. “A lot of credit unions have become staff heavy. We have installed solutions and worked with some great partners, such as Upstart, Open Lending and Gravity, as part of our vision to build a better pipeline. We’ve been able to decrease FTEs even as demand has risen. We are really, really close to being able to auto-approve and auto-fund credit cards.”

Having those tools -- as well as strong risk-based pricing -- in place are a big part of the reason Vantage West is in a good position to capitalize on the new rate environment. “Credit unions need to have their fingers on the pulse of a changing rate environment,” he related. “Traditionally, credit unions are slow to change their pricing. We have to be pricing correctly for risk, but that has to be balanced with being competitively priced, as well.”

Moreover, Pinard suggested credit unions need to be willing to take a tiered approach to pricing their loans. “We have our core members. We want to give them the best rates,” he said, noting that these are the members who earn better rates by doing more business with the credit union. “Then we have those non-core channels.”

Given the long history of credit unions offering one vote for each member regardless of how many dollars a member has in play at the CU, the idea of tiered pricing can go against the grain for some CU executives, but tiered pricing can help credit unions weather economic storms.

It also helps to have a lot of different tools in the financial toolkit. “We have had really good deposit growth, about 7.5% year to date,” Pinard related. “Traditionally, credit unions have relied on CD rates, but we are really focused on how to build channels out so that we have lots of levers we can pull in order to ensure a low cost of funds. Credit unions need to make sure they match funding to pricing. A lot still don’t do that.”

And changes in interest rates can lead to changes in more than just pricing loans and deposits.

“In the past, we saw a lot of mergers driven by size -- seeing large credit unions acquiring much smaller credit unions,” he said. “Now, I think we will see, and have already seen, strategic mergers among larger credit unions.”

How do interest rate cuts lead to mergers? It’s all about the pressure to be better and stronger, not merely bigger.
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“This new rate environment is going to challenge a lot of credit unions to step back and say, ‘what are we really good at, and what are we not?’” Pinard suggested, noting that the answers to those questions may lead even more credit unions to take a hard look at mergers, as well as strategic partnerships, technology and, honing in on their core competencies.

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