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National Association of Federally-Insured Credit Unions
Curt Long, Chief Economist
Credit unions transitioned quickly and effectively to the challenges of COVID-19. Most branches remained open as drive-thru only or operated under limited hours or by appointment only. Recent investments in technology by the industry allowed for a relatively seamless transition to full-time remote work for back office staff, and for uninterrupted service to members. NAFCU surveys found that virtually every credit union provided options to distressed members to see them through the worst of the economic fallout, such as allowing skipped loan payments and waiving fees.
Actions taken by legislators and regulators have collectively had a sizable impact on the industry. Credit union loans have performed better than many feared, due in part to the CARES Act. While fiscal measures were effective in delivering aid to those most in need, they also drove a surge in deposits. That has diluted regulatory capital across the industry, and most credit unions have no access to capital markets. There is lots of uncertainty about how much of those funds that were saved in 2020 might be spent in 2021, but if a decent chunk remains on credit union balance sheets, it is likely to take several years for the industry to rebuild capital.
The overall impact of the pandemic on the industry has been large, but uneven. This is especially evident in the area of lending. Many loan products have contracted, but the most glaring exception is mortgage lending. Through the third quarter, outstanding residential mortgage loans were up 12 percent from a year prior. Credit unions with loan portfolios focused in other areas, such as auto, have had a harder time generating loan growth.
Credit unions have fared admirably in meeting the challenges thus far, but there are still grave concerns about what lies ahead. Credit unions offered substantial loan forbearance to their members, and it could turn out that a large share of those loans will have to be written off. Another source of anxiety is interest rates. Small depository institutions like credit unions rely heavily on earning a spread between loan and deposit rates, but that spread gets compressed in the current low-rate environment. If it persists for years as the Federal Reserve is suggesting could happen, many in the industry will find it difficult to survive.