NEEDHAM, Mass. (2/21/08)--Credit unions and other consumer lenders must remain on alert to the full ramifications of the subprime mortgage meltdown, which are yet to be felt, says a new study. "Market volatility will remain a fact of life among U.S. consumer lenders in 2008," said the Needham, Mass.-based TowerGroup, which identified top business drivers and trends for consumer lending for 2008. The subprime fallout has lowered financial performance expectations for many lenders but also offers opportunities for those that adapt and plan ahead, said the study. Because the loan market is volatile, consumer lenders are in "a defensive mode," with revenue and profitability expected to decline across most consumer lending business lines, said Bobbie Britting, senior analyst, TowerGroup's Consumer Lending practice. The consumer lending industry must "refocus and begin taking steps toward a broad reformation of credit," said Britting. Institutions must focus their organizational, operational, financial and technology operations on addressing gaps that contributed to the crisis and prevent new ones, said TowerGroup. Paying attention to key business drivers and reforming outdated strategies will be critical to providing the types of products consumers want and can understand. TowerGroup noted these business drivers for consumer lending in 2008:
* Topline metrics (lending volume, revenue, profits, home sales, home prices, auto sales and college costs) will worsen this year; * Lenders will face increasing regulatory burdens and will need the right information technology systems to adjust rapidly. Technology, especially core lending systems, will have a major role in enabling consumer lenders to remain viable. * Institutions will need a broad credit reformation encompassing product, service and channel innovation; improved risk assessment and loss mitigation; and increased focus on the member/customer. * Fundamental business actions by lenders will include: integrated systems to understand better households, with a holistic view of their relationship with the financial institution; better use of data to develop successful products; and automation to engage in these activities consistently, compliantly and cost effectively. * Innovation, integration, transformation, automation and optimization are no longer buzz words, but represent key initiatives supporting credit reformation. * A potential wildcard: any new crises in other types of highly leveraged credit instruments that would exacerbate consumer credit market volatility globally and again reshuffle lenders' strategic responses.
"A credit reformation is needed across all areas of consumer lending, including mortgage lending, loan securitization and loan servicing," said David Hamermesh, senior analyst, TowerGroup's Consumer Lending practice, and co-author of the report.