Bankruptcy reform, not economy, greater influence on CU delinquencies and charge-offs

WASHINGTON – Credit unions would do better to keep an eye on developments with bankruptcy legislation currently in conference committee than economic conditions when trying to predict upswings in mortgage loan delinquency rates. The pattern of low charge-offs will be tied more to bankruptcy legislation than to economic cycles, says CUNA’s Senior Vice President and Chief Economist Bill Hampel. While the bill is tied up in conference, the number of bankruptcy filings has abated. But look for that to change once the bill comes out of committee, Hampel said. “The clock will be ticking for the first six months after the bill comes out of committee because members realize it will be more costly to file for bankruptcy after the bill goes into effect and will be rushing to file. There will be an initial surge, then afterwards it will let up.” Since reaching a high of 3.8% in 1983, loan delinquencies for credit unions consistently dropped with only one minor exception from 1994 to 1995 – 0.9 to 1.0, respectively. From May to October 2000, delinquency rates were at historical lows. Credit unions should not be deceived into thinking that this was due to borrowers’ behavior, advised Hampel. “A lot of the decline is due to the changing way credit unions are reporting delinquencies. They are charging off more loans now and faster than they did in 1983.” In 1983, for example, credit unions were holding on to more loans that have been delinquent for more than one year. That’s hardly the case anymore, said Hampel. Despite the talk about an imminent economic recession, Hampel also doesn’t expect this will effect credit unions’ delinquency rates as much as earlier recessions did. “Now more than in the past there are two wage earners in a family. This is moderating delinquency pressures,” he explained. Moreover, Hampel noted that recession doesn’t affect entire sectors of the economy equally. There are more consumers employed now in the service sector than there were in the last recession in the early 1990s. -