Catching members on the way up

With many credit unions facing liquidity woes, they are left with having to pay for much needed money to lend. As a result, the significance of yield on loans has never been more critical. How do you keep lending when you must pay for the money yourself? It is a compelling question with an easy answer. As our founder Rex Johnson often said, “The trend is your friend.” If we can recognize which members are trending upward, we can build on our commitment to our communities and continue lending to higher-risk members. With the proper score code training and interviewing skills, we can easily identify these members that have credit scores on the rise.

Your recommended net yield should be 6.5% or higher. This requires some key factors that are all working for the greater good of the credit union. This will also allow credit unions to achieve the needed spread if they themselves are forced to borrow.

1. Appropriate pricing according to risk and FICO with six tiers, and a spread of 13-15% between your highest and lowest tiers
2. Healthy amount of unsecured loans and credit cards that comprise approximately 15% of your total portfolio
3. Appetite for risk with the following breakdowns:

• • A+/A = 35%
  • B = 30%
  • C = 20%
  • D/E = 15%

Bullet points numbered two and three both create challenges for credit unions. They require an appetite for risk and a comfort level with loans such as debt consolidation loans that carry greater risk. Credit unions’ strongest yielding products include any unsecured loan product and C, D, & E auto loans.

What do these all have in common? Risk, risk and more risk. We will explore how to make your staff more comfortable with taking these types of risks in this month’s article.

We believe the number one factor in being able to make loans that others cannot or will not is simple and that it can be narrowed down to two words – interviewing and codes. Your staff must be willing to find out ‘more to the story’ and they cannot let a low FICO score allow them to ‘stop short.’ Many lenders do not dig deep enough to give themselves a chance. Opportunities to dig deeper where many other lenders may quit are:

Score code analysis: The codes often can tell the story when the loan interview has holes. Understanding what codes should be in what pecking order after the FICO is critical. We refer to this as “how high up the mountain can each score go?” For example, codes with the word time must be in third or fourth place after the score. There are also certain codes that can and cannot be present with certain loans. An example of this is Code 12—this code cannot be present for debt consolidation loans because this indicates the member is still actively opening credit cards. Other codes can tell us that the score is trending up, changing the way we underwrite.

Employment concerns: Instead of denying for lack of job stability, you need to be asking for more information. Your application should require specific start and end dates. It is essential to understand why the member left their previous job and how employable and motivated they are. Does the member have acquired and transferrable skills? Is the new job using any of the same skills as the previous? How has the income changed? Does the job require a degree? Did the member graduate college? The vast majority of credit union loan applications do not allow or require an in-depth analysis of job strength. When you are looking at making the types of loans that carry strong yield, job stability may be one of your biggest allies. The credit report most likely has some flaws.

Low FICO scores: The trend of the score is far more critical than the current state of the score. Many credit unions approve numerous loans on a daily basis where the score is trending down, despite being in the 680+ score range. Many of these loans carry tremendous risk due to the amount of revolving debt in relation to installment and have capacity concerns. These loans often suggest imminent bankruptcies and do not allow you to be compensated for the risk. How would that score look in 90 or 180 days?

Delinquent credit history with others: We believe the only reason you should deny a loan is if you believe you will not get repaid. In fact, we suggest your lenders document in the loan notes why the credit union will not be repaid and why the money is better off left in investments, earning one or two percent. Denying for delinquent credit with others is especially confusing to your members if they have held up their end of the bargain with you. In efforts to “hone in” on how they repay you, we suggest requiring how many loans as well as on-time payments have been made specifically to the credit union. This information should be documented on the front sheet as well as in the loan notes. Taking this one step further, focusing on “like loan repayment” is also key. If the member is looking for a car loan, require lenders to add up how many car loans in total have successfully been repaid. How a credit card is repaid is far less significant when you are looking at approving a car loan.

Collateral information: Go back and look at your last fifteen secured turndowns to see if the following information was gathered:

• What is the vehicle they are purchasing or refinancing?
• What is the value?
• Was the vehicle their primary mode of transportation?
• Was the vehicle needed for work?
• Did you inspect the vehicle?
• Did you know the condition or time left on tires?
• Was it a vehicle that holds its value?
• Has the member paid similar loans with similar payments in the past?

Most consumers will pay their auto loan if they like the car and need their vehicles. If the member has a good job, the loan amount is 50% or less of the gross annual income, have forced payments and the member is not a bankruptcy threat, many of these loans are turndowns that could be made.

Understanding the score code trend will allow you to keep a healthy yield despite a liquidity problem. Never forget the reputation in your community is something that is difficult to change, but with your help everyone’s best days are ahead of them.