Increasing Your Bottom Line on High Risk Consumer Lending

By. Don Emmer, Best Advantage Credit Union and The Cooperative Trust

In today’s highly competitive and fast-paced market, organizations need strong, aggressive, employees and leaders to meet ever-changing business goals.  The same goes for Credit Unions.  Any financial can offer you a checking account or a loan for 1.99%, but what sets your financial apart?  Your employees are a great place to start.  People continue to do business with people they like and people that help them out when they need it most.  Having a solid lending team with sales skills is a must.  Anyone can make a loan, but it’s critical to make loans and have them perform at the same time.

High risk lending is extremely profitable and can be successful if it is set up to succeed.  Lending to A paper members can be done by any financial; however you have extremely narrow margins and are nowhere near as profitable.  You may be comfortable with that mindset, but it may cost you member loyalty and your bottom line may suffer.  Credit Unions are not-for-profit financials but we still have to manage our bottom line to keep the doors open, while offering our members the best products and services moving forward.  You are probably asking yourself; “Why should we make higher risk loans?”  Although risky, the people who need these loans have the greatest need, with the fewest options.   In fact, credit unions were formed to serve these members.   Dealer financing may cause you to lose many A paper loans, but once you help a D and E score member they become loyal and pay you first.

To be successful you have to have a plan in place.  You may not be able to help out a member right away, but you can give them a plan to follow and have them come back in three months.  Start them out with secured loans, maybe the car that gets them to work every day, or a credit builder loan.  Price your loans appropriately.  When taking higher risk you should be compensated with a higher interest rate.    Members will understand they have to pay a higher rate, especially when you sit down with them and explain how you can help increase their credit scores to get a better rate down the road.  Your collection efforts need to be more aggressive on these loans; this starts with a “firm close” from your interviewers.  Interviewers are extremely important.  Computers can’t form relationships, cross sell your ancillary products, and ask them for more business.  Having the right employee is crucial to make this a success to your credit union.  Lastly, you have to ensure your management and board is aware and knowledgeable that some of these riskier loans will go bad.   You should be compensated by pricing and covered by collateral value.

Be sure you have the correct employee in place for lending.  You can have an interviewer that does what the member asks and gets them a loan, or you can have a seller that is able to bring more business and take care of the member beyond what they originally came in for.  Find out what drives your employees.  Most of the time setting up a nice incentive program will allow you to maximize their potential.  The more business they bring in and the more products they sell, the more incentive they earn.  The more ancillary products they sell the better your bottom line looks each month.  Connecting with your members emotionally is important.  Make sure your interviewers are explaining to members how the products work.  Incorporate leading questions when selling GAP insurance, Mechanical Breakdown and Debt Protection , such as; “Do you have funds to pay off your loan when insurance doesn’t cover the full amount;  Do you have money set aside for vehicle repairs when something expensive breaks; Do you have enough money set aside if you become ill or are injured, to cover the next six months of payments? ”   This allows them to think of that product as an enhancement to their loan rather than an additional expense.  If your interviewer doesn’t have those conversations with the member, the member may be unaware they are available.  These supplemental products may cause the members payment to be increased.  For a member that is concerned with payment, look to extend the term of the loan and help keep that payment affordable, at the same time adding value to your collateral.  Typically adding three months per supplemental product will keep their payments the same as they were without them.  Terms up to six or seven years are acceptable with the right collateral.  Most dealerships are offering these products, and most borrowers are payment driven, so get them in a loan that will set them up for success.  Best Advantage Credit Union in Brillion and Sherwood WI has built up their lending team on this concept.   They are consistently selling GAP and Mechanical Breakdown at high levels and also maintaining at least 50% penetration on their debt protection monthly.   A lot of this has to do with your lending partners and making sure their products and services are easy to sell, and they provide training for you to be effective.   Best Advantage’s success has increased with their lending partners; Allied Solutions and Route 66 Warranty Company.

The final piece is your underwriting team.  The underwriter needs to look at the information the interviewer provides, assess the risk and create a performing loan.  When moving into higher risk lending, your underwriter can’t have an A paper mentality.  Many people think good credit approved and bad credit denied.  If you want to have success in lending you need to think different.   You could have a credit score of 714 and be on the verge of bankruptcy and same with a credit scored of 575 could be rebuilding.  Underwriters can’t get the full story if all they see is black and white.  The interviewer should be giving them information such as; affordable payment, cash down, debts being paid if consolidating, values on collateral, rates on loans being stolen, and gut feeling.  Members with poor credit need a car to get to work, and they may turn in the keys to their home before they turn in the keys to their car.  Underwriters can’t look at credit reports and say “they don’t pay our competitors so they won’t pay us.”  If you look at a loan that way you may be letting a loan walk out the door.  Instead of saying no, have the member bring things to the table such as a down payment.  Helping your underwriters succeed is crucial.  You have to empower them to make decisions and give them space.  They are going to make mistakes every once in a while and must be helped to learn from those mistakes, and make better loan decisions moving forward.  If they have “handcuffs” put on, they may go right back to the conservative mindset and your credit union will miss out on great opportunities.

One of the biggest struggles credit unions have today is how to get loyal members.  Forming a relationship is the key.  You are always going to have people who shop around.  When you take time to sit with a member and give them options, educate them, save them money and set them up for better rates in the future, you form that relationship.  Once the relationship is formed they will come back to you first and appreciate the fact that you helped them when other financials would not.   Building strong and effective sales lending staff is essential to doing this.  Not only are you helping your members out, you are getting an extremely good yield on the loans you are doing and setting members up for success moving forward.

Don Emmer

Don Emmer

Don is currently the Director of Sales for Chatter Yak (Marketing/Advertising CUSO) based out of Citizens First Credit Union in Oshkosh, WI. His role there is to help financial ... Web: www.chatteryak.com Details