Leveraging Loan Portfolio Performance Data for Point of Purchase Growth
By. Michael Cochrum, CU Direct
Loan to Share ratios remain below average due to a rise in member deposits. As a result, credit unions will need to identify strengths in their lending strategies in order to capitalize on the continued rise in auto sales and to increase loan growth on loans that tend to re-price faster than the mortgage loans that stand to create Interest Rate Risk issues in the coming months as rates increase. Loan portfolio performance data may provide a roadmap to more effective point-of-purchase business development.
One of the common challenges in point-of-purchase lending, and auto lending especially, is maximizing penetration within a retailer’s book of business, while maintaining loan quality. A credit union may have one Ford dealer, for example, that is sending a good distribution of loans across all pricing tiers, where another Ford dealer in the same city is sending only loans in the low-priced tiers or loans that have a higher loss potential. It’s safe to assume that dealers of the same manufacturer have the same customer base within a geographic region. Therefore, one strategy to increase loan growth and origination efficiencies would be to duplicate successes and eliminate challenges throughout the credit union’s lending network.
The chart above shows origination and loss data from two same-brand auto dealerships in the same geographic area. ABC Ford is originating more loans than XYZ Ford in all credit tiers except tier “A”. XYZ Ford’s originations weighted heavily toward members with higher credit scores who are attracted to the credit union’s low rates for “A” tier borrowers. They originate almost four times as many loans in “A” tier than are originated in “B” tier. On the surface, it appears that the quality of XYZ Ford’s portfolio was better than ABC Ford’s based on the credit score of the member at origination. However, when loss data is factored into the analysis, it’s clear that XYZ’s portfolio would not be that profitable.
While the volume of loans being originated in the “A” tier at XYZ is very high, so are the losses, which means the credit union is taking high losses on loans that they are most likely not pricing to support that level of loss. This often happens when a merchant discovers a “loophole” in the lender’s underwriting, which allows them to contract high credit score borrowers at low rates who would not qualify at other financial institutions, such as borrowers with high loan-to-value or debt-to-income ratios.
It’s preferable to originate a more balanced portfolio like ABC Ford’s that has higher average yields and more narrow loss severity increases from tier to tier. ABC Ford’s portfolio, in this case, is more representative of the population as a whole, and benefits the credit union by providing more consistent earnings throughout the portfolio.
Once analysis like this is completed, the credit union business development representatives have an excellent tool to use in the field when talking with merchants in the network. In this case, the representative could visit XYZ Ford and go over these results, reset expectations, and put the dealer on notice that the quality of his portfolio is being monitored. It is expected within dealerships that their top lenders are performing this type of portfolio analysis.
Finally, this type of analysis can also assist credit unions in determining if their underwriting guidelines and pricing strategies are helping them maintain a competitive edge. Using regular analysis, credit unions will be able to see when changes in lending strategies have a negative impact on loan volumes, not just in the portfolio as a whole, but within segments of the market.
