Mitigate subprime lending risk: nine steps

Higher-risk loans can both help members and boost CUs’ loan yields.

Making loans to subprime, or nonprime, borrowers is risky business. But if properly implemented and controlled, these loan can be an acceptable complement to credit unions’ loan portfolios—and a vehicle to meet members’ needs.

That’s according to “Non-Prime Auto Loans,” a report from the National Credit Union Foundation.

The report outlines several steps credit unions can take to mitigate subprime lending risk:

1. Use a co-signer. Doing so is generally acceptable for a borrower with limited credit, but be wary about using a co-signer who has poor credit. Parents typically are acceptable cosigners, as long as their credit is good.

2. Encourage the borrower to use automated payments from checking or savings, or direct deposit. These loans perform better than payments made via a statement or coupon book.

3. Provide financial education. Some credit unions require financial education as part of their subprime auto loan programs to educate borrowers about their credit scores and how to improve them, and to help them establish a workable budget that includes both the car payment and other costs of car ownership.

Another way to encourage members to complete some form of financial counseling or education is to reduce their loan rates following completion. There are variety of programs credit unions can make available to members, including Greenpath Debt Solutions, a CUNA Strategic Services alliance provider.

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