Businesses and consumers remain ill at ease when it comes to the economy -- and the threat the federal government will fail to avert the fiscal cliff of mandatory spending cuts and tax increases. These uncertainties also contribute to credit unions’ slow lending growth.
But new lending opportunities do exist, credit unions say, especially in the areas of risk-based lending and auto lending.
Risk-based lending: Balance rewards and losses
Tewksbury (Mass.) Federal Credit Union, $51 million in assets, is balancing the rewards and losses of risk-based lending to add new members and reward current ones.
Risk-based lending, says CEO Shelley Robinson, makes it possible to offer lower rates than members can get from competitors. It’s a methodology of deploying resources to borrowers based on their probability of defaulting.
The credit union has a 13-year history of using risk-based approaches for all lending, with delinquency rates that have since remained between 1% and 3.5%. Current loan rates range from 1.99% to 17%.
Tewksbury leaders offer this scenario to compare the potential returns available from risk-based lending as compared with placing the same amount in a certificate of deposit.
