Taking the lead in opening doors to new customers, TEG Federal Credit Union is lending to people it previously considered bad credit risks.
Since March, customers with poor credit ratings have been getting loans at 2% to 4% above standard rates.
TEG started the program because - pressed by its federal regulator to adopt tough underwriting standards - it was losing loans to the competition.
"We were rejecting loan applications from our members and they would go to a hank to get a loan," said Joseph Prokop, president of the $52 million-asset institution, based in Fishkill, N.Y.
TEG, which serves about 120 employee groups, is one of the few credit unions in the country with a risk-based loan program. About 6% of credit unions offer those loans, according to a 1993 survey by Credit Union National Association. That percentage has held steady since 1991.
More credit unions, awash with liquidity and faced with anemic loan demand, are considering such programs.
"There is an increasing amount of interest," said Keith Peterson, an economist for Madison, Wis.-based CUNA.
Some managers "see it as a way of competing against others that already do this, and as a way to extend credit to more people."
Some in the industry oppose risk-based lending.
"If this translates into higher rates for low-income people, that could create additional barriers to people getting affordable credit," said Cliff Rosenthal, executive director of the New York City-based National Federation of Community Development Credit Unions.
The trade group represents 120 credit unions that serve poor and minority areas.
"It too easily could shade into a kind of redlining," he said. Many community development credit union customers could be considered credit risks, but the credit unions don't charge them higher rates, he said.
Mr. Prokop doesn't see a problem.
"We're not being prejudiced," he said. "We're still helping people. Our rates are still better than the competition's."
TEG is more concerned, he said, about these risky loans going bad. So far that hasn't been a problem, but if the credit union takes any losses on the loans it would have to tighten the approval criteria, he said.
Business Expected to Grow
The credit union now has. about 35 higher-risk loans in its portfolio, worth about $250,000. Mr. Prokop said he expects business to pick up, although some customers wouldn't qualify even under the looser standards.
There are two categories of higher-risk loans: moderate risk and high risk. The moderate-risk loans are for customers who have a debt ratio of 45% to 51% and small blemishes on their credit history. The moderate-risk loans are 2% above the credit union's regular rates.
The high-risk loans are for customers who have a debt ratio of 51% to 56% and more severe credit history problems. The loans are 4% higher than the normal rate.
"It used to be if you had a past delinquency, it was the end of the world, we couldn't give you a loan," he said. "Now we can."
Tougher Standards
Until five or six years ago, the credit union would have been able to offer its standard-rate loans to people who now only qualify for the higher-risk ones. During the late 1980s, the National Credit Union Administration forced credit unions to adopt tougher underwriting standards.
"When I came over to the credit union from banking 15 years ago the NCUA examiners were pussycats," Mr. Prokop said. "Now they're tigers."
The loan program satisfies the federal regulator because TEG is managing for increased risk, Mr. Prokop said. And it satisfies him.
"It gets us closer to the way things were in the old days," he said.
