Advice On Getting A Return On No-Margin Loans

Declining rates have squeezed margins so that on many loan products profit is almost non-existent, according to two speakers at CUNA Mutual Group's Discovery Conference here.

"If you haven't looked at individual loan profitability lately, you may think you are doing better than you are," Millard Eisler, CCUE, CUNA Mutual lending master trainer, told the meeting.

"Some of your loan volumes may be up, but if you really look at the individual numbers, subtracting best deposit rate from the best car rate while factoring in a 3% operating expense, you may find that you are only earning $60-$100 per year on a typical car loan."

Eisler said member protection solutions such as credit life and disability insurance, mechanical repair coverage, and guaranteed asset protection are a way for credit unions to earn more on a loan while also providing another service to members.

Rates of Return

"Though rates vary by state and coverage terms, a credit union typically earns $300 on a $25,000 car loan that is protected with credit insurance," he said. "One-hundred dollars comes from the loan and $200 from the credit disability/credit life combination. In short, it takes three unprotected car loans to earn as much as one protected loan."

According to Eisler, other benefits of packaging member protection such as credit life and disability insurance with loans include:

* Helps pay for credit union operating expenses and increases net income.

* Contributes to strong return on assets.

* Reduces delinquencies and charged-off loans.

* Saves time and money for collections.

* Protects member collateral and credit rating.

* Provides members with affordable coverage.

* Helps preserve member savings and assets.

* Promotes credit union full-service image.

Denise Anderson, CUNA Mutual lending protection manager and Eisler's co-presenter, suggested that lenders begin to think of loans as packages like peanut butter and jelly. "When I say peanut butter, you think of jelly. The concept of loan packages is no different. Begin to think of loans and protection solutions in the same way," she said.

The key to packaging loans with protection is to get the member's commitment to a payment that includes the protection solutions at the very beginning of the application process.

"Asking questions early in the loan process will help you assemble the best package for the member," Anderson said. "Ask your member if he or she has a life and disability insurance plan with his or her employer, then determine what the plan waiting period is and how much their employer plan will pay. Under the asset section of the application, determine what individual coverage the member has with cash surrender value. And, ask if they have a beneficiary."

Anderson said most members object to protection coverages due to an existing plan. "By discussing employer plan waiting periods and other existing plan details at the beginning of your discussions you are showing the member that this is a different coverage from what they already have and that they need it."

Rates of Return

Once a lender has opened discussions, a series of steps can be followed to package loans and protection solutions. Anderson suggested lenders get a payment commitment. "Ask how much can you afford each month?" she said. "Then get a second commitment on the package by quoting the total payment. Ask 'how does that sound?'"

Follow this with the news that the package includes principal, interest and protection solutions. "At this point you'll want to get agreement to the protection solutions package," she said.

Anderson said the deal should be closed as soon as the member shows signs of interest. Explain the loan agreement and have the member sign it.

"In the end you'll, of course, thank the member for his or her business and you can use this point of discussion to promote future business," she said.

If a member does not want the loan package you have offered, offer them options, "a package with a higher rate, shorter amortization or a combination are all possibilities," Anderson said.