'Changes In Market Have Led To Increased Risk Exposures'

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Risk exposures for credit union collateralized loan portfolios have increased significantly, according to one person.

"Risk exposures on collateralized loans have traditionally been well understood and anticipated by collateral protection providers, but today's climate presents greater risk than ever before, thanks to several emerging marketplace trends," said Dave Boswell, VP-collateral products with CUNA Mutual.

Rising numbers of bankruptcies, riskier lending practices and the failure of borrowers to secure insurance coverage on their autos and homes are hiking the risk exposure, he said.

Since 1996, Chapter 7 and Chapter 13 bankruptcies increased 45% and 7%, respectively. Concurrently, loans subject to bankruptcies shot up 15% and net charge-offs 32%. These increases are due, in part, to higher unemployment and non-traditional lending practices such as indirect, risk-based and sub-prime lending.

"We've all seen ads attempting to attract borrowers by guaranteeing a loan 'If you have a job and $90 in your account,' or 'Got Bad Credit? No problem. You can get financing.' Consequently, more loans are being written off while the collateral comes back damaged and uninsured, or not at all. Credit unions are left with the losses."

The number of uninsured and underinsured borrowers, particularly for automobiles is skyrocketing to alarming and unacceptable levels, Boswell argued. The Insurance Research Council reports 14% of all drivers nationwide are uninsured.

He recommended credit unions and their collateral protection provider analyze eight key indicators to assess the credit union's risks and coverage options:

* Management philosophy. Is the credit union reluctant or willing to force-place coverage on members, and to what degree should staff be involved in administering a CPI program?

* Lending style-conservative or aggressive?

* Location-urban or rural?

* Field of membership-Single segment or open charter?

* Expense management. Is the credit union willing to fund a CPI program or pass those costs on to members?

* Size of credit union.

* Use of technology-Automated or manual?

Boswell led small groups through six risk assessment exercises requiring score assignments for each risk factor. Results were plotted on a continuum, which helped guide the participants toward the most effective collateral protection solution, such as simple "blanket" program, a more sophisticated "tracked" program, or some type of a hybrid.

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