BROOMALL, Penn. - The economic slowdown has credit unions across the country taking another look at their loan underwriting standards. Those that haven’t done so are being urged to make sure they do.
“It makes sense to periodically re-evaluate underwriting criteria,” reminded Allan Stevens, vice president-senior loan officer with Franklin Mint FCU. “Knee-jerk reactions to reduce application approvals will hurt your members and membership. Losses can be averted or reduced by effective portfolio management and collection processes.”
Credit unions experiencing a moderate or sharp increase in delinquencies or write-offs need to review underwriting processes and credit-score cutoffs, stressed Stevens.
Bill Vogeney, senior VP-chief lending officer with Ent Federal Credit Union in Colorado, agreed.
“Over the last few years, the consumer credit markets as a whole became very liberal in their credit granting,” he said. “And many credit unions followed.”
“The subprime market operated very well for decades because they avoided risk layering,” Vogeney continued. “Someone with seriously damaged credit was not going to get a 100% LTV home equity loan on a stated income basis. Subprime home equity was typically limited to 70% to 75% LTV with fully documented income and a full appraisal.”
Of course, the current crisis is the result of violating those underwriting principles. As for credit union’s risk policies, Stevens said these only need to be reviewed if losses are escalating to unacceptable levels. “Typically credit unions are seeing increased, not excessive, losses,” he said.
In cases when credit unions should review their credit-risk policies, Stevens said they should “go back to the future.”
“Continue evaluation of the four C’s–credit, capacity, collateral, conditions,” he advised. “Use the most current delinquency and bankruptcy scoring models available on the market coupled with prudent debt services and collateral evaluation processes.”
In the future, Stevens said he is expecting to see increased losses, but leveling off this year or in 2009, “unless there are additional adverse financial developments.”
Vogeney said that credit unions definitely need to be evaluating their credit criteria, especially on home equity loans.
“For example, just a year ago, 100% home equity loans were the norm,” he said. “Now, they are the exception. Many of the piggyback loans made by credit unions for the purchase of a home were unwritten through a Fannie Mae Underwriting Desktop approval of the 80% first mortgage piece. While that underwriting decision was great for the first mortgage side–assuming an 80% LTV–it should not have taken the place of underwriting the 100% second mortgage.
“Too many loans were approved to borrowers with limited ability to repay and assets.” Vogeney agreed with Stevens on a strategy of “going back to the future” when facing the question of what credit unions can do about reducing their credit risk.
“In some respect, credit unions almost have to turn back the clock,” he said. “They should ask themselves ‘How did we liberalize our lending policy in the last five years?’ I personally try to be very consistent in lending. When the economy is running at full speed, it’s easy to get too liberal. Then when the economy goes through a recession, lenders have to make equal and opposite lending criteria changes. I prefer to be a Steady Eddie, so to speak.”
Lloyd Gill, EVP, chief lending officer with Minnesota-based City County Credit Union and a member of CUNA Lending Council, said CCCU has re-evaluated its underwriting guidelines, recently. “Within the past six months, we’ve tightened on debt-income ratios, and we’re looking at the (member’s) ability to repay loans,” he said. “Our guidelines were way out there to start out with, so we’ve done relatively minor changes.”
Jeannine Moore, VP of marketing for BALANCE, recommended credit unions promote to members any credit-counseling services they have available, whether it’s through BALANCE or any other provider. “They should make sure to include it on their websites, newsletters, and in statements,” she said. “People need to know it’s a free service and they should take advantage of that. Now more than ever, it’s important people know there is a place to turn.”
For More Information
www.fmfcu.org
www.ent.com
citycountycu.org
www.balancepro.net
