Credit unions are taking the wrong tack when it comes to issuing loans, one expert says. Instead of seeking only "A" and "A+" paper, they should take a cue from the world's largest retailing company.
Rex Johnson, president of Elgin, Ill.-based credit union consultancy Lending Solutions and former CEO of Baxter Credit Union, told attendees of the National Association of Community Credit Unions annual conference here CUs should simplify their lending process, and, like Wal-Mart Stores, charge less to make more.
"One-hundred million people a week come through Wal-Mart, so I think they are worth listening to," said Johnson.
Credit unions have an opportunity to drive up members' scores and drive down their rates, he continued. For example, if small past due accounts were paid off, a member's credit score would go up significantly.
According to Johnson, CUs are making several mistakes when it comes to lending: they are not proactive about raising the credit limits for their members with high incomes and high savings balances, they shouldn't let people join for a deposit of a mere $5, they don't examine their members' credit reports for cross-sell opportunities, they treat all bankruptcies the same, and, most importantly, they are afraid to take risks.
"Why do credit unions let people deposit $5? They shouldn't do this," he recommended. "Ask for all of their business, especially the checking account. Tell them the difference between a bank and a credit union, and the difference between a customer and a member. Tell them they are part of a family. Find out why the new member picked the credit union, and get their mortgage away from Washington Mutual."
"Credit unions should be pushing credit cards like there's no tomorrow," Johnson added. "Credit unions are getting out of the credit card business, and I don't know why."
A person with a credit score of 730 who declares bankruptcy will suffer a loss of about 200 points to 530, Johnson said. But a person with a poor credit history who carries a score of 560 at the time of bankruptcy declaration, probably will only lose about 30 points.
Unfortunately, he said, credit unions often treat these two members the same because they have the same score. In reality, the former is an A+ member who got off track, while the latter "already was in the toilet." Someone on the credit union's staff should investigate to see if the former member's problems were a temporary issue. If the person has a job and had a solid credit history before, the CU should be willing to give the member a loan.
"I don't know why credit unions are so afraid of bankruptcy-they should have plenty of practice by now," he quipped. "If a person goes bankrupt and doesn't pay the credit union back, that's a problem. But if someone goes bankrupt and the credit union doesn't lose money, it's not a problem."
Johnson said he believes every credit union should have a policy that no one at the credit union can turn down a member for a loan without talking to him or her, he said.
Risk Aversion
Johnson showed attendees a financial analysis of an anonymous CU with a delinquent loan rate of 0.11%. Instead of patting the credit union on the back, he said the extremely low delinquency rate shows it is not taking a chance on members.
"Credit unions are afraid to take risks, and it is costing them money. They don't make money on 'A' or 'A+' paper because they won't pay a premium rate," he said. "The 'D' and 'E' paper people have jobs, they have cars. Credit unions have no idea how much money they are losing by saying 'no.' People need mortgages after bankruptcy, they go to banks because they have no choice-credit unions are not stepping up."
Part of the problem, Johnson asserted, is credit unions are allowing examiners to "run the credit union." Examiners have to be trained how to take risks, because making loans only to those with top-level credit doesn't pay.
"Credit unions should match or beat rates from their competitors. Lending is an attitude," he said. "A credit union's product is money-we take it in and give it out. Members need loans, we have money."
