ELGIN, Ill. — Credit unions can differentiate themselves from banks, improve their loan yields and save their members from paying the punishing interest rates charged by payday lenders by looking past the top credit tiers.
That is the message from Ed Swanson, VP and consultant for Lending Solutions. He told Credit Union Journal as economic conditions improve, CUs can find opportunities in people who have low credit scores but actually are good risks.
"About 25% of the country has a credit score less than 600, which credit unions define as D paper," he said. "While there are indications the economy is turning, and there are positive signs, there are a lot of good people who had wonderful credit scores, but bad things happened. There are many people who had to let their houses go and maybe they had to declare bankruptcy. That is why today there are twice as many payday lenders as McDonalds."
Every loan represents risk, Swanson continued — even to a borrower with an 850 credit score and 30 years on the job. He noted that person's company might get sold and the borrower could be out of a job with no warning.
"At Lending Solutions, we have a University of Lending curriculum to teach how to look beyond just a credit score," he said. "This helps credit unions differentiate themselves from the banks, who are not lending to these people. Everybody pays somebody, but now can it be the credit union."
Credit Score Enhancement
One of the principles Lending Solutions emphasizes when consulting for a credit union is credit score enhancement. Swanson noted a person's credit score is made up of five factors, and two of those make up 65% of the score — payment history and capacity. He said CUs can help members build their scores with consolidation loans, which help both of those key factors.
"The problem is, most credit unions have credit limits on personal loans that are too low to help someone in such a situation," he said.
Credit cards can be a credit union's most profitable product if they take the time to learn how to use them properly, Swanson asserted. When he was speaking at a recent conference in Las Vegas, one attending CU had more than $1 billion in assets, but no credit card program, which he said is a huge missed opportunity.
LSI's philosophy is that CUs should give members a credit card limit that represents one month's gross income — at a minimum. If the credit card only carries a limit of $500 or $1,000, if people hit that limit that drives down their capacity score.
Better Underwriting
Swanson emphasized Lending Solutions is not advocating CUs do payday lending. When lending to members who have less-than-perfect credit, he said pricing to risk is one part of the equation, but training the employees is the most important factor.
Lending Solutions has an underwriting tool that considers 27 factors "above and beyond the credit score," he explained. The company calls it a high yield lending strategy, or HYLS.
"Anybody can make a car loan at 1.99% to A-plus paper, but that misses opportunities to help people in the communities credit unions serve," he said. "We teach credit unions to do these loans the right way."
Step one is for a credit union employee to interview the member to get to know their story behind why their credit score is low. "And just because it is a good story still doesn't mean we make the loan," he said.
The second phase is underwriting, which Swanson noted usually stops after a CU review's an applicant's credit score and debt-to-income ratio. "We teach them to go beyond that. We teach them how to dig deeper, how to say 'yes.' Look for someone who has always paid the credit union on time, even if they don't pay others. Look for someone who does a full direct deposit of their paycheck into their credit union account rather than just $5."
The third phase is closing properly. When lending to someone with damaged credit, Swanson said a CU cannot simply give that person a check as it would with an A-plus borrower.
"The credit union has to give counseling and what we call tough love," he said. "A loan well closed is half collected. This might mean getting the member to cut up all their credit cards, or setting up automatic deductions out of the member's account for the loan payments."
The fourth phase is collecting properly. Swanson said if a loan does become delinquent, it is imperative the CU sit down with the member immediately to come up with a full solution rather than "dialing for dollars" and expecting members to call back.
Full Share of Wallet
Opportunities are out there for CUs to help people with mortgage loans, both refinancing and buying a house, Swanson said, even though the economy is "not out of the woods yet."
"People still need help and they are going to non-traditional subprime lenders rather than credit unions. Credit unions need to make sure they have all the relationships — credit cards, auto loans, financing their kids' education. No matter the economy, they need transportation back and forth to work; they need to send their kids to college."
