LATHRUP VILLAGE, Mich.-An increasing number of credit unions are indicating they are finding good lending opportunities with borrowers whose credit was damaged during the recession.
A number of CU executives told Credit Union Journal they are going after these subprime borrowers-reliable members whose credit scores have taken a hit due to a job loss or some other hardship, and with the improving economy now find themselves back on their feet with capacity to pay, but their credit scores simply have not caught up. Lenders reported they are pricing for the additional risk.
The $600-million Michigan First CU, for instance, just introduced its Turning Point Home Loan that adjusts some of the CU's mortgage lending policies to extend credit to more borrowers. The product comes with a lower FICO cutoff than its traditional first mortgage and a smaller down payment requirement (Credit Union Journal, Feb. 20). "We believe it is a good move to give these borrowers a chance a little bit ahead of schedule," said Chris Maynard, VP of lending.
Mike Sullivan, CIO at the $277-million McGraw Hill FCU in East Windsor, N.J., said MHFCU is aggressively going after C and D credit for auto loan recapture and is experiencing low delinquency. "There are a lot of people who were A and B credit a couple years back and now are C and D, maybe through no real fault of their own. Maybe they didn't lose a job, but someone in their household did."
Moving away from tightened lending standards instituted in the early stages of the recession is one of the reasons the $4.9-billion Suncoast Schools FCU, Tampa, Fla., ended a three-year loss skid, posting $21.4 million in net income in 2011, explained CEO Tom Dorety. Suncoast Schools, which serves markets hit hard by the real estate downturn, has been carefully extending credit to more members.
"You begin reaching out a little further and then a little further," said Dorety. "You get more comfortable and you keep doing that. We are making the decision based on the individual more than we have in the past. It is more like lending we did ten to 15 years ago."
Too Much Weight On Credit Score?
Credit Union Direct Lending data reflects the opportunity taking shape. The Ontario, Calif.-based company indicated that in 2011 the proportion of CUDL credit union used and new vehicle loans made to prime borrowers declined while non-prime loans increased (see chart).
Bill Handel, VP of research and development for the Lombard, Ill-based Raddon Financial Group, believes it's time credit unions begin moving away from placing too much weight on credit score. "That kind of environment is a little out the window. When things were good we had built all these systems based on score. It was quick scoring and quick decisioning. Score certainly applies, but these models have to evolve. You take that first look at the score, but it's not simply a 'yes-no' decision anymore. It's become 'yes-no-maybe.'"
In the move to extend credit to lower scores, Handel advised looking closely at the length and depth of members' relationship with the credit union, and how well the member has paid the CU in the past.
Ben Rogers, research director at the Filene Research Institute, Madison, Wis., has also seen more credit unions lowering FICO cutoffs lately, much of it in the sand states. "In this environment this is what credit unions are exactly supposed to do, help members who have fallen on hard times-as long as they have enough capital to support the risk associated with dropping the credit score cutoffs."
The $420-million University of Kentucky FCU in Lexington, Ky., is looking at loan apps these days with a "softer eye," said CEO David Kennedy. "I think good underwriting today is looking at a situation in totality. You now often see there is a window of time when something bad happened to the member, they have gotten back up, but their score is lagging behind."
As Low As a 520 FICO
Phil Minden, board chairman for the $450,000 Choices FCU in St. Louis, said extending credit to members with FICO scores damaged by the recession is something his community development credit union has to do. "Lower-FICO-score members make up the majority of our borrowers. Throughout the recession we have been going with flexible, risk-based underwriting. We go as low as a 520 FICO."
The move to deeper credit does not necessarily mean greater risk these days, pointed out Michael O'Brien, SVP and CMO at the $212-million St. Louis Community in St. Louis. "We are seeing half of our delinquencies and losses in A and B paper. We are finding loyal members in lower credit scores who have had challenged credit in the past, have it now, but are paying us first because we gave have given them a chance."
Filene's Rogers acknowledged that credit unions reaching down to lower credit score borrowers and placing less emphasis on the score can be a difficult change. "You get accustomed to working the loan to the FICO score. It's hard culturally, technologically and emotionally to get away from that. But more credit unions are saying we need to do a little more underwriting than just what the FICO score says."
