'Near Prime' Credit Offers CUs Prime Opportunity

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FARMINGVILLE, N.Y.-Credit unions need to take a closer look at B and C credit this year, because biggest opportunity lies in auto loans, a number of sources told Credit Union Journal.

Even a CU raking in the business on A-plus paper is considering "near prime."

"We are hearing talk in the market that there will be a move away from A paper because of the opportunity," said Nancy J. Orlando, SVP of credit for the $4-billion Teachers FCU.

TFCU is currently offering a 1.99% APR, 60-month deal on new cars for A-plus credit that is significantly increasing new car loan volume (see related story).

Orlando said Teachers is looking at B and C credit, and has a risk-based model to handle the business if it comes their way. "It has always been subprime and A-plus paper, and now it sounds like a swing may be taking place to near prime."

Tony Boutelle, CEO of the Ontario, Calif.-based Credit Union Direct Lending (CUDL), sees a great deal of opportunity in B and C, and is encouraging its member credit unions to consider the option as long as they have proper risk controls in place. "In some of our markets there is a big opportunity in B and C-plus FICO score members. Credit unions claim in the early days was that they were the best B and C lenders. Now they are a little risk averse."

Risk-Management A Must

Boutelle contended that the very low rates being advertised to attract A-plus credit are shrinking margins to the point where those deals are not that worthwhile to the CU's bottom line, while B and C offers more room to generate income. "Banks are now looking to book a full set of business to get them back to profitability. And that is what we are trying to encourage credit unions to do, with the proper risk management in place."

Bill Vogeney, SVP at the $3.1-billion Ent FCU, Colorado Springs, Colo., emphasized that dealers need lenders to buy B and C credit. "This is where they are having a tough time getting deals, the 600 to 660 range. Plus, to really get the good A-plus paper, you have to buy some B and C to keep dealers happy."

Vogeney acknowledged that 600 to 660 credit is a range in which there is a wide variety of credit types, such as former A-plus borrowers who filed for bankruptcy in the last year, and those who have walked away from a home or car loan. "This is not a homogeneous group, so you have to be careful what you buy here.

"But if credit unions want to be able to buy some more business and think they can manage the risk, this is probably where to go," continued Vogeney. "But the challenge is getting the loan-to-value to where you want it to be with these borrowers. And you must avoid layering risk."

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