Sub-Prime Borrowers A Prime Market For 1 CU
Credit Union: Credit Union of Texas
Nominated By: Centrix Financial
Nominated For: Sub-prime Lending Module
Credit unions, like other financial institutions, know that earnings are fed by the yield on loans. The larger the loans in size and number, the rule of thumb goes, the higher the yield. Compound that by higher interest rates and the yield increases exponentially.
The Credit Union of Texas, Dallas, knows this and is doing a good job making the earnings equation work for them, according to Elizabeth Newman, the $1.6-billion credit union's vice president of lending and member services. But CU Texas also applies the overlay of service to member groups with difficult credit histories who otherwise might have to seek higher-rate loans elsewhere.
The credit union accomplishes this through a sub-prime lending module administered by Centrix Financial LLC, thereby serving members groups who are in the greatest need while realizing significant yields on its auto loan portfolio. CU of Texas can do this through the involvement of Eberest National Insurance Co., which virtually removes the risk by guaranteeing the loans in the Centrix portfolio.
"Centrix underwrites and manages loans we don't want to keep on our books for risk reasons," says Newman. "I think we're their largest client for this service."
The service began in January, with much of the portfolio generated through the credit union's indirect lending relationships with auto dealers, says Bruce Moore, CU of Texas's director of business intelligence.
"We wanted a way to move money from our investment to a loan portfolio that provided a higher yield without the accompanying risk," said Moore.
The program has grown significantly in that time and the sub-prime portfolio is fed both by indirect and direct loans. Any loans scoring less than 600 on the FICO scale are shuttled to this category, enabling the credit union to write loans for members who otherwise would not meet underwriting standards.
"We don't compromise those standards and target only larger franchise dealers," said Newman.
To date, the program has met with tremendous success, adding significantly to an already healthy lending portfolio. Currently, CU of Texas carries $185 million in direct auto loans and $25 million in indirect loans made through dealers, says Newman. The loan yield averages 6.6% on the standard paper, she says.
The sub-prime loans in the Centrix portfolio add a whopping $300 million to the pot, with yields as high as 8.33% for new cars and 9.25% for used vehicles. "This is the add-on to our existing portfolio," says Newman.
In addition, CU of Texas owns CU Services Inc., a leasing company with a $144-million portfolio yielding 10% on the loans, Newman says. It may be apples and oranges, but CU of Texas' loan "basket" holds nearly $650 million in auto loans at various rates and yields, all of which provide significant income with a minimal amount of risk.
"You have to do a lot of monitoring on a program like this, especially of the sub-prime loans, but it's currently working very well for us," says Moore.