LAKE JACKSON, Texas — After recently starting an indirect lending program for local merchants, Texas Dow Employees CU is expanding its loan staff by three to prepare for volume that's expected to reach $2-million a month from the businesses early next year.
"We've been at it full pace for about five months," explained Lance Wortham, VP of business services for the $1.4-billiion TDECU. "Volumes are pretty good and we have tried to maintain steady growth and not outpace our staffing. From March until June we only had two employees in the merchant lending area, and they got to where they were producing $500,000 a month in volume between two of them."
Greater Yield on Loans
The credit union generally generates an extra 25 to 50 basis points on loans run through its merchant lending program. "Our unsecured consumer loan is 7.99%, and I can do 8.25% or a little better on these," Wortham said.
TDECU uses a solution from the Austin, Tex.-based Teres Solutions, and the program works much like automobile indirect lending. The merchant connects to a Teres website via a secure server, completes a 13-field form, and then the loan runs through the credit union's decision engine. If the loan meets TDECU's credit criteria, the loan is approved within a few seconds. If not, a member of the credit union's merchant lending team looks at the application and usually returns a decision with five minutes, Wortham said. "We run the program from 8 a.m. to 8 p.m. Our staff have laptops with Verizon (broadband) cards, and after 5 p.m. they get an e-mail if a loan is not approved automatically."
To use the Teres system it costs TDECU about $7 a loan. The program started with a local John Deere equipment company as a means to make sure buyers returned to the merchant to complete the loan, Wortham shared. "Members would come to the credit union and get approved. But between our office and the equipment company they'd often get buyers remorse and not go through with the purchase."
20 Merchants in Program
With the pullback by national finance companies such as GE Capital and Capital One, more merchants are seeking local lending support, Wortham said. The credit union now has 20 merchants in its program, including two swimming pool companies, an RV dealership, a gastrointestinal surgeon, two dentists, a doctor who specializes in hearing aids, two water softener stores, and a "mom and pop" electronics shop. "Now I am looking at a company that makes high-end barbecue pits," Wortham said.
Despite having statewide reach, the community-chartered and SEG-based TDECU limits the program to its five-county primary market. "We are new at this and want to keep things in our own backyard," Wortham said. Texas Dow ECU started the program by only allowing merchants to make loans to its existing members to better track delinquencies, but has since expanded the program. "Most of the deals come in that $3,000 to $10,000 price range, which is what the program is designed for," Wortham said. "You need the loan to be at least $1,000 - you are paying $7 per loan plus your staffing costs. Anything in the $500 to $600 range and you have to have a very efficient system. We have not reached the point yet where can finance anything less than $1,000."
Wortham said that formula, as opposed to targeting higher-ticket loans, also allows the credit union to manage risk. "We get a lot of deals that way and you can spread your delinquencies over a large number of loans." The CU's overall loan portfolio stands at $1.2-billion.
Delinquencies
Delinquencies for the merchant lending program are running about 60 basis points, according to Wortham, who said that's better than his credit card portfolio. The average credit score is 680. TDECU's decision engine and loan terms for merchant lending are similar to its consumer loan portfolio.
"But when I model it I add in something to cover the extra risk because members are not coming into the branch. I raise the minimum credit score, and if you have any blemishes on your credit we look at those a little harder. That's one of the reasons I have staffed a little higher than I need to now, in the early stages of this program."
As with any loan product there are risks involved, pointed out Wortham. "This one is no exception. So it's important to have good decision criteria, risk management tools, and collections practices in place. These loans are coded on our system to allow us to track production and delinquency by type of loan all the way down to a level of delinquency by merchant." Wortham said loans under $5,000 are generally considered unsecured. Items financed above that amount, and based on the residual value of the collateral and ease of ability to take it back, are taken as collateral. Since swimming pools often run near $40,000, TDECU takes a lien on the property.
Merchant lending runs out of the CU's business services unit. "My business lending portfolio has been at $100 million for four years," Wortham said. "By this time next year my merchant lending piece will be 20% of my business services loan volume."
Program Does The Talking
Interest in the program is so great that TDECU does not promote it. "You talk to one company in a line of business and you will get four phone calls from other similar companies wanting in," Wortham said. "The word of mouth publicity in this program is unbelievable."
