CHICAGO-Credit unions have the information they need to boost lending and manage risk right at their fingertips-it's just a matter of utilizing business intelligence.
That's the view of Mike James, COO of Lending Insights, who said credit unions must also understand what regulators have on their radar, and if they're not managing to those points, they should be.
In particular, he told NASCUS' annual meeting that there are five areas regulators are given specific scrutiny:
1. Static Pool Analysis: The most accurate measure of loan performance over time, this also allows for the quickest changes.
2. Concentration Risk.
3. Indirect Lending Practices: in particular, understanding which dealers are profitable and which are responsible for the highest number of losses and delinquencies. "If you're not managing your dealers, it will eat you alive," said James.
4. Interest Rate Risk: James noted that it's a matter of when not if rates change, and CUs need to have a plan in place to protect themselves. He also noted the importance of re-examining risk-based pricing models to be sure they're working and pricing different credit tiers appropriately to compensate for risk.
5. Credit Migration and Portfolio Review: It's important that CUs understand how the risk in their loan portfolio has shifted.
James went on to explain that there are several keys to effective risk management that, if properly executed, can help boost loan volumes. Some of those include:
A documented risk management strategy. James stressed that the board should have just as much at stake in formulating risk management guidelines as CU executives do, and he added that every person in the institution should understand those guidelines. "Push your policies and guidelines right down to the actual staff that's doing the business," he said. If CEOs understand the policies but loan officers don't, then something needs to change.
CUs should be able to determine the profitability of each individual product they offer.
Credit unions need to examine their collections policy and any underwriting changes to understand if quality of lending and collections is increasing or declining, and then make changes as needed.
CUs need effective collection and loss-prevention strategies. James noted that while everybody does a good job reacting, being proactive takes a bit more work. He stressed looking at lists of past-due accounts, but also planning ahead and contacting those members with a history of delinquency before their accounts get further behind. He pointed out that sometimes members have bills due at different times than their paycheck gets deposited, and simply clarifying those dates and making changes can help drive down delinquencies.
Know which segments of your loan portfolio are the riskiest, along with which branches and dealers are responsible for the most delinquencies and highest levels of loss.
The Need For Intelligence
James stressed that business intelligence can be used to help identify the lowest risk, most profitable members, and to also manage risk and grow loans. He noted that vendors-including Lending Insights-can help CUs harness information they already have in a way that helps their book of business.
"Time and time again, credit unions are very cautious about how to protect their most valuable assets," he said, adding that "you'll be surprised at how inexpensive it really is."
Among the strategies James suggested was credit score migration studies-examining members' credit scores regularly for up or down movement and then planning around that for sales or possible delinquencies-and reviewing loan rates at origination to ensure the right mix of credit risk.
For CUs that deal in indirect lending, James also recommended having a team dedicated to that area of lending. He noted that those CUs with a team in place-specifically to manage for dealer delinquency and identify the most profitable dealers so more business can be shipped their way-are the ones that do it best.
