FAIRBORN, Ohio-Credit unions may be making lending harder than it should be.
While September's loan data indicate that CUs may face negative loan growth in 2011, some credit unions are experiencing lending spikes. And while those CUs on the positive side of the loan ledger say it's not easy making loans, they also suggest credit unions themselves may be partially responsible for the slide.
A number of CU execs and members of the CUNA Lending Council told Credit Union Journal that it's time to relax lending standards a bit and prudently extend credit to subprime borrowers. They also indicated that credit unions should spend less time talking about lending and its problems and simply work harder at getting loans.
Most agreed that 2011 has been tougher than 2010, due mainly to increased competition from banks going after prime credit. All the more reason, execs say, to include subprime in the loan mix-but price appropriately for the risk and have a strong collections team.
Eric Bugger, VP of consumer lending for the $2.2-billion Wright-Patt FCU, believes extremely tight lending standards have become the "new norm" for credit unions. "I have talked to a lot of lenders that have just tightened up so much they are afraid to lend beyond prime. Their delinquency and charge-off ratios have gone through the roof the last two to three years," Bugger noted. "Ours have gone up, but we have a very strong collections department that works hard with members to keep charge-offs down."
Despite the competitive and consumer credit challenges, Wright-Patt has not shied away from lending. "But we work with the credit-challenged applicants to turn them into good loans," said Bugger, whose CU is experiencing 9% loan growth this year. "That does not mean we will give someone with a low FICO score a loan for a $30,000 vehicle. But if a member comes in and makes a reasonable request and has a good relationship with us that we can hang an approval on, we are going to do everything we can to make that loan."
Shallow End Of Pool
At the $4.7-billion CEFCU based in Peoria, Ill., Keith Reynolds, community president of CEFCU San Jose (Calif.), contended that when you eliminate subprime from your lending mix you dramatically decrease your loan pool and throw the credit union squarely in the middle of all the A credit competition. "I can't speak for other credit unions, but I am a believer in subprime borrowing on the consumer side," Reynolds said. "Nationally about one-fourth of every FICO score is below 600. If you take the position you are not making subprime loans, you are essentially flushing one-fourth to one-third of your members out of the loan market."
CEFCU this year has seen a 7% increase in loan volume compared to last year and a 3.5% jump in outstandings. Like a number of other lenders who spoke with Credit Union Journal, Reynolds endorses subprime lending through disciplined underwriting and pricing. But one thing the credit union should never do is layer risk.
"That's what gets you in trouble. I can make loans to poor FICO scores and that won't get me in trouble. I can make loans to borrowers with elevated debt ratios and that won't get me in trouble. But layer those two and that is a prescription for problems."
Crop Isn't Just Cream
Aaron Bresko, VP of lending at the $9.5-billion BECU in Tukwila, Wash., and chair of the CUNA Lending Council, said many CUs are talking about wanting to lend. "But many folks are trying to lend to the cream of the crop where it's really competitive and not looking for other opportunities."
Bresko, whose credit union has seen 13% loan growth this year, said BECU tightened underwriting during the recession to the point where the volume that was coming in was so clean and losses so low the CU "actually created a situation where have the opportunity to take on more risk. We have since reviewed every aspect of the application, the loan criteria, and reevaluated all of our cutoffs and line assignments on all consumer loan products. We are not taking on tremendous risk, but we are definitely lending more than we did few years ago because it makes sense. Just drop your FICO cutoff 10 or 20 points and you bring a lot more loans in the door."
BECU is not just dropping FICO cutoffs, but looking for mitigating factors to allow the credit union to accept a lower credit score, such as a large down payment or better loan-to-value. "You dig deeper to find other ways to approve the loan," Bresko said.
Three-Year Effort Pays Off
At the $140-million Vacationland FCU in Sandusky, Ohio, loan growth is 11% this year. But CEO Kevin Ralofsky said that did not come by flipping a switch. It took about three years of steadily focusing on lending. "It has been a three- to four-year focus on making sure loans are the financial engine of the credit union. People may say they focus on loans, but do they really do that, day in and day out?"
Vactionland runs credit committee meetings every week, closely monitoring loans on the business and consumer sides. It also changed its internal culture to one that emphasizes sales. "We brought in a full-time trainer who is teaching staff be more than order takers." Ralofsky said that change has helped to boost loan volume as staff identify loan candidates.
The Broader Perspective
Bill Vogeney, SVP at the $3.1-billion Ent FCU in Colorado Springs, Colo., offered a broad perspective on why some credit unions are bucking the trend of flat or negative loan growth. "It's a combination of things. For those doing well, at the center is a well-defined business model, knowing what works for them, and leveraging their strengths," Vogeney observed.
"For some, it's operational efficiency. They have the ability to make loans quickly and inexpensively. For others the credit union has a well-defined pricing model and has chosen to lower rates to rock bottom and take advantage of consumers who are looking to squeeze every dollar out of their budget. Other credit unions have a well-developed sales and marketing model, and they're trying to generate every cross-sale they can."
Yet what is holding some back is just the competition, concluded the CUNA Lending Council vice-chair, who noted that Ent's loan growth should be 3% to 4% this year. "Everyone has sharpened their pencils and wants more loans. We found trying to generate additional volume easier last year, more low-hanging fruit; 2011 has been a lot tougher for us," said Vogeny. "We're working our tails off. We have about eight or nine major consumer lending initiatives we're working on for the next year or so. There are no home runs. They are all ideas that could help generate new volume or keep existing loans to the tune of perhaps .25% to .50% of growth per year per idea. Get enough ideas like we have, and we could wind up moving the needle about 3% to 5% a year in incremental growth."
