Four Steps To Revamp Underwriting
Q: At our $220-million CU, for several years our VP of lending has set stringent lending parameters. I've supported this. The board supported this. We turned down loans other credit unions accepted. Now we are seeing the impact with declining use of our products by our members. Our members have many products at other local credit unions and banks. What can we do to get these members to use our products again?
A: Conservative underwriting during the past few years has probably been a good practice. Due to the unprecedented economic crisis and high unemployment rate, many financial institutions have experienced historically high loan losses. If you currently feel that too many loans are denied, I suggest the following.
1. Review the cut-offs for credit score and other underwriting criteria. Many credit unions use a third-party credit score (i.e. FICO) to assist in the loan decisions. The scores are calculated from data in a member's credit report. This would include: payment history; amounts owed; type of credit used; new credit, and length of credit history.
Each credit union determines the cut-off for approval. Scores above the cut-off are approved and those below the cut off are denied or referred to a loan officer for review. Management should periodically review these cut offs to ensure they are valid and adjust accordingly.
Similarly, other factors used in the credit decision should be tested for validity. These may include: length of employment, income and/or disposable income. An analysis of actual charge-offs can determine if these factors are effective in the loan decision process and if they should be adjusted.
2. VP attendance at a seminar or conference. There are several educational opportunities that the VP of lending could attend that discus how to evaluate risk vs. reward in today's economic climate. For example, a credit union could expand its loan portfolio by effectively implementing risk-based pricing. This requires the ability to set prices to ensure an adequate return given the risk. This and other important lending topics could be very beneficial to your goal of increasing loan approvals.
3. Peer review and assistance. One of the great advantages of working in credit unions is that most CEOs are willing to share their good practices. In this case, you could find a few organizations that have similar fields of membership, good loan growth and low loan losses. They probably would be willing to share their best practices with you.
4. A final thought. I suggest you ensure that any underwriting changes agreed upon are consistently implemented by the loan officers. In my experience, staff members are sometimes reluctant to change their practices, despite management's direction.
In summary, a credit union is not adequately serving its membership if too many good loans are being turned down. These members will take their business somewhere else. As CEO, you can reverse this trend by helping the VP of lending modify the underwriting parameters to reflect a more balanced approach to risk versus reward. Educational courses and other credit unions can be assistance and all agreed upon changes should be consistently implemented.
Chuck Cockburn is president of Credit Union Strategic Planning, and formerly was a credit union CEO for more than 25 years. Mr. Cockburn's coaching led to eight prior direct reports also becoming CU CEOs. To submit a question and leverage Mr. Cockburn's experience and insights, click here.