An increasing number of credit unions are bucking tradition by pricing loans according to the riskiness of the borrower, according to industry sources.
These institutions are changing their ways to reach borrowers who previously slipped through their fingers - from members with solid credit histories who were lured by premium rates elsewhere to those whose blemished records would ordinarily disqualify them for a credit union loan.
"I see it as growing out of the period from two to three years ago when loan demand dried up," said Keith Peterson, an economist for the Credit Union National Association.
"When there's a shock to the system, it gives people time to think of options they wouldn't have thought of before," he said.
Industry observers expect interest in risk-based pricing to be fueled by a 17-page National Credit Union Administration white paper on risk-based lending that went to all federally chartered institutions in September.
"Many credit unions have been risk-basing their loans," NCUA Chairman Norman E. D'Amours wrote in the letter. "Credit unions should engage in risk-based lending, not as a means of re-pricing existing balance sheets, but as a tool to reach out to the under-served and take a risk that might otherwise be avoided."
The letter addresses planning, policy, and monitoring issues of risk- based lending, as well as examination procedures.
Neither the regulator nor industry trade groups know exactly how many credit unions now engage in risk-based lending. Only a few are believed to do it now, but many more are expected to jump on the bandwagon, Mr. Peterson said.
Credit unions didn't get into risk-based lending before, in part, because examiners had frowned on such activities. Also, credit unions were reluctant to charge some members more than others.
"There was an attitude by credit unions that all members, regardless of their credit history, should be offered one rate," said Gerald Scott, president of Innovatra, an Austin, Tex., consulting firm.
Taconic Educational and Governmental Federal Credit Union started a risk-based pricing program targeted at subprime members a year and a half ago, said chief executive Joseph Prokop.
He said the higher rates on riskier loans had helped boost earnings at the $52 million-asset institution in Fishkill, N.Y. But "we work twice as hard on those loans," he added.
"You just have to monitor it and give the NCUA reasons for each and every loan you make," he declared. "You have to watch those loans like a hawk. If they go delinquent five days, you get on the phone."
Indeed, the NCUA letter said examiners would inspect policies and procedures for such programs and expected documentation of loan decisions.
University Federal Credit Union in Austin, Tex., plans to start a risk- based lending program in three to four months, said Phil Mitchell, senior manager of lending for the $250 million-asset institution.
Besides using the program to reach members with blemished credit histories, University Federal will price loans to go after members who have clean records and have found better rates at other institutions.