Livin' La Vida Lending

Consumer lending success demands creativity.

Although first mortgages and mortgage refinancings are tapering off, credit unions are doing just fine, thank you, due to creative consumer lending programs and innovative technology.

For the past five years, credit union loan growth averaged 9.2%, according to Bill Hampel, Credit Union National Association (CUNA) senior vice president, research and policy analysis, and chief economist. CUNA forecasts 12% loan growth in 2004, and 10% in 2005. Currently leading loan growth are new-auto (12.6%) and home equity loans (22.6%), reports CUNA Mutual Group.

Credit unions are competing successfully for consumer ans despite 0% offers from auto finance companies. To book consumer loans, credit unions offer speed, low rates, 24/7 availability, and member outreach.

Speedy responses

"Just accepting a loan application over the Internet isn't good enough anymore," says Gloria 'Green, CUNA MutuaPs Loanliner documents business development manager. Members are getting used to instant credit decisions. Credit unions can provide instant answers if their online loan applications connect with decision engines.

Online loans are approved or referred to loan officers. "You can't deny a loan online," Green explains. Even referred applications may get answers within minutes from 24/7 call centers. The LoanLink Center, which CUNA Mutual and several credit union leagues own, reviews applications and responds within 15 minutes.

Even if credit unions aren't on the cutting edge of technology, they can hasten their lending processes. Loanliner establishes an open-end lending plan members can access at a moment's notice.

"Some credit unions combine their account-opening document with their Loanliner application," says Green. "Deposit disclosures and the credit agreement all are in one booklet. It doesn't feel like you're doing two different things for the new member."

Once established, the credit union never again may need to get a signature from that member for a consumer loan, unless the state requires "wet signatures" on a security agreement.

SECU Credit Union of Maryland in Linthicum began taking online loan applications three years ago. The $1.4 billion asset institution implemented automated underwriting from Appro Systems Inc., Baton Rouge, La., in September 2003. Today, 35% of its consumer lending business comes through that online service, reports Michael Gordy, vice president of lending.

Zero percent counteroffers

Zero percent new-car loans are tough to beat, especially when the terms stretch to 60 and 72 months. "We tell members to take our 3.59% loan and the manufacturer's rebate," says Curt Perry, vice president of lending at $151 million asset Pioneer Federal Credit Union, Mountain Home, Idaho. "But in some cases, dealers offer 0% and a rebate." The credit union's rate includes a five-basis-point (bp) discount for automatic payments.

Pioneer Federal emphasizes auto loans because its real estate loan portfolio is growing. To beef up auto loans, the credit union created a homegrown recapture program and rewarded its employees. "We follow up on preapproved loans," says Perry, "and if members take dealer financing, we switch hats and go into refinance mode."

Perry also pulls "soft-hit" credit reports to discover whether members have taken out auto loans elsewhere within the past year. These members receive a preapproved offer to refinance by phone or mail. The credit union pays employees $50 for each loan recaptured, or it offers members $50 to refinance.

In an October contest, branch employees could earn $50 for every loan they did above the monthly average. Perry set goals by how much each branch had done in 2004.

"We grew 28% in 2003, and we're on a pace to grow 5% this year," Perry says. "If we put our goals at 10% higher than we did the year before, everyone would come up short and no one would participate."

Employees at one branch had earned $700 in October with more than a week to go. "We're on a pace to do more auto loans in October than we've done any month this year," he says. "Normally, July and August are our big months."

Pioneer Federal was on pace to do 370 fewer auto loans in 2004. However, the credit union is doing more with those loans in terms of selling credit life, guaranteed auto protection, and extended warranty insurance.

One thing eating into auto loans is a two-yearold home equity loan program. It was expected to grow 104% in 2004.

Loan recaptures

CUNA Mutual helps credit unions recapture auto loans, says Denis Karandjeff, lending marketing solutions manager. A credit union gives CUNA Mutual a list of current and potential members and an acceptable credit score.

Then, CUNA Mutual does a credit search for members who have taken out automobile loans within the past six, 12, or 18 months. From that search, it creates a targeted monthly mailing offering to refinance those loans at a more attractive rate or term. "Compared with a mass mailing that gets a 0.5% to 1% response rate, we're seeing response rates up to 11% with proactive follow-up," Karandjeff maintains.

Some credit unions follow up with a phone call, where state law permits. Others follow up with a postcard. The credit search also uncovers cross-sell opportunities, such as home equity loans if members have mortgages.

Recapture mailings can be stratified and targeted by credit score. An emerging trend is to offer loans to members with "bruised credit"-those with Minneapolisbased Fair Isaac Co. (FICO) scores of 580 to 620. CUNA Mutual provides protection default insurance to backstop these loans.

Credit-impaired borrowers

More than 200 credit unions offer auto loans to people with impaired credit by using Centrix Financial's Portfolio Management Program. The Centennial, CoIo.-based firm has a staff of 850 employees and a network of 7,000 auto dealers in 40 states.

Centrix Chairman/CEO Robert Sutton points out that 30% to 40% of consumers have some sort of blemish on their credit reports. "It doesn't mean they're bad people or deadbeats," says Sutton. "They've just had some financial problems."

The subprime market typically includes people with FICO scores of 600 or less. Centrix weeds out almost 80% of applicants. "We're looking for people on the rebound: those who have had a few failures but are gainfully employed and have lived in one place for a year or two," Sutton says.

One such borrower was Laurie Little. At age 18 she moved out on her own and quickly "maxed out" her credit cards. Her credit score was in the 50Os when she needed her first car loan so she could get to work. She has worked at a floral store for 10 years and has since rebuilt her credit rating.

"The loan through Centrix made a big difference," she says. "They would give me a courtesy call if I was a couple of days late with a payment, and it never went against my credit rating." Little now is buying her second home.

Centrix protects subprime loans with default and collateral protection insurances. The insurance, plus Centrix underwriting fee, adds a 4% to 6% premium cost to the loan, bringing annual percentage rates to about 18% as of last fall. The alternative might be no loan or a finance company loan with an interest rate of more than 20%.

Credit unions can pick and choose loans among borrowers in their fields of membership. Credit unions pay Centrix the 4% to 6% premium cost up front, and Centrix collects a monthly servicing fee of 0.135%, based on the loan balance outstanding. The subprime program is helping credit unions improve their loan-to-share ratios.

Midwest United Credit Union, Blue Springs, Mo., $140 million in assets, saw its loan-to-share ratio grow to 102% last fall.

"Subprime lending has helped our bottom line as well," says CEO Pat Yokley. "Our return on assets was running 50 bp to 75 bp four years ago. This year, it's almost 200 bp."

Midwest United chose Centrix so it could reach out to people of modest means, a primary credit union mission. The community-chartered credit union serves two counties in and around Kansas City.

The credit union is working with Centrix to build better member information files. That information could help Midwest United make specific offers to meet specific needs.

The credit union's charge-off rate for subprime loans is 0.8%, the same as for other loans. Still, the credit union limits these loans to 15% of assets. To do that, it has held two loan sales through Centrix. Midwest United recently received a 2004 Excellence in Lending Award from CUNA Mutual and the CUNA Lending Council ("CUs achieve lending excellence," p. 12).

SEG partnerships

Three years ago, $1.7 billion asset GTE Federal Credit Union, Tampa, FIa., began a select employee group (SEG) relationship with the Automobile Association of America (AAA) of the South, Orlando, FIa. The organization asked GTE Federal to provide auto loans to its 3.8 million members in Florida, Georgia, West Tennessee, and Puerto Rico.

As a result, the credit union's Express Loan system now links to AAA of the South's Web site. AAA members can apply online, or AAA call center employees take applications by phone and key information into GTE Federal's Express Loan system, explains Neil Timson, senior vice president of lending.

Express Loan approves 75% of AAA-member loan applications instantly. The rest are referred to loan officers. Less than 15% of applications are denied. "Their members have higher credit scores than ours," says Timson.

Three years ago, GTE Federal's loan-to-share ratio was in the low 70s. Now it's around 100%. Ten percent of the $80 million in consumer loans the credit union makes monthly are AAA-related. Auto loans make up 55% of the credit union's loan portfolio.

"GTE Federal pays AAA a fee similar to but a little less than you'd pay a car dealer," says Timson. "We're starting to have repeat business come directly to us."

GTE Federal members have benefited, too, with discounts to join AAA. When the CEO of an AAA-sponsored credit union retired, that credit union merged with GTE Federal. AAA of Eastern Tennessee and AAA of Northern New England now use GTE Federal's Express Loan service.

The lesson: "Keep your eyes and ears open," says Timson. "You don't know what kind of partnership you may have through a SEG."

That's good advice for any credit union looking for creative ways to serve members and make loans.

Copyright Credit Union National Association, Inc. Jan 2005
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