Members' stories can play a key role in loan decisions, CEOs agree. Added to credit scores and strong underwriting practices, stories help you serve members in need and build loyalty.
A happy member
Before 2007, FivePoint Credit Union, Nederland, Texas, had very conservative lending policies because of delinquency problems about 10 years earlier. So the credit union tightened its criteria. “We got a little too conservative,” admits Erik Shaw, president/CEO of the $401 million asset credit union.
As a result, while delinquency rates were very low, so were loan yields. “We realized that in the low-rate envi-ronment, it would be difficult to maintain an adequate spread with A+ paper alone. And we weren’t serving members as well as we could,” Shaw says. “We knew we needed to take on more risk, but we had to do it effectively and wisely.”
The credit union embarked on a training program with an outside expert and changed its lending philosophy. “We educated lending staff so they’d realize when it was appropriate to take on more risk,” he explains.
“They have that authority now, and we hold them accountable for loan yields after losses,” he adds. “At first, they were out of their comfort zones and reluctant to take on risk, but now they’re more comfortable.”
FivePoint’s loan portfolio changed dramatically. “We were in the bottom 25% of loan yields in our peer group and now we’re in the top 25%,” he says. “It’s made a difference of about $1.5 million in our annual income and we haven’t seen significant increases in losses.”
Members are taking advantage of the opportunities. “Even in a down economy, we’re on pace for 10% growth this year,” says Shaw. “Our yield hasn’t gone up quite as much as when we started, but rates have gone down, too. We’ve made huge strides.”
Lending staff have changed priorities. “I’ve trained myself not to look at the score first because you get a pre-determined notion,” Shaw says. “I look at other qualifications first—how long people have been at their jobs and how long they’ve been members.”
If a member has questionable credit, Shaw asks about it. One member with an extremely high debt ratio, for example, recently came in for a personal loan. “Four or five years ago we would have denied her,” Shaw says. “But we visited, and she had great credit, had been at her job for a while, and was a longtime member.
“We told her it wouldn’t be a good idea to add new debt; her income didn’t support her debt load,” he continues. “She didn’t understand. She said, ‘I pay my bills on time.’ ”
The member had recently remarried and her husband was earning $6,000 a month. “Normally we would add him on the loan, but she didn’t want that,” explains Shaw. “Her previous husband never gave her any control of money and she’d had a really hard time establishing credit. She never wanted to be in that situation again.”
It was a compelling story and FivePoint made the loan. Just a few months later, she paid it back, says Shaw. “We made a member happy.”
The credit union’s delinquency has increased, but not enough to outweigh its additional loan income. “A lot depends on how you close loans and your conversations with members,” Shaw emphasizes. “We tell them if it doesn’t look good on paper, and we say, ‘Help me feel better about the things I’m concerned about.’ If we can, we document that and go ahead with the loan.”
Next: Risk-based lending