Consider Members’ Stories  When Making Loan Decisions

CUs make more loans and increase member loyalty by empowering their loan officers.

November 22, 2011

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

Risk-based lending

Constellation Federal Credit Union, Reston, Va., has always considered members’ circumstances when lending. “We do risk-based lending and look at each individual application and consider the scenario,” says Karen Moe, president/CEO. “A member could be having financial difficulties and we try to help if we can.”

Most of the $168 million asset credit union’s members are employed by the U.S. Defense Department and in-telligence agencies. “They have to keep their credit scores up to keep their clearances,” Moe says. “But their family members don’t always have great scores. We normally see a lot of A paper and then much lower-grade paper.”

Because Constellation Federal has few members with low credit scores, its two loan officers are able to take time to assess their situations. “We contact them and do everything possible to give them loans unless we see it won’t benefit them in the end,” says Moe.

Recently, a 20-year-old member—with no credit history—came to the credit union for an auto loan. “The dealer wouldn’t lend to her and her parents weren’t good co-signers, but she had an uncle with good credit who could co-sign,” Moe relates. “We worked with the family to find the best option to get a car at a good rate.”

That type of loan usually pays off, she says. “We have very low delinquency compared with our peers, largely because of our type of membership. Any delinquent borrower tends to be outside the agency.

“But we can always work something through when someone gets into trouble,” she continues. “We can lower the payments or extend the terms of the loan.”

Front-line approvals

“Our loan philosophy is very member-centric,” says W.K. (Ike) Keener Jr., president/CEO of $943 million asset Allegacy Federal Credit Union, Winston Salem, N.C.

“It starts with our mission to help members make smart financial choices,” he adds. “It’s very important to take their stories into account. People have events beyond their control—anything from a medical condition to a job loss.”

Allegacy Federal approaches lending with the notion of saying “yes.”

“Our front-line people can approve loans, but declines have to go to a committee for a second look, to make sure we’ve given the member an adequate chance,” he explains.

“Our staff feel empowered to make decisions, and our process really helps,” he says. “If someone has extenuating circumstances, employees become advocates for the member—not only the first-line but the second-line person reviewing the loan.”

The credit union had to reaffirm its approach because of the recession, because so many members were going through difficult circumstances. “It confirmed our philosophy,” Keener says.

When one member with a low credit score couldn’t pay rent and faced eviction, credit union staff listened to the reason and made a loan to prevent it. Another member needed a car to get to work and keep his job. The credit union approved an auto loan. “If we hadn’t stepped in, we would have put the member in a situation where he couldn’t pay his bills,” says Keener.

“You’ll always have a higher delinquency rate when dealing with people who have financial difficulties,” he continues. “But it helps if you take great care in structuring the loans. Have adequate collateral and schedule payments at times they’ll have ability to pay, for instance.”

When you lend under those circumstances, you build member loyalty. “They’ll often pay you before their other creditors,” he says. “In my 36 years in business, I haven’t seen a time when it was more critical to do this than now. Otherwise you’re failing to help members in need.”