Believe it or not, there’s an upside to the economic down cycle: a wealth of information on bad accounts.
The economy, members, and credit unions have all struggled since the beginning of the recession. Bad times for members translated to added burdens on loss management teams—and added losses.
While delinquencies and losses have tapered off, there’s still hidden risk in credit union loan portfolios. Home equity and mortgage foreclosures will continue to increase as members exhaust financial reserves. Some will run out of ways to stay above water. We expect equity losses to be steady for the next few years.
But bad-account data is a great resource for quantitative analysis. Careful review of portfolio perfor¬mance relative to application charac¬teristics can help identify opportunities to spur loan growth. Incremental changes to underwriting, pricing, or secured loan structure are within your control.
If done well, they’ll improve your competitive position.
Underwriting today is different in two specific ways:
1. Credit unions, including BECU, reacted to increasing delinquencies and losses by tightening underwriting criteria. Credit score exceptions received more scrutiny. We
instituted greater controls on collateral underwriting advances. And we added measures to reduce credit and collateral risks, and to prevent layering of both.
To be competitive today, we must look at all aspects of underwriting—score, credit file depth, income, debt to income, payment to income, total advance, and other
characteristics. Portfolio analysis helps refine corporate underwriting guidance to more effectively target groups of members.
2. The uncertainty of the tight economy and unemployment undermined member demand for credit. Fear is causing some members to forego purchases or new debt.
Others are dealing with reduced income and can’t afford more debt. Members who are borrowing are either serious or desperate. Credit unions need to be ready and
competitive for these members who are able to borrow.
Members who make it through the more difficult underwriting maze perform better, relative to their scores, than expected because of the added due diligence. Recognize the risk-mitigation steps you’ve taken in underwriting and adjust your strategy based on the impact those changes have had on performance. There’s no one-to-one relationship, so incremental steps are key.
Our credit union’s product-by-product performance analysis breaks down all attributes. For direct and indirect auto loans, for example, we discovered the primary applicant score drove our influenced pricing model.
The co-applicant simply increased the rate assigned to the application. Most of our joint applications were “peas in a pod,” in that the primary and the co-applicant had consistent credit scores.
When the two varied, our joint loans performed consistently with the higher score. Therefore, by pricing to the performance of joint applications in our portfolio, we could offer a lower rate on a segment of joint applications, and also expand our approvals.
This all points to several responsibilities all credit unions share:
Carefully review loan performance from the past few years;
By closely analyzing performance in all lending areas, we found opportunities to increase approval rates without increasing forecasted losses. Our portfolio is performing better today than two years ago, so our credit union can lend to more members in the mid-tier levels.
Gone are the days when we’d have only an annual review of our cutoff scores. Now we review them quarterly, or even monthly, to stay on top of the game.