Look beyond the credit score

When it comes to lending decisions, credit unions need to take more into account than just a member’s credit score, says Michael Cochrum, executive lending advisor with CU Direct.

That’s a shift in thinking from the way credit union lenders have operated in the past, but it’s a shift credit unions show consider making in order to survive, thrive, and grow their lending portfolio in the future.

“We are at a moment in time in credit union land where we have to make a decision,” says Cochrum, who spoke during a breakout session at the CUNA Lending Council Conference in Las Vegas. “Do we want to be different? Do we want to be what our members want?”

To be what members want, credit unions will have to change how they approach making lending decisions. To start, Cochrum said a few myths that need to be addressed:

• I need underwriters to manually decide marginal loans. Cochrum says while some may believe it’s necessary to have a human underwriter review and make a decision on some loan applications, when reviewing the process, it’s shown that an underwriter takes no more time to review the application and make a decision than a computer program does.
• I can’t trust the credit score. Use the credit score, but continually update it throughout the member’s loan. “The credit score is about the future,” Cochrum said. “It’s based on what they’ve done, but it’s mostly used to forecast what they’ll do in the future.”
• Underwriters make better decisions than computers. Humans make bad decisions when they allow bad data to impact their decision. “We must start talking and investing more in data,” Cochrum said. According to a recent FICO study, 97% of lenders are already using internal customer data to predict risk and profitability, 78% of lenders are analyzing performance pools monthly in order to predict how its loan portfolio will perform in the future, and 57% of lenders are using historic customer data as a predictive analytics tool to inform future decisions.

In order to take full advantage of the data available to credit unions and how it can be used to make changes in its lending process, Cochrum said there are three things credit unions should do in the next 12 to 18 months:

1. Data management. Collect the data the credit union already has, invest in the right tools to use the data, and hire a data scientist.
2. Build a custom risk model. This will improve the accuracy of decision making and pricing for loans, allow the credit union to more accurately assess risk based on multiple factors, and help credit unions prepare for the Current Expected Credit Loss model (CECL).
3. Optimize technology. Review the technology available at your credit union. Is it up to date? Having optimized technology will allow credit unions to increase their lending efficiencies and decrease expenses. It will also provide consistency.

“If you have a passion for your credit union, in order to survive, these are the things you must do,” Cochrum said.