Did you miss Risk-Based Lending Part 1?

Transcription

1 Welcome! We will begin today at 1pm central. Did you miss Risk-Based Lending Part 1? Check out the archive for video + slides

2 Risk-Based Lending Three Credit Union Perspectives Betsy Sommers, SVP Seasons Federal Credit Union Nina Myers, VP Operations Fitzsimons Credit Union Jim Brown, Director of Retail Lending University Federal Credit Union

3 Risk-Based Lending Seasons Federal Credit Union

4 Betsy Sommers SVP Seasons Federal Credit Union Middletown, CT

5 Non-Prime Lending: One Credit Union s Story of The Good, the Bad, the Ugly and the Lessons Learned.

6 Setting the Stage: Our 2011 Environment Middlesex County 1.7% unbanked 11.6% underbanked 8.6% unemployment rate New Haven County 7.2% unbanked 15.1% underbanked 10.7% unemployment rate Connecticut has struggled with a slow-growth economy since the last recession, recovering only 80% of the jobs lost as compared to 108% for the nation as a whole. In Connecticut, lack of transportation is a barrier to employment for families with no or unreliable transportation. Of people ages 16 and older that work, 96% use a private vehicle to get to work because public transportation isn t readily available.

7 Non-Prime Lending: We Were ALL In! Lending Philosophy circa 2011: The only reason a member should ever be turned down for a loan is when our loan officers or decision makers believe the member will not pay the credit union.

8 Fast Forward.

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10 1. Be Measured and Purposeful in Your Approach a. Include your entire team b. Have a solid grasp of your product profitability c. Walk before running

11 2. If You Build It They Will Come a. Review your policies, procedures, suite of products and services and concentration limits before jumping in b. Don t try to compete on rate in the non-prime space c. Don t buy other people s d. Your delinquency WILL increase e. Shore up your collections team and process

12 3. Take a 360 Degree Approach to Analysis a. Lending in the non-prime space will have consequences across the organization, not just in lending and collections b. Quantify everything c. Trust, but verify

13 4. Be a Willow a. Be prepared to juke and jive, adjusting as necessary b. Have a plan for opening and closing the non-prime spigot c. Implement changes gradually or you run the risk of over-correcting (remember, you re turning a cruise ship not a rowboat)

14 Questions for Betsy?

15 Risk-Based Lending Fitzsimons Credit Union Aurora, CO

16 Nina Myers VP Operations Fitzsimons Credit Union

17 Steps to Risk-Based-Lending Program Success Evaluate the need Look at your pricing and underwriting factors Look at your products Step up your analytics Have a risk mitigation/collections plan Put it all in your business plan Rinse & Repeat be prepared to tweak often!

18 Reasons to look to non-prime lending Change of charter member demographics What does your SEG or community need? Attracting younger members Credit union financials Higher loan-to-share Fee income Lower interest rate risk

19 Risk-based Lending vs. Risk-based Pricing Score is used to price, not to underwrite Underwriting is based on risk(s) & mitigating factors Items in a borrower s credit report Trending of credit history Ability to Repay/Debt-to-Income Loan-to-Value Relationship with the credit union Non-traditional credit Borrower commitment (aka CASH) Your counter-offers should increase

20 New Products & Services Payday loan alternatives Immigration Specific loan products to benefit community Lending to non-citizens Employer-sponsored loans Credit-builder loans Year, mileage or other vehicle loan adjustments Evaluate GAP, warranty & debt protection plans Dealer relationships

21 Evaluate and manage risks Analytics tools internal or external Trends Profitability Static pool analysis Exposure/negative equity Meet to review Underwriting reviews Post-mortems of charge-offs

22 Have a Collections Plan Delinquency & charge-offs will increase Knowledgeable and sufficient collections staff Advanced tools Legal assistance Economic & industry changes

23 Engage your board Inform on strategy Put into strategic plan Make adjustments to budget Give frequent updates

24 Be prepared to tweak Don t set it and forget it Review trends Learn from mistakes and react quickly Tweak policies and procedures

25 Questions for Nina?

26 Risk-Based Lending University Federal Credit Union Austin, TX

27 Jim Brown Director, Retail Lending University Federal Credit Union

28 The UFCU nonprime story Why we do it These are the members with the greatest need. These are the members with the fewest loan options. Credit unions were formed to serve these members. If you help C, D, and E members, they will be very loyal. Aggressive dealer financing will cause us to lose many of our A+/A members. You can actually make money on C, D, E paper loans. (improved yields)

29 The UFCU nonprime story How we do it How we underwrite nonprime auto loans How we close the loan How we collect the loan The growth of the program

30 How we underwrite the loans Credit Report Job/Income Account Relationship Other factors Guidelines

31 How we close the loan Verifications Minimum down payment References Firm close

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33 How we collect the loan Dedicated collectors Queues

34 The numbers Since July 2004 we have funded over 16,400 loans for $254,000,000. D&E Auto Delinquency (60 days+) = 1.61% 1,801 charge-offs for $13.6 million Average loss $7,600

35 The Good, The Bad, and The Ugly: The Good: We are able to not only help people just get a loan but to get a fair rate We are able to help members improve their credit scores The Bad & the Ugly: We have not really had any bad and ugly, what we have had is challenges. We know there is a big potential for these to go bad so we need to staff accordingly in collections (need to have the resources to manage the risk) We need to make sure that our established procedures for these type of loans does not slide We need to pay attention to good practices, change management, and lending standards

36 Lessons learned Start slow and make sure your policies, procedures, and processes work before jumping into the deep end Make sure you have systems that can identify these loans at origination and in collections (i.e. loan type) As the portfolio get bigger the numbers get bigger (i.e. repos, chargeoffs) we need to manage the numbers and make sure we keep an eye on the overall results (yield and profitability) and not freak out on the dollar amount alone When they go bad they are ugly and can be painful (remember the spread) Don t put all your eggs in one basket, keep a balance of all tiers (don t set out to be the subprime lender of choice) Hire the right people to collect (make sure they have the experience and emotional intelligence to do the job) Make sure you close the loan correctly (firm close and closing summary) Start collection activity on day one

37 Questions for Jim?

38 Thank You!