How to be Successful With Higher-Risk Auto Lending

Transcription

1 How to be Successful With Higher-Risk Auto Lending Heartland Credit Union Association Annual Convention Overland Park, KS October 6, 2017 By Brett Christensen, Owner CU Lending Advice, LLC

2 Four Undeniable Facts 1. There are very thin margins on A-paper auto loans. 2. You can make serious money on D and E-paper loans. 3. Members with bad credit need a car to get to work. 4. Members with bad credit can choose to pay their credit union on time. Exhibit A: University FCU, Austin, TX Exhibit B: TransUnion Statistics 2

3 The Math That Governs Your Business My Toyota Tundra Loan: $41, Months 1.29% Total interest paid over life of the loan: $. A Loan I Made at a CU in Georgia: $45, Months 18.00% Total interest earned by credit union: $! 3

4 Reasons to Make Higher-Risk Auto Loans 1. These are the members with the greatest need. 2. These are the members that have the fewest options. 3. Credit unions were formed to serve these members (i.e. the working class). 4. If you help D and E-paper members they will be very loyal. Can the same be said of A-paper members? 5. An aging population will force you to buy deeper into the pie in order to maintain loan growth. 6. Aggressive dealer financing will cause you to lose out on many of your A+ and A-paper member auto loans. 7. You can actually make money on C, D and E-paper loans. 4

5 Keys to Successfully Making Higher-Risk Loans 1. Do your higher-risk lending on the direct side of your business. 2. Start with the car that takes them to work each day. 3. Build performing higher-risk loans in the interview. 4. Price these loans correctly. 5. Underwriters must learn which higher-risk loans to approve and which ones to deny. 6. Collect the higher-risk loans more aggressively. 7. Management and the Board of Directors cannot FREAK OUT when the first few loans go bad. 5

6 The Most Common Mistakes Made With Higher-Risk Lending 1. Too much car = too much payment. 2. Putting them into the wrong collateral. 3. Not recognizing bankruptcy risk. 4. Incorrect loan-to-value (LTV) decisions. 5. Too dependent on your debt ratio calculation. 6. Too conservative with auto loan terms. 7. Incorrect pricing of higher-risk auto loans. 8. Being too aggressive with youngsters and new members. 9. Denying good loans. 6

7 Lending Attitude Check In order to approve more higher-risk loans, your lenders must have the correct attitude and approach. 1. When your lenders look at a member s credit report and application, do they begin by looking for positives or do they begin by looking at the negatives? 2. Do your lenders know their job? The job of a lender is to evaluate risk and make good loans. The job is not to be offended at a member s personal financial behaviors. 7

8 Building a Performing Higher-Risk Loan in the Interview 1. Put the member into appropriate collateral. 2. Lend the member a reasonable amount of money. 3. Give the member a payment that is comfortable on their monthly budget. 4. Obtain a cash-down commitment. 5. Set up the loan payment to be made by automatic payroll payment or automatic transfer from their account. 6. Sell the ancillary insurance products. 7. Give the member a firm close. 8

9 Sample Consumer-Secured Loan Rates October 1, 2017 Credit Credit Consumer Secured Loans Score Tier (Autos, Boats, RVs, Motorcycles, etc.) 0 to 35 Months 36 to 59 Months 60 to 83 Months 84 Months and Higher A+ 2.49% 2.79% 2.99% 3.90% A 2.90% 3.40% 3.90% 4.90% B 4.90% 5.40% 5.90% 6.90% C 7.00% 7.50% 7.90% 8.90% D 13.00% 13.50% 13.75% 14.50% 549 or less E 15.00% 15.50% 15.75% 16.90% Notes: 1. Regardless of a member s qualifying account relationship discounts or matching rate provision, at no time will the rate go lower than our current floor rate of 2.49%. 2. Secured loans financed that are older than ten-model years back will be priced at signature loan rates. 3. Secured loan terms in excess of 72 months require a loan amount in excess of $10,000 and loan terms in excess of 84 months require a loan amount in excess of $20,000. 9

10 Three Essential Underwriting Approaches for Higher-Risk Lending 1. The counter-offer. 2. Use your leverage. 3. Use underwriting guidelines to walk away from a bad loan; never a good loan. An important point: Use the FICO score more to price than to underwrite. 10

11 The Definition of Good Higher-Risk Auto Loans 1. Members that work at good jobs and they have job stability. 2. The loan will be paid automatically by payroll deduction or by automatic transfer. 3. The member is not a bankruptcy threat. 4. The member has learned to pay the credit union on time. 5. The member has demonstrated that they will make on-time payments on car loans. 6. The deal is structured correctly (i.e. reasonable amount borrowed and monthly payment, good collateral, cash down, insurance, and payroll payments, priced right, etc.) 11

12 Ten Strategies for Success 1. Do higher-risk auto lending on the direct side of your business. 2. Start with the car that takes them to work each day. 3. Do not finance old, high-mileage cars. 4. Obtain a cash down commitment. 5. Lend them an appropriate amount of money. 6. Put them into a comfortable payment. 7. Set the payment up on auto pay. 8. Sell the member your ancillary insurance products. 9. Give the member a Firm Close. 10. Collect these loans aggressively. 12

13 Is Doing Higher-Risk Lending a Winning Strategy? June 30, 2017 Call Report Navy FCU Peer LTS Ratio: 101% 82% Avg. Loan Yield: 6.75% 4.32% Misery Index: 2.70% 1.17% Net Worth: 12.0% 10.76% ROA: 1.60% 0.69% **Navy FCU Misery Index is 131% higher than peer and net income is 132% higher than peer. 13