Last month I attended the NAFCU annual conference in Seattle. There was a session titled, “The State of Member Lending: How to Step Away from Traditional Lending” that peaked my interest since I strategize around the use of alternative credit data to grow loan portfolios and manage credit risk.
When it comes to growing prime and super prime loan portfolios, we all know that it’s a race to zero yield. Every credit union and community bank in the country continues to fight for the limited supply of these A and A+ loans. At the same time, deposit dollars are coming into credit unions at an increasing rate every quarter placing even more pressure on the CU to lend.
Do CUs need a third party to help them grow loans?
Loan growth for credit unions has been in the double digits since 2013 but is down 1.04% in Q1 2018 over Q1 2017. So the question becomes, how do credit unions continue to grow their loan portfolios at double digit rates into the future? Many credit unions rely on direct and indirect auto lending to fuel their loan growth. Auto buying is slowing and interest rates are on the rise causing further difficulty in maintaining the loan growth momentum of the past 5 years.
However, this session was not about how CUs can use new approaches to continue their existing loan growth. It highlighted third party service providers that will put loans on the CUs books through lease programs, consolidation loans, or web based auto refinancing. Why should credit unions need to look to expensive third party vendors to grow loans when they are growing membership at a rate that has increased every year since 2014? The answer to this question is found in the way that CUs are underwriting loans.
New data can enable CUs to grow loans organically.
Using only traditional data for loan underwriting means that you are passing on many credit worthy members that don’t have traditional credit on file. Every borrower has to take out their first loan in order to build credit. But who is going to be the first lender to offer them credit and how do you do it in a way that manages risk? Many CU loan execs will answer this question by suggesting the option of a cosigner. This may be a good solution for some borrowers, but many young borrowers either don’t want to have a cosigner or don’t have a creditworthy cosigner available to them. There are lenders out there using data in underwriting that supports approving loans for these new to credit borrowers. LexisNexis® RiskView™ is a credit scoring solution that uses data exclusive of traditional tradeline data to score consumers and rank order their credit riskiness. By using such a solution, the CU is able to maintain low levels of delinquency while growing their portfolio organically.
Credit unions know their communities and members better than anyone else. By adding tools to their toolbox that allow them to approve more of their members for loans without compromising the high credit quality of their portfolio they can deepen the communities trust in them by serving underserved members while meeting their loan growth goals. All of this can be done with tools that are readily available without giving away yield to third party loan originators.
Find out more about LexisNexis® RiskView™.