Credit union directors across the country are looking for ways to stand out in their markets by returning to the foundational philosophy of the movement to serve underserved borrowers. While many directors see great opportunity in this initiative, management teams struggle with the possible negative impact that no file or thin file borrowers will have on their loan portfolio.
First Time Auto Buyer
One such product that credit unions are wrestling with is the first time auto buyer loan. Typically, credit unions are evaluating no file or thin file borrowers and making their decision primarily on their relationship with the member. This may suffice for very small credit unions but as the industry is consolidating through mergers, it is becoming more difficult for credit unions to know their members well. In an effort to compensate for insufficient firsthand knowledge of the member, credit unions are using information like address stability, job stability, and LTV to make a credit decision. The problem is that it is hard to qualify what this information means when it comes to the borrower’s ability to perform on a loan. Without the capability to confidently assign a level of risk to these loans, the credit union is left to mitigate risk by limiting the number of these types of loans they book as well as the dollar amount of each loan. With a limited portfolio, the impact of each non-performing loan becomes much larger as a percentage of the whole. Many times these programs are abandoned due to poor performance.
This is where the need for alternative credit scoring enters. If a credit union can get a score for a borrower with no trade line history, they can more confidently assess risk. With more confidence in the quality of the portfolio comes the ability to continually grow the portfolio and sustain it long term.
This offers the Credit Union the ability to gain a competitive advantage in their markets through:
- A unique product offering.
- A new opportunity to develop relationships with underserved borrowers that will deepen as time goes by and other products are cross-sold.
- The opportunity to book new loans that will increase the average yield of their portfolio.
Very few credit union are using alternative data to score borrowers. As most credit unions have a limited field of membership, using alternative data can widen the potential borrower pool. In the long term, a higher number of potential new borrowers means more opportunity down the road for cross sales. The result is a board of directors that feels it’s fulfilling the credit union mission and a management team that is moving the credit union towards a strong future.
Check out this white paper for more information: Construct A New Way to View Risk.