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|Graduates of the Winter 2015 CU Development Educators Training stand with training staff at the American Airlines Training & Conference Center in Dallas, Texas.|
|L-R: Rick Schmidt, CEO of WestStar CU; Richard Holloway, CEO of Alta Vista CU; and Ray Shams, Chief Lending Officer for Xceed Financial FCU|
Hailing from Las Vegas, where the bulk of his members are gaming employees, Schmidt’s perspective illustrates a phenomenon gaining speed across Nevada, California, and the nation. Tarnished by the Great Recession, many borrowers are still too risky to lend money to, or too young to show established credit.
That’s on paper. The reality is, several of these individuals are just as creditworthy as their peers with higher or established credit scores, for various reasons. Credit unions have an opportunity to fill this gap, a fact that many CEOs and lending executives are starting to realize.
“About 70 percent of people who apply for loans at our credit union have a credit score under 650,” Schmidt said. “Does this mean they’re not worthy of borrowing from us, or they’re bad people? We can’t completely use the past to judge their future because the past is so, so skewed.”
Research points to the same conclusion. A migration toward “holistic underwriting” by some credit unions and banks is stirring in the ranks, according to a white paper released in August by the Credit Union National Association’s (CUNA) Lending Council. Folks who had good credit are now seemingly subpar due to financial setbacks during or after the recession—usually the loss of a job, home foreclosure, or sometimes both. They are “still willing to pay their debts,” the council’s research states. “There is room for loosening some underwriting standards while still being prudent lenders.”
A commentary published by the Federal Reserve Bank of Cleveland in November 2010 reminds lenders that consumers’ credit scores aren’t “totally within the individual’s control.” The odds of someone repaying a loan aren’t completely dependent on his or her score, but rather “their translation into the level of riskiness they represent at the current time.”
Further research issued by the Applied Research Institute—a consortium of credit unions in California, Nevada, and other western states—validated this point in a September 2010 analysis, entitled New Consumer. “Standards need to be adjusted,” it states. “If not, credit unions are likely to unnecessarily over-tighten and damage the service they provide their members, and lose out on potential loan opportunities.”
This forward-looking approach of seeing consumers in a new light goes even deeper. Technological improvements to underwriting and so-called “behavior profiling” and “big data mining” are vetting the right opportunities for lending at some financial institutions, said Karan Bhalla, managing director of IQR Consulting, a firm serving both credit unions and banks.
“Behaviors tell a lot,” Bhalla said. “They tend to be very strong indicators of loan performance.”
Studying payment behaviors and decision habits isn’t new. But in this day and age, larger amounts of information and analysis on credit union members and bank customers is helping anticipate the exact moment they’ll need a loan or credit, along with their chances of default. Banks, especially the large ones, are ahead of the curve on this trend.
However, even the smallest of credit unions have enough data to start crunching numbers and charting possibilities.
“In many cases, you can still lend to someone even if they don’t have a good FICO score,” Bhalla said. “There is huge potential for credit unions of all sizes, a few of which are at the beginning stages of this. For many, it will be a leap of faith.”
Click here to read the full perspectives of WestStar CU CEO Rick Schmidt, Alta Vista CU CEO Richard Holloway, and Xceed Financial FCU Chief Lending Officer Ray Shams within the latest News and Views column on Pages 6-7 in the February/March edition of Credit Union Digest!