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Lookin’ for Loans in All the Right Places
Tuesday, October 17, 2017 6:35 AM

Bob Rehm, CUDE, VP Sales and Service, Credit Union Resources

At the recent Leadership Conference, our impact group began a study of the state of lending. The group engaged in a lively discussion with subject matter experts on the trends in consumer lending and how adaptation of data analytics and technology are changing the traditional methods.

Our panelists were Shana Richardson of SerTech, Pierre Cardenas of Capital Credit Union, and Sue Travis of CU Members Mortgage. Dean Borland was our facilitator extraordinaire. In addition to the impact group session, the same panel was featured in a breakout session for the general conference.

Among the questions posed to the participants was a simple one: What’s the biggest challenge in lending? One panelist suggested data competency could be a stumbling block. Due to CECL, credit unions might end up overcapitalized, if they can’t effectively manage data for the calculations.

Another suggested that the ease of use and convenience offered by Fintechs will be a challenge for credit unions. Originations at SoFi, Prosper and Lending Club are growing. In the case of SoFi, they recently raised an additional $500 million of equity to expand into new regions and move closer to becoming a full-service financial services company. But some in the group wondered if online services will be able to duplicate the relationships of person-to-person interactions.

Making it easy for the borrower
In a previous article, I wrote about the customer effort score, which is consumer research that tries to determine how much effort is required to do business with an organization. During the sessions, we talked about borrowers’ expectations and how those expectations may be set by organizations that focus on ease of access to services and customer satisfaction.

That topic launched us to Rocket Mortgage. How are they doing what they are doing? One of the panelists submitted that it’s very good technology, but if the applicant has issues, it’s not going to be fast. More about Rocket later.

So, the question was asked, mortgage lending is so highly regulated, how will lenders respond to the need to offer prompt service? To narrow the window, some lenders are rolling out an electronic approval process—tax transcripts, income validation, etc.

Another hurdle could be the speed of the appraisal process, which can be an issue for lenders in some markets. Alternatives to the traditional appraisal are beginning to show up, such as Freddie Mac’s automated collateral evaluation. ACE assesses the need for a traditional appraisal by using data from multiple listing services, public records, and historical home values to determine collateral risks.

For several participants, part of the answer is credit union staff; you have to have good people. Good underwriting, plus streamlined processing, requires good people. Also realize that the particular loan request may be less important—give the borrower lots of other options for additional types of loans. Another aspect of staffing is that credit unions need people with sales experience to sell more backend and additional loan products. 

Data analytics and servicing of members
Several times during the discussions, the topic turned to the challenge and opportunity of data analytics. As mentioned earlier, it helps with CECL. But analytics can also help you measure the effectiveness of systems, people, and physical locations. For example, you might want to know who is coming through your branches vs. connecting via mobile. 

And how about profitability? Credit unions can use credit analytics to serve a much larger member base, that being those with lower credit scores. One credit union participant found that his members with mortgages look to his credit union for other products. So, for them, the mortgage holder was the most profitable household.

Some warned that there’s a lot to consider. Beware of the deluge of data! You will likely need help interpreting and using data. 

How do we compete against Rocket Mortgage? Is it real?
In some cases, Rocket Mortgage can close in 10 days. But that timetable points to a very straightforward, uncomplicated borrower. Most credit unions want mortgages that fit secondary guidelines. The originator has to document and validate, which takes time. One of the panelists noted that Fannie Mae’s Day One Certainty, which fully approves the loan up front, will help. 

The member experience is key; they want to connect via phone, internet, and mobile. One participant said going forward that they can’t tell a member to come in to a branch to sign papers. Technology is changing the way things get done.

To remain competitive in this world of increasing technology, what kind of lending partner should a credit union look for? The relationship with the vendor has to be part of a strategic plan. Look for those aspects of the service-level agreement that support the tactics of the credit union. Partners must be responsive and flexible. APIs need to be easily implemented. Credit score screening is getting better. Between better APIs and better credit screening, credit unions may be able to seize an advantage. 

How do we get the low-hanging fruit of direct member loans?
One panelist suggested that non-banked, under-banked, immigrants, etc. are a rich target, and one that regulators want credit unions to serve. Check out data from bureaus that can give you new groups of borrowers. Targeted marketing data is cheaper than FCRA data. You choose many different segments, including those members who already have a loan somewhere else. 

One of the credit union participants reported that, for them, auto loan recapture is very effective, with an ROI as high as 6 percent.

For mortgages, low-hanging fruit could be as simple as better marketing. Have loan products front and center on the credit union’s website. Make sure your staff is trained to answer questions and get the member to a mortgage loan officer ASAP.

One participant suggested that among credit unions, the highest-paid employees should be the rainmakers for direct loans. That means credit unions need to get good people and separate the member service from the operations. Put good people on the phone and chat. That’s where your growth is. Sales people should be in your remote delivery area.

How do I assess future members, demographics, credit scores, etc.? How do we go after the non-prime market?
One credit union in the group books lots of subprime loans and is making good money—ROA = 1.42; avg credit score in the 400s. Another commented that everyone is after the 800 score, and with long-term rates projected to be about 3.00 percent, what are we going to do to make money on loans across the long haul? 

One participant said they can show that relationship mitigates risk (e.g., checking accounts). Delinquency is much lower on their borrowers that have a checking account with the credit union. “We see lots of opportunity," the participant said. "Our credit union doesn’t want prime paper. We want near prime. And it’s good for member relations, since we are supposed to be in the risk business."

In summary, the impact group will continue to probe the gap between the historic bricks-and-mortar delivery system and getting a loan online. The ease of getting a loan will factor into the mix of how and where people get loans. New entrants will continue into the market with mobile apps and financial tools that simplify the loan process and provide the fast loan experience that consumers want.

Bob Rehm is vice president, sales and service, for Credit Union Resources, Inc., a wholly owned subsidiary of the Cornerstone Credit Union League. He can be reached at brehm@curesources.coop.