Nonprime Loans Hold Credit Union Opportunity, Says CMG Exec
LAS VEGAS -- With careful controls, credit unions stand to reap profits from lagging auto portfolios by offering more nonprime loans, according to a CUNA Mutual Group executive.
Addressing a breakout session here at the annual Auto Lending Symposium of Credit Union Lending Direct Corp., Steve Martin, director of CMG's Lenders Protection Insurance, advocated CUs take a much closer look at dipping below 680 credit scores because of major income opportunities.
"But it all has to be done smartly and with care given to relaxing some of the limitations," declared Martin.
In Martin's view, there are "way too many credit unions with squeaky clean portfolios simply unwilling to take a calculated risk" in dropping credit scores to reach a market segment that is being bypassed.
He stressed he is by no means advocating putting the CU in risky financial straits, but with appropriate due diligence nonprime loans can be successful without running into regulatory problems like the NCUA risk alert.
The NCUA risk alert on subprime issued two years ago dealt with third parties, he noted, in which CUs handed over servicing and loan decision-making. It was noted that the NCUA alert figured prominently in the 2006 Centrix Financial bankruptcy in Colorado and which for months has been the object of CU litigation.
For the last two years CUs have sought to unwind their old Centrix portfolios as the firm under new management and following court action changed its name to Flatiron Financial Services.
On prime credits, Martin maintained that competition in recent months has become particularly keen with large banks and captives capturing the lion's share of the business. Besides, "there's little money to be made" in prime as many CUs are discovering, he said.
But CUs, he said, can earn as much as 200-300 basis points on nonprime credits by loosening up in such areas as down payments, term limits and loan-to-value ratios and doing it in such a way that it becomes attractive to the dealer and borrower.
In the current environment, some CUs simply "deny loans below 680", but the fact is he said good yields can be secured on scores of 650 or slightly below and "it's all a matter of how loan decisioning is handled."
"Everybody in the world is competing on the good borrowers with scores above 700 and there's very little risk," he said noting the margin squeeze has become so tight CUs are constrained to cover the cost of funds.
Before venturing into nonprime, Martin urged the CU lending staff "to get the financial people involved" as well as the board to appraise them that "there will be more defaults, delinquencies and charge-offs."
But that should not be a cause of alarm since CUs stand to still make money, he concluded.