Credit Score Decline Has CUs Seeking Alternatives
Like most parts of the country, unemployment has hit some members of ORNL Federal Credit Union in a devastating way.
So much so that keeping up with loan payments has been a struggle for some by leading to a drop in their credit scores. The $1.3 billion ORNL FCU in Oak Ridge, Tenn. knew it had to use a solution that would not only help it price their near and nonprime segments of their portfolios but also achieve higher net return on assets.
“Unemployment in East Tennessee is hovering around 10%. Members have been touched by that,” said Emily Gibson, assistant vice president of lending at ORNL. “We had to look at internal programs to facilitate payment for loans already on the books.”
The credit union turned to Lenders Protection, a program offered through Open Lending Inc., an Austin, Texas-based auto loan underwriter. The program aims to get credit unions to take a second look at existing applications, said John Flynn, president/CEO. Typically, a credit union will look at 100 car loans, approve 50% and then fund 35% of that percentage, he explained.
“You’ve got this incredible amount of applications that will be countered or become a flat denial,” Flynn said. “Most credit unions don’t go as low as a 620 FICO score.”
Lenders Protection is a risk management program with default insurance coverage that allows for the approval of near to nonprime auto loans. The program features loan terms up to 72 months, loan-to-value ratios up to 125%, not including additional loan products, vehicles up to seven model years old, and eligibility for borrowers with credit scores as low as 580.
Flynn said for most credit unions, these program features will significantly expand risk-based lending guidelines, reduce or eliminate down payment requirements, extend loan terms and allow the credit union to serve more members. Credit unions maintain control of credit decisions, loan servicing and collections, portfolio yield targets and risk-based pricing configuration rather than delegating these functions to a third party.
The typical net yield on ORNL’s auto loans is 5%, Gibson said. She likes that Lenders Protection allows room to build one’s own yield. It has become a strong component of the credit union’s indirect lending portfolio and is also used a first-time loan program. ORNL has approximately $156 million in indirect loans on the books. Eighty percent of the autos bought are used ones through the program.
“Basically, it’s a nonprime lending program that expands our current program for deeper buying power,” Gibson said. “It has strong loan to values.”
Gibson said she also likes that Open Lending is flexible in listening to and addressing specific needs. After a recent conversation with the credit union’s support person about reports, she is now able to have customized reporting in real time rather than on a monthly basis.
Since 2004, more than $1.3 billion in credit union auto loans have been underwritten and insured through Lenders Protection, according to the company. The program’s launch goes back to December 2003 when Open Lending entered into a 50/50 joint venture with CUNA Mutual Group to offer Lenders Protection. Insurance coverage was provided by CUNA Mutual Insurance Society.
In September 2009, Open Lending purchased its 50% interest in the program from CUNA Mutual. As part of the agreement, CUNA Mutual made an equity investment in Open Lending to further its development of Lenders Protection. In August 2010, Open Lending formed a new partnership with the AmTrust Group.
Lenders Protection is interfaced within the CUDL platform, Flynn said. The integration allows CUDL’s credit union partners to submit and underwrite loan applications for the program from within the CUDL workflow. Open Lending also works with other platforms.
The normal turnaround to set the program up is 30 days, Flynn said. There are no minimum requirements or setup fees. Open Lending only gets paid if the credit union accepts coverage on the loan, he added.
“Over the last two years, there has been a major shift in FICO scores,” Flynn noticed. “It’s not because people are paying late. Banks are cutting credit limits coupled with high unemployment rates. So many credit unions have not caught up with this are afraid to lend to someone with a 620 score. I think this is a way to help more underserved members.”
Gibson went back to how unemployment has led to some dire situations for many people.
“I don’t think there isn’t a part of the country that hasn’t been touched by what’s been happening. One of our strengths is offering solutions to help those who have been affected. We want to be able to give them some options.”