Loan Committee Surge at SECU
When State Employees’ Credit Union initially created its loan review committees, the intent was to allow actual members to take another look at loans that were denied at the branch level.
Members selected by the $27 billion cooperative in Raleigh, N.C., reviewed the declined applications and frequently met with the denied members to discuss the loans and offer another source of consideration for possible approval.
On April 2, SECU's board of directors said it approved expanding the credit union's 13 member-loan review committees from 85 members to 276 serving on the peer councils.
Committees will be established in all 46 SECU districts to accommodate the 253 branches in North Carolina, according to the credit union. The new loan review committee program will be implemented July 1.
The expanded committees will allow SECU to place more emphasis on local loan review and decision making, said Jerry Harmon, SECU's chief lending officer. More than tripling the number of volunteers reviewing the loans also had to do with geography. SECU President/CEO Jim Blaine said he wanted the credit union's membership to be able to have access to the committees closest to them rather than having to drive out of their way to meet.
“From a practical standpoint, in the lending process, there can often be friction and misunderstandings,” Blaine said. “If a member felt like they didn't receive a fair hearing on the loan, they can get a second opinion from their peers. When you get to tell your story about a difficult situation, hearing that person provide more details can often change your opinion.”
Members will be selected by SECU's local managers and approved by the board to serve two-year terms, said Blaine. They must be at least 18 years of age and active leaders in the community, he added. Because the credit union's field of membership consists of state employees and staff in the education system, the volunteers selected could come from all walks of life.
“It might be a principal or teacher or it could be a bus driver or cafeteria worker. It would be helpful if they were with Kiwanis, coached little league, active in their church or in a fraternity, for instance,” Blaine explained. “The committees are a mirror of the community.”
Volunteers on the committees will not have access to Social Security numbers, birthdays or other personal information, according to Harmon. A SECU staff member will meet with them and provide the information needed to make a decision.
Training on rules, regulations, policies and procedures will also be conducted on a yearly basis and volunteers will be kept informed of any changes as they occur, Harmon said. The committees will be able to review all types of loans, however, they will not have the authority to make exceptions to board policy, he added.
Blaine said while SECU has not been sued for denied applications based on too much subjective information, the member loan review committees can help diffuse those scenarios. The credit union had less than 20 complaints filed with the CFPB, he offered. Of those that filed between April 2012 and January 2014, four were related to loans or lines of credit, two of those were disputed by the consumer and all were closed with explanation, according to the CFPB's consumer complaint database.
“A centralized system of credit scores is the most discriminatory lending process in the world,” said Blaine. “It validates discriminating against those who have less than perfect credit. Credit scores give the impression that they’re fair and reasonable but it's the exact opposite. We’re one of the few left that don't risk rate our loans.”
There isn't a credit committee at the $2 billion Municipal Credit Union in New York, but members can appeal if they are denied loans, said Mark Brantley, board chairman. However, another review is conducted by a higher level staffer.
“I think every credit union has its own makeup and uniqueness and because of that, there are regional and size differences. (The review process) should be tailored to that institution's needs,” Brantley said. “However, I think the division of duties is necessary. A higher-up loan officer is trained in this area. Whereas I may have familiarity with loans, that's not my expertise. Then, you can get into the possibility of liability.”
However, the strength of credit unions and the credit union movement has been in the way they invite their members to participate in the credit union's strategic activities in positions such as the board, supervisory committee and loan or credit committee, said Kian Moshirzadeh, managing partner of Turner, Warren, Hwang & Conrad AC, a tax, accounting and business consulting firm in Burbank, Calif., that works with nearly 150 credit unions and CUSOs with assets ranging from $20 million to over $6 billion. However, this strength also presents some challenges.
“Many committee members do not have the formal experience that would be necessary to make complex lending decisions,” said Moshirzadeh, who is a member of the National Association of Credit Union Supervisory & Auditing Committees. “For example, credit unions that may have large-balance MBLs with covenants is usually far beyond the skill set that a consumer loan officer would have, much less a credit committee member that is a member of the committee because of his eligibility for membership and not his or her work experience.”
Moshirzadeh said fundamental lending practices and concepts for less-complex lending decisions such as auto loans and Visa lines of credit can be easily taught and as long as the committee understands policies and the lending attributes that are important to that credit union, they can fulfill the responsibility of approving these loans.
“Where they may run into some issues are exceptions, and how far away from the policy they are willing to go to make the loan,” he warned.
Members who review loans should be bonded and undergo thorough training, said Ron Starr, president of Transnet Real Estate, a Novi, Mich.-based firm that works with credit unions. Even then, fraud and identity theft are possibilities.
“They really need to be trained in ALM and other areas,” said Starr. “That's not something that happens in a three-hour class.”
A volunteer loan review committee can be a benefit providing the process is structured correctly, said Michael Richards, managing associate of Richards & Associates, a Yorba Linda, Calif.-based credit union audit firm and NACUSAC member.
“The committee should work from a checklist of underwriting procedures and not depart from that scope,” Richards advised. “This would include verifying loan type, interest rate, loan to value ratio, debt ratio, perfecting of liens, credit score and approval.”
The committee should also include a sampling of loan denials to see if policies are too restrictive, said Richards. All of this should be done without access to the borrower's name and financial information. If questions arise about employment information or credit issues, those should be referred to the loan manager who will research and report back to the committee.
Still, one reason why most credit unions no longer use a volunteer credit committee for lending decisions is because allowing access to confidential information by volunteers who are also co-workers of the borrower could create legal issues with the sponsor company, according to Richards.
“Loan files contain a lot of confidential information used in the underwriting process. The credit union has a statutory responsibility to secure that information. Depending on the field of membership, volunteers could also be co-workers of credit union members,” he suggested.
Richards said it is also very important that credit unions have a quality control process for loans granted that includes a review of randomly selected loans of all types to verify compliance with board-approved underwriting guidelines and a review of charged-off loans to identify any common deficiencies. Typically, this is done by the lending manager or internal auditor. To be effective, this review should be completed by someone with the proper credentials for lending, he pointed out.
When asked how strongly do peer reviews weigh on the approval decision, Blaine said the member volunteers can override the staff's decision or suggest a counter offer but can't propose a different rate.
SECU is known for its reliance on member feedback. The transition to the new member loan review committee format will also incorporate the credit union's 253 branch advisory boards comprised of approximately 3,000 volunteers who serve as a communication link between members, SECU's staff and the board of directors, the cooperative said.
Many loan review committee members will combine with existing advisory boards and the 46 member loan review committees will be selected from the combined group of volunteers. Six members per district will serve a dual volunteer role and receive additional training for duties on the committees.
Blaine said despite how large credit unions get, they have to reach back to maintain ties with their membership. A peer review is one way to make that happen.
“You can move away to automation. A credit union is a personal financial organization. You can lend to peers but technology will take you away from that. We can all be out-teched but then we become the Well Fargos and Bank of Americas. We’re looking at those who have some blemishes due to normal life events. You may have lost a job but then you’re branded by a credit score.”