Credit Unions Eye Near-Prime Lending to Boost Income
By deliberately lending more to members with near-prime credit scores and not as much to members with prime scores, two credit unions are beefing up their balance sheets.
“I don't avoid my A paper members,” explained Teri Robinson, president/CEO of the $14.8 million Pacific Northwest Ironworkers Federal Credit Union in Portland, Ore. “If one of them comes in with a loan offer from somewhere else, I will match the rate. But honestly, we don't really have that many of them.”
The credit union serves the 5,500 members of unions that belong to Ironworkers District Council of the Pacific Northwest, an area encompassing Washington, Oregon, Alaska, Montana and Idaho.
Including Robinson, the credit union has four and a half fulltime staff positions and serves its members through three union halls in Portland, Ore., Seattle and Spokane, Wash. Pacific Northwest Ironworkers’ members also use mobile banking, ATMs and CO-OP Financial Service's shared branching network.
According to the credit union's June 30 call report, its loan to share ratio stood at 100.40%, down from 104.20% in March, when it almost doubled the LTS ratio of its peers.
“I go to conferences and hear credit union executives complain about not being able to make loans or foster loan demand, and I wonder what's going on at those credit unions. I really do,” Robinson said.
Her credit union makes most of its loans to members with B, C or D paper, she noted. Most of them are for car or other types of vehicle loans, including RV and motorcycle loans, and a few are for signature loans or lines of credit.
Pacific Northwest Ironworkers’ does not offer a credit card and makes home loans through a partnership with another credit union, Robinson said. However, the credit union does offer HELOCs for members who already own homes, as well as refinancing existing home loans.
“A lot of my members find the housing approval process a challenge,” Robinson explained. “Because ironworkers usually work by the job and not for one employer, on paper it can look like they have worked for one employer for eight months and for another employer for six. We know they were doing what ironworkers do – working at one site before moving to the next.”
Much of the credit union's lending success has come from knowing its field of membership so well, Robinson said. For instance, while Pacific Northwest Ironworkers’ offers a line of credit and a signature loan, in practice the credit union will make more of the latter because they know the fixed amount and the fixed interest rate will resonate more with their members.
“There is a heavy cash culture among our members,” Robinson said, adding they tend to favor having one set payment each month.
Ironworkers build the steel frames that make up large structures such as skyscrapers, suspension bridges and major dams. According to the U.S. Department of Labor's Bureau of Labor Statistics, 2013's median wage for ironworking was $46,140 and the agency forecasted it would expand 22% per year for the next five years.
According to the NCUA's March 31 data, the latest data set for peer groups, Pacific Northwest Ironworkers’ average loan yield stood at 7.66% compared to 5.95% for its peers. In addition, its loan delinquency is below that of its peers even as its charge offs hovered just above its peers.
Robinson said she regularly points out to examiners who criticize the credit union's loan quality that loans with lower FICO scores bring in more interest income. She also credited those loans with helping the credit union build its 2.93% return on assets.
Further, she noted that during the latest downturn, nonprime borrowers were not the ones that cost the credit union the most money; it was the small number of prime and super prime borrowers.
“I really don't understand why so many credit unions spend so much time and effort chasing loans that everybody else is chasing,” Robinson said. “You want member loyalty; you want to make a difference in someone's life? When I refinance an auto loan from 36% to 16%, I am golden. The credit union is golden and that's worth it.”
Read more: How GTE Financial found its way out of the Great Recession ...
Tina Narron, vice president of consumer loans at the $1.7 billion GTE Financial Federal Credit Union in Tampa, Fla., said focusing on lending further down the FICO scale was helping the cooperative find its way out of the impact of the Great Recession.
“It's not a great secret that it seemed like we were on the way out for a while,” Narron said. “But we are doing the sort of lending that is helping us come back.”
The credit union is in the black $4 million as of June of this year, according to NCUA data. Delinquent and charged-off loans continue to steadily fall as well.
“We have a number of legacy situations which continue to mask our current progress on our books,” Narron said. “But if you look at the loans the credit union has made in the last three years, you will see a delinquency rate of just over 1%.”
Narron characterized most of her members as middle and lower income, and said the credit union had adopted a number of different underwriting approaches, such as income verification and larger down payments, to cut delinquencies and charge offs.
GTE Financial has also changed the way it collects on delinquent debts, Narron said, adding the word collections is a misnomer for what the credit union does.
“We start calling with a friendly reminder and to catch any situation early, two or three days past due,” Narron said. When members experience a job loss or a cut in work hours, GTE Financial tries to work with them to refinance the debt or bring the payments to a level where they can be paid, Narron said.