MADISON, Wis. – Eighteen months into the piloting of CUNA Mutual Group's Lenders Protection Program that began in three states, the product is now available to CUs in all 50 states that want to use the default insurance program to expand their vehicle loan portfolios by lending to members with near-prime credit scores while managing the risks that come with these types of loans if the borrower defaults. When Lenders Protection, a joint venture between CUNA Mutual and Open Lending Inc., Austin, Texas, first launched, 15 credit unions in Texas, Michigan and Wisconsin were tapped for the initial rollout (one credit union in Missouri was added to the pilot test at a later date.) Now, as the pilot winds down, 38 CUs are actively using it, and Steve Martin, director of Lenders Protection said those CUs had generated more than 5,000 loans totaling $100 million so far. Martin isn't surprised that more CUs aren't using Lenders Protection as yet. He explained it's a product that appeals to credit unions that want to go deeper with their auto loans but are hesitant to because of their safety and risk concerns. "In our discussions with credit unions about this kind of lending, we make very sure they know what they're getting into, and that there's still risk for them even with this program. Lenders Protection doesn't get rid of the risks, it gives credit unions a safety net. It mitigates their risks," he explained. Lenders Protection does this by pooling CUs' default risks. In the case of default, Lenders Protection pays the difference between the loan balance and the greater of 80% of the NADA wholesale trade value of the vehicle at the time of the default; or the amount the CU has sold the repossessed car for "Credit unions are still fairly conservative lenders," Martin continued. "This is something most of them want to do – do more loans and get more yields, especially when the yields on prime loans are very slim. Near-prime auto loans give credit unions yields that are three or four times deeper than prime loans." According to Martin, CUs typically see a yield of 150-250 basis points for below prime loans, compared to 30-50 bp for prime loans. "These types of below prime yields can be available to credit unions without the default insurance, but credit unions would be exposed to too much risk," he offered. It's understandable that state and federal examiners are concerned about credit unions taking on too much risk, but Martin says, "Some credit unions interpret that as meaning they (examiners) are discouraging credit unions from taking on more risk. It's more likely the credit union is just uncomfortable taking on more risk because it's not the way the credit union has grown up." He continues to explain that, "It's a given that if you go deeper with loans you're going to have more delinquencies and defaults. But the extent of how much more you expect and if you monitor that closely, as long as you stay close to that expectation your yield will be there. It could be a big shock to credit unions in fact what their yield could be with below prime loans." Still, to assist credit unions with their due diligence for these types of loans, CUNA Mutual has compiled a 50-page due diligence process book which Martin says credit unions can show to their examiner to demonstrate they've done their due diligence. While CUs may be interested in Lenders Protection, Martin emphasized they first have to be doing risk-based lending and be willing to take on more risk. If a credit union isn't doing risk-base lending, then this isn't the way for them to start, he said. These are the benchmarks he suggested CUs use to determine if they're ready for Lenders Protection: * willing to accept lower credit scores (580 is Lenders Protection's minimum acceptable score.) * willing to accept some risk for expanded loan opportunities * looking to increase their vehicle lending directly or indirectly * looking for higher yielding loans. Martin stressed that credit unions that participate in Lenders Protection remain in control of the decisioning all the time. It is just giving them additional criteria to put into their decision process to help them decide whether to make the loan, he said. The credit union remains in control of the servicing and collection of the loan. "The last thing we want is for an NCUA or state examiner to come to a credit union and the credit union CEO not be able to fully explain the Lenders Protection program," said Martin. Of the nearly 40 CUs currently using Lenders Protection, Martin says about half are in Texas. That's because, he said, of Open Lending's presence in the state. At this point he said about four to five CUs are joining the program a month – most of them large CUs – and he expected by mid-year to be adding 10 CUs a month to the program. -

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