When it comes to underwriting consumer loans, some communitydevelopment credit unions have found success by looking at otherfactors besides credit scores.

The three leading national credit bureaus – Equifax, TransUnionand Experian – are meant to provide credit unions and otherfinancial institutions with a guide for their underwriting. A givencredit score can help speed up the process and give the creditunion a reasonable idea about the likelihood a given borrower willrepay the loan.

But credit scores are typically only a quick a summary of aperson's credit history.

Two leading community development credit unions, the21,000-member, $91 million Shreveport Federal Credit Union in Shreveport, La., and the27,000-member, $161 million member Hope Community Credit Union in Jackson, Miss., have found goingbeyond the credit score to be a successful lending strategy.

Shreveport's loan application system requires that all memberswho apply for a consumer loan and who have a credit score of below600 or a bankruptcy in their history have to answer additionalquestions about their financial history, according to the creditunion. This allows Shreveport to both protect itself from anyunforeseen risks and to evaluate members who might look worse onpaper than they actually do.

“We have found that a lot of our underserved or lower income members might have a credit scorewhich looks discouraging, but which might reflect only a fewexplainable items,” said Shreveport FCU President/CEO Helen Godfrey Smith, adding that it's the same process with thebankruptcy questionnaire.

“Yes, they might have had a bankruptcy, but why did they haveone? Was it an unavoidable medical expense? An unavoidable jobloss?  We believe bankruptcy was created to help deal withsuch things and that a borrower should not be penalized because ofthem.”

At the end of 2012, Shreveport had a net worth ratio of 15.45%,well above its peer group which is made up of both CDCUs and non-CDCUs, according to its most current NCUAfinancials. In addition, at 1.48%, the credit union's return onaverage assets is roughly three times that of its peers.Shreveport's ratio of gross income to average assets was 10.37% inDecember 2012, more than double that of its peers. The credit unionalso led among its peer group in the average loan yield category at10.49%.

Smith said the credit union had recently determined that roughlyone-seventh of their $70 million loan portfolio was made up ofloans that required additional underwriting and $5 million of theportfolio came from loans that the credit union would not have madeif it had relied on credit scores alone.

Shreveport's lending manager, Latonya Kelly, reported that thecredit union has 15 loan officers spread out across eightbranches.  Working with members who need the extra layerof underwriting could have taken a lot of additional time but Kellysaid the loan officers have gotten it down to a science to preventit from killing efficiency.

Still, the additional time and member attention does mean highercosts and that can be seen in the Shreveport's ratio of netoperating expenses to average assets, which was 5.34% compared tothe peer average of 2.91% at the end of 2012.

Smith said some of those added costs come from working with apopulation that tends to want to conduct more transactions inperson than over the phone or on a computer. However, she defendedthe additional costs more underwriting might bring.  

“So many of our members would just be put off from applying fora loan at all if it were only done through an automated system,”Smith said. “Many of them already know they don't look good onpaper and many expect us to say 'no' already.  Workingwith a loan officer is the only way many will do it.”

Working with a lower-income population may sometimes mean thatthe credit union's ratio of charged-off loans to average loans ishigher than its peers. Shreveport's ratio is 0.93% compared to itspeers at 0.58%, according to the credit union's NCUA records.

Smith acknowledged that, but also said the figures have to beconsidered in context. In 2012, for instance, Shreveport wrote $38million in consumer loans with $14 million of those requiring theadditional underwriting, Smith said.  But of that $14million, which carried a net average interest rate of 12.56%, only$105,000 was charged off. As a result, making those loans was justgood business sense, she said.

Hope Community Credit Union takes the Shreveport policy a bitfurther and does not consider credit scores in deciding whether ornot to make a loan at all, however, the cooperative does considerthe score when pricing its loans, according to Sandra Patterson,vice president for consumer lending.

Like Shreveport, Hope's net worth ratio at 11.01% came in higherthan its peers, according to the CDCU's NCUA financials as ofDecember 2012. Its return on average assets lagged at 0.16%compared to its peer group at 0.62%.

Hope had a ratio of net chargeoffs to average loans that ishigher than its peers at 0.88% compared to 0.64%. Its yield onaverage loans was also higher than its peers at 6.31% versus5.70%.

Patterson said the credit union will let the credit score guideits loan underwriting when they are high, but follows an approachsimilar to Shreveport's when it comes to lower scores on loanapplications.  

Hope's approach is not as formalized as Shreveport's is butsimilar questions are asked to discover the member's reality behindthe credit score, which allows the credit union to also uncoverother problems in a member's financial life, she added. As anexample, Patterson described a recent incident when a woman on theedge of retirement had come in for a loan to help replace her car,which had recently become too costly to repair. 

Looking closely at her financial situation since she had acredit score on the lower end, Patterson said Hope hadidentified three active predatory loans the woman had taken out. Hope helped her to payoff the loans and obtain a used car loan to replace her automobilewhile cutting her overall debt payments by $158 per month. In theend, Hope firmly believes that simply lending to lower incomeconsumers does not have to be unprofitable, Patterson offered.