Lending Data & the Credit Union Mandate

The very first provision of the Federal Credit Union Act declares that, in addition to promoting thrift, credit unions exist to create a source of credit for members to be used for provident or productive purposes.

The lending department is key to credit unions fulfilling this mandate. Your credit union’s loan products help members build better lives, with favorable rates and terms that promote thrift.

Back in 1934, when the FCUA was signed into law, most credit unions had occupational fields of membership. The rest were associational, mostly religious in nature. A lack of competition, coupled with a culture that centered on the workplace and church, made credit unions a go-to source for credit. It was easy for credit unions to meet individual’s credit needs because they were, in most cases, their easiest or only option.

Today, ensuring members are aware of your credit union’s ability to offer provident or productive credit isn’t as easy. Credit unions face far more competition in the marketplace, and consumers are inundated with advertising that pitches hundreds of options…many of which may seem thrifty, but are far from it.  That’s why it’s important for credit unions to identify opportunities to assist members when it comes to their financial needs. Hanging out an attractive shingle isn’t enough anymore.

Thankfully, data can greatly improve credit unions’ ability to reach out to members, fulfilling their mandate. One way is to use data to manage risk and, in turn, grow loans.  For example, your lending data can help you determine if your underwriting criteria are too conservative. One of our credit union partners had long held the belief that loans to members with scores below 700 were significantly more risky, and had restricted auto-decisioning them for many years.

However, after comparing the performance of loans with credit scores greater than 700 against loans with scores from 660 to 669, using CU Direct’s Lending Insights portfolio analytics, the credit union discovered very little difference, opening the door to new loan opportunities and serving more member needs.

This discovery, coupled with other underwriting changes spurred by data research, resulted in the credit union experiencing an annualized 3% loan growth, faster approval times for members, more competitive pricing and absolutely no additional risk to the credit union’s portfolio.

It’s also important to track credit scores in order to determine if members have increased their credit risk, or if they have improved their scores and can handle more credit. Based on the outcome, credit unions have the ability to determine which members may need help to improve their situation — perhaps consolidating debt from other high cost lenders that are making the loans difficult to pay — and thereby causing credit scores to slide. And, if the latter situation, provide an opportunity to help members make smart new credit choices…with provident and productive outcomes.

Data can also help your credit union ensure it is providing the products and services your members need. Your credit union’s field of membership has probably grown and changed since it was chartered, not to mention the needs of your members (and consumers) have mostly likely changed over the years, too. As those changes have occurred, your product lineup has also developed and evolved accordingly. Those products shouldn’t be developed on a hunch, trend or opinion. Instead, data should lead the way.

Data can be used to analyze loan originations by age group and further categorize them by loan type, term and amount. This first step is important, because it can reveal a shift in member needs and identify which products are meeting those needs and which aren’t. Additionally, data gathered through the origination process can determine if other credit providers are meeting the needs of your members, and present ideas for how your product and service lineup can be altered to better serve members.

If you participate in an indirect lending program, data can reveal which dealers have a high level of member satisfaction, and are acting in their best interests. An example of this, one of our credit union partners uses its data to track delinquency and charge off rates by the originating dealer. The analysis has helped the credit union identify dealers that are/were operating under poor, and sometimes even fraudulent, practices.

Data can help credit unions increase market share and profits. And because credit unions are cooperatives that leverage economies of scale and revenue for the benefit of members, these practices and others ultimately help them fulfill their mandate as set forth by Congress.