Risk-Based Lending: Serve More Members and Increase Loan Volumes

Judy Dahl
February 6, 2007

There’s been a sea change in credit union attitudes toward risk-based lending (RBL). Ten-plus years ago, many in the credit union movement vehemently opposed it. They believed pricing loans based on borrower risk violated the credit union philosophy of treating all members the same.

But from 1995 to 2005, the percentage of credit unions using RBL increased dramatically—by 308%—according to CUNA’s 2006-2007 Environmental Scan. Between 75% and 90% of all credit unions over $50 million in assets now offer this option. “And in general, you see credit unions of all asset sizes beginning to do it,” says Bill Klewin, assistant vice president, Loanliner lending products, CUNA Mutual Group, Madison, Wisconsin.

There’s still ample room for RBL growth in the credit union marketplace. According to CUNA’s 2005-2006 Credit Union Lending Survey, just over half of credit unions (53%) are using RBL. And only about half of credit unions with RBL are making loans to members they wouldn’t have otherwise, according to CUNA’s 2006-2007 Environmental Scan.

Some credit unions still believe RBL doesn’t fit their strategies. State Employees Credit Union (SECU), Raleigh, North Carolina, is among the credit unions operating successful loan programs without RBL.

Other credit unions firmly believe RBL is a useful strategy, if not a necessity. “In my opinion, at some point everybody needs to be doing RBL to be competitive,” says Claire Ippoliti, vice president of lending for Philadelphia Federal Credit Union and also an executive board member of the CUNA Lending Council.

RBL enables credit unions to reach out to higher-risk borrowers, keeping them from predatory lenders. It also lets credit unions offer lower rates to the most creditworthy members, rewarding their excellent credit habits and keeping them from the competition.

Because RBL is complex, it’s important for credit unions to do their homework before implementing it. A 1995 NCUA letter notes that successful RBL demands sound planning, specialized expertise, and reliable monitoring and control systems. Pricing loans properly and adjusting rate tiers as needed are among essential RBL success factors.

And now that more credit unions are comfortable with RBL concepts, says Klewin, it’s time to bring its benefits to more members. The NCUA’s letter notes that “credit unions should engage in RBL, not as a means of re-pricing existing balance sheets, but as a tool to reach out to the under-served and take a risk that might otherwise be avoided.”

Profiles of five credit unions using RBL illustrate how the practice can help credit unions extend their lending services to more members at both ends of the credit spectrum. BECU, Franklin Mint Federal Credit Union, Oregon Community Credit Union, Philadelphia Federal Credit Union, and Travis Credit Union are all lending deeper into their memberships while successfully managing risk.

This executive summary is from a CLC white paper entitled “Risk-Based Lending: Serve More Members and Increase Loan Volumes.” Find the entire paper at http://www.cunalendingcouncil.org/tools/research.html.