Desperate for Loans? Don’t Get Desperate with Underwriting

Lisa Freeman, Credit Union Journal
March 11, 2008 | COMMENTS

Credit unions may be desperate to bolster sagging loan volume, but one expert warned against taking a “desperate times call for desperate measures” approach to lending.

“The fact of the matter is, whenever loans get tighter, credit union folks say, ‘let's broaden our horizons,'” observed Bill Klewin of CUNA Mutual Group. “They look at making arrangements with independent auto dealers, appliance dealers, etc. The key is to make sure they don't relax their lending standards and continue to do their due-diligence.”

Though Klewin said he didn't expect to see a “tidal wave” of credit unions seeking out indirect lending deals with independent auto dealers or appliance dealers, he said there's no question that some credit unions are looking to such avenues to fuel-inject their loan portfolios.

“When they set up these arrangements they should be no different from the arrangements they have in place with the big dealers,” he suggested. “You want to set up your credit criteria the exact same way. You have to do the due-diligence that the dealer is completing all the paperwork properly, that they understand your credit union's credit parameters, that they're doing the Truth-in-Lending disclosures, following the lemon laws, etc.”

Klewin added that credit unions do need to be careful about which independent dealers they do business with, noting the “fly-by-night” reputation some have. “Sometimes stereotypes do have a rational basis,” he observed.

One of the potential concerns when a credit union forges a relationship with an independent dealer, Klewin noted, is the amount of subprime business being done there. By establishing set credit score limits, a credit union can avoid any potential subprime problems.

What's not Needed

“What you don't want is a situation where you've increased your loan portfolio, but it's all 580 credit scores,” he commented.

That said, Klewin cautioned against painting all subprime loans with the same brush, noting that when problems in the market, such as the ongoing subprime mortgage meltdown, occur, “the natural inclination is to flee to quality”—a reaction that sometimes makes good sense and sometimes is just plain irrational, he noted.

“There's some sense to it. If the guy can't make his mortgage, what are the odds he can make his car payment,” Klewin pointed out. “But if you are doing your underwriting correctly, there are still loans to be made in the subprime world.”

Klewin said has already seen and expects to continue to see credit unions shying away from all sorts of subprime loans, not just subprime mortgages, and to a certain extent, it may make a lot of sense to do so until the market shakes out, but credit unions may need to take both a regional and case-by-case approach to this.

“If you're in California or Massachusetts or Vegas, where there have been big meltdowns in the housing market, fleeing to quality across the board may be a prudent thing to do,” he offered. “But if you're in Wisconsin or Des Moines, Iowa, for example, that may not make sense. You may need to take a closer look to make sure you're not missing a good lending opportunity.”

Lisa Freeman is the managing editor of Credit Union Journal. This article appeared at www.cujournal.com and is reprinted with permission.