By Heidi Overman
This April, I had the opportunity to sit in on CUES School of Consumer Lending, facilitated by Brett Christensen, owner of CU Lending Advice, LLC. This brand new offering from CUES, which will be repeated in September, allows lending staff to learn about the current macro-economic environment and break out of the lending “boxes” that bind them. Among several key takeaways, we heard Christensen’s thoughts on how to responsibly underwrite higher risk loans.
According to Christensen, there are a number of reasons to support higher risk lending, most importantly because these are the members with the greatest need and the fewest options. He asked attendees to remember the credit union mission of “people helping people.” Credit unions seek to serve all members well, and members are fiercely loyal for this reason. Higher-risk members will be deeply loyal to the credit union that offers them a chance.
Responsibly writing higher risk loans starts with offering secured loans, according to Christensen. Secured loans limit the risk, yet allow a relationship with members to build.
Members with poor credit can choose to pay their loans on time. And lending staff should use the interview process to build the foundation of a performing loan. This begins with being positive and connecting emotionally. Using phrases such as “help me” and “I understand” may seem simple, but tend to go a long way in building a relationship with members, he said.
Christensen also promotes learning to ask conversation- and sales-promoting questions during the interview process. For instance, asking a higher risk member how much of a down payment they will be making should be a mandatory question, he advised. After all, a member typically would not offer a cash down payment unless asked and, even though a down payment does not guarantee repayment, it does support the member’s overall commitment.
Another key to writing higher risk loans: End the interview with a firm close. This includes a full review of the payment amount and due dates and setting up an automatic transfer or payroll deduction, Christensen said. Then, review late fees with the member, noting consequences of late payment, and review the contact schedule should a payment be missed.
Christensen also advocates for including an insurance requirement. Finally, thank members for their business and let them know if they stay in line with their loans, the credit union will be a source for future loans. In the event a member falls behind, another key to responsible higher risk lending is: “Be prepared to collect higher risk loans more aggressively,” he said.
A final word of advice from Christensen when considering higher risk lending: Management and the board of directors must promise not to “FREAK OUT when the first few D and E paper
loans go bad.” Some will, but if they are priced appropriately, it will be worth taking the risk to serve additional members.
Heidi Overman is professional development coordinator for CUES.
Attend CUES School of Consumer Lending, Sept. 17-18, 2012, at Embassy Suites Hotel, Schaumburg, Ill.
Brett Christensen will also lead CUES Advanced School of Consumer Lending, Sept. 19-20 in Schaumburg.
