Don't lose sight of members' perceptions.
By Brett Christensen
Not surprisingly, a credit union loan program that effectively serves members is more likely to rate well on other lending metrics, such as loan-to-share ratio, loan growth, and delinquencies. But as you lead your people through the trenches of making loans every day, it's easy to lose sight of how members perceive your lending operation. When you're ready to take a pause and consider this key question, here are some food-for-thought questions you'll want to answer:
- Are you offering the loans your members need? If you don’t have credit cards, mortgages or business loans, you are just inviting your member to go to a competitor. And the problem with sending them to a competitor is that they might find out they like it there and not come back.
- What is your denial rate of consumer loans? I can make the case that this is the most important number to your members. They could care less about your return on assets, expense ratio, "misery index" (delinquency and loss ratios) or cost of funds. I think that if you are SEG-based, you should be looking at a consumer loan denial percentage of 10 percent to 15 percent and, if you are community based, you should be no higher than 20 percent to 25 percent. Please note that I am just fine with a 40 percent to 50 percent denial rate on indirect auto loans because it is inherently higher risk.
- What percent of your consumer loans go out the door each month in C, D and E paper?Or asked another way, “Does your credit union love to make loans to all members or does it just love to make loans to members with good credit?” If your credit union has an average loan yield above 6.5 percent, it tells me that you have a large percentage of C, D and E paper consumer loans on your books and you do not hold a large percentage of your loan portfolio in mortgages. Ideally, I think you should target an average loan yield between 5.5 percent and 6.5 percent. You should have no problem turning a good bottom line with a loan yield in this range. The following loan portfolio composition by credit tier should give you an above-average loan yield: A+ and A paper: 55 percent; B paper: 20 percent; C paper: 15; and D and E paper: 10 percent.
- Are your employees able to quote your low prices for GAP and extended warranty to your members? Encourage your employees to try to save your members significant money on the insurance products, even if your dealer partners shake their heads about it.
- How quick and easy have you made the process of acquiring a loan? Good luck to you if you are still entrenched in the 1992 lending model of face-to-face loan interviews at a branch combined with a manual and paper-driven process. If you are not diligent, technology will leave you behind.
Make it a great year at your credit union by measuring your lending operation for success and then working on your areas for improvement. Brett Christensen is the owner of CU Lending Advice, LLC. Christensen will lead CUES School of Consumer Lending, July 18-19, 2016, and CUES Advanced School of Consumer Lending, July 20-21, in Seattle. This blog post is an excerpt from Christensen's article, "Measuring the Success of a Lending Operation" in the premium content section of the CU Lending Advice website. Photocredit: Dollarphotoclub.com/corund
