Earlier this year, I encouraged credit unions to take a tough look and their underwriting process. Specifically, the tendency I’ve noticed for credit unions to default to no and work their way up to a yes. In this article, I want to take a more in depth look at how credit unions can go about changing that mindset to get more out of loan applications.
There are many paths that a credit union could travel down in the pursuit of evaluating a “never say no” practice and I’ll run through a few of those ideas that are often discussed and occasionally implemented (recognizing that I will not be covering all possibilities that are available nor necessarily the best one for your credit union).
A simple first step is a second look approach for all loans that your team wishes to deny. In other words, how do you create a lending member advocate? That one person that is the last stop in the review/underwriting process charged with the task of determining what else can be done before the denial is written and delivered.
Just want to pass the application on in lieu of a no? There are firms (credit unions, banks, finance companies) that would be happy to take a look at those downstream opportunities. Selling denials is not an uncommon practice. And unfortunately, I get contacted monthly from third party firms that are interested in paying credit unions for denied loans. Certainly, it is a business option but not one very high on my list of things to follow up on.
If you don’t like the idea of just selling off those denials to the highest bidder, there’s also the network sharing approach to denials–the top alternative to working out a way to say yes, in my mind. There are credit unions in the network that would be interested in taking a look at your loan for a possible offer to the member. Would you be willing to participate in the loan to the tune of 10% and participate out the remainder? Assuming a credit union will buy (set terms and conditions for 90% of the loan), you retain the member, you service the loan and you have shared out 90% of the risk based on the terms of participation.
What would be required to make this work? A participation loan policy. Partnering with a credit union or group of credit unions that would review the loans and potentially bid on the presented loans. A defined lending workflow for identifying what loans would be eligible to be participated. Operational rules of engagement will be necessary for defining the type of loans that are eligible for review by your partner credit union (there may be loans that simply don’t qualify based on certain credit criteria you may define with your credit union partners. Included in the documentation will be how funds settlement, documentation and reporting would be managed.
If any of the above ideas pique your interest let’s start a dialogue. The tools and the opportunity exist today.