By John Flynn, Open Lending President & CEO
As the US moves forward in our ‘new normal,’ so are credit unions. Given that we haven’t been through a pandemic in more than a hundred years, it’s time to reconsider lenders’ risk management strategies for what’s to come, so we can capitalize on the coming opportunities to lend to consumers in need.
The core of risk management lies in strong policies and enforcement, which I appreciate very much as a previous credit union CEO. It’s making sure your team understands the framework and abides by it. There are always new compliance measures, economic shifts – always more you can do to help mitigate risks – both micro (single loans) and macro (across a portfolio). Pricing loan products is critical – are they competitive yet still priced for the borrower’s risk and your credit union’s risk appetite?
Ensure your loans are structured appropriately. If priced too low or the terms get too long relative to the asset, your risk can grow exponentially. If they’re priced too high, you’ll be missing out on opportunities to serve new borrowers and run the potential for reputational risk. Constantly monitor your market to make sure you’re finding the right sweet spot for your credit union’s market. Balancing growth and risk is a tricky task, but one with which credit unions in the US have decades of experience.
If your credit union participates in indirect lending, you may be losing out on loans because your credit criteria don’t fit the dealer’s needs or the potential borrower’s profile. Do you understand their business, and what they need from you to succeed? These relationships can be extremely valuable as they can bring in higher volumes of auto loans and new members. Work with them, and structure deals so everyone wins. If your credit union’s credit criteria is too restricting, it can keep you from getting perfectly good loans on the books and members in the door. If you don’t invest in these relationships, your competition will, because the dealers are looking to get more cars out the door.
Let’s also consider loan decisioning. Is your process for determining creditworthiness based on the traditional credit score and income evaluation? While this is the common approach, it can generate unnecessary risk, as you’ll deny loans that can benefit your members or you may be approving ones that, upon reviewing more data, you shouldn’t be.
Open Lending takes a different approach to determining creditworthiness. We leverage data from copious sources to help your credit union make better lending decisions. Information like how long they’ve owned their home, their bill payment history, and even social media profiles provide very useful data to better score potential borrowers. We call this our LP Score. Leveraging the data ensures a broader perspective of the consumer, allowing Open Lending to help lower our risk.
Open Lending is your partner to smartly grow your auto loan portfolio while limiting your credit union’s risk exposure. Contact us today to learn more!