Lenders learn early in their careers that taking a conservative, risk-averse lending position is the best strategy to maintaining a grade A rating and a healthy balance sheet. According to a recent research brief issued by TransUnion and the Filene Research Institute, credit unions are leaning too far on the conservative spectrum of lending, resulting in missed opportunities and undermining their long-standing reputation as the lenders who are best able to help the communities they serve.
The analysis reveals that many credit unions have extremely low delinquency and charge-off rates, signaling that their current lending approach no longer aligns with the true nature of a credit union – to be accessible to all people, regardless of credit profile. Through interviews, qualitative and quantitative data, many credit unions reported to TransUnion that they were losing valuable business for the sake of maintaining an unrealistic number for delinquencies and charge-offs.
The research also showed that an over-reliance on machine-based learning have played a role in decisions to decline loans that typically would have made good business sense. By reducing or eliminating the personal review of a loan application, credit unions were also losing touch with their customers – a relationship that historically differentiates credit unions from traditional banks.
This position is blindingly apparent when it comes to auto loans. Customers who do not present with shiny balance sheets are often rejected, thanks to an algorithm and an over-reliance on fintech data. A missed payment, increased medical debt, or interrupted employment history have become common during the pandemic, even stretching back to the Great Recession. So, credit unions continue to lose market share for auto loans, an area where they were once dominant.
Credit unions market themselves as having strong bonds with their members. And knowing their members’ stories provides an old-fashioned form of alternative data. The lesson learned from the TransUnion study is that while technology is a great tool, it cannot be allowed to replace that personal touch. When it comes to auto loans specifically, consider supporting all forms of credit data, revising risk assessment models, structuring loan payments differently, and applying a human touch to loan evaluation. You never know, there might be more growth opportunities right in front of you.
Additionally, as credit unions look to recapture lost auto loan market share, it’s important to stay true to the member-first mindset by protecting your members. Providing complimentary consumer protection products, like limited powertrain protection or vehicle return protection, demonstrate to your members that you are still invested in their success.
These products also differentiate your auto loan offerings with prospective members by providing valuable protection when they need it most. When their vehicles break down they can more easily repair their vehicles and get back to life without drastically affecting their financial situation and keep their auto loan current. If they experience involuntary unemployment, members can simply return their vehicle with no impact to their credit.
Make a leap of faith in your members by returning to your roots with EFG Companies. With more than 40 years of experience helping clients achieve long-term profitable gains, we know what it takes to keep your credit union current and increase market share. Contact us today to get started.