January 25, 2011

Credit Union Management magazine’s Web-only “Loan Zone” column runs the fourth Tuesday of each month.

Good loans will make you, and bad loans will break you. This is the mantra of Brett Christensen, owner of CU Lending Advice, LLC, Euless, Texas.

It’s easy to blame the economy for loan programs going sour these days, but Christensen said credit unions can cause their lending problems by not doing a good job staffing lending, not having a strong sales culture and being afraid of profitable lending.

Indeed, he advised attendees at CEO/Executive Team Network™ last November in Las Colinas, Texas, that lending failure is directly proportional to the number of employees involved. He asserted that credit unions can reduce the number by centralizing underwriting, centralizing processing and closing, making phone loans, separating sales and service duties, and using technology effectively.

He also recommended focusing staffing on people who can sell. In fact, he said effective lending requires “a small group of sales psychos,” who can measure their effectiveness in a variety of ways:

1. disbursed consumer loan dollars per month;
2. applications taken or processed per day;
3. members seen or spoken to per day;
4. percentage of loans closed vs. applications taken;
5. percentage of loans funded with insurance products sold and
6. time spent on lending vs. account maintenance.

Focusing on sales for a highly operational undertaking can be challenging, however. Christensen cautioned his audience to expect the operations view of the world to be different from the sales view. The lending staffers will say, “Sales (department) paperwork is lousy. It’s not accurate. Their desk is a mess … But they (operations employees) can’t sell their way out of a paper bag.”

Christensen recommends every piece of the lending process report to the same manager who can say, “Quit your whining and fix it.” Remove all the other duties from the sales force, including paper work, underwriting, and delinquency work, he advised. “Sales and detail do not go together.”

He also advocates the sales force be in a call center rather than a branch, and making the only way members can get a loan be by phone. Members who wish to apply for a loan in a branch should be helpfully directed to a phone where they can complete the process.

He points to credit unions following these processes as models for others. “Space Coast (Credit Union, Melbourne, Fla.) could take in Eastern (Financial Credit Union) because [Space Coast] had expense control. One hundred percent of all loans and new accounts are via phone at Clark County (Credit Union, Las Vegas, Nev.) … Some of those members only had to be walked in (to the phone) four times before they realized they could do this from home,” he deadpanned.

Christensen also encouraged attendees to step up and broaden their lending target market. “If you want to make money in lending, you’re going to have to take on risk,” he said. He noted that according to Fair Isaac, 43 million Americans have credit scores under 600.

His rationale?

1. There are very thin margins on A-paper loans.
2. You can make serious money on D- and E-paper loans.
3. Members with bad credit need a car to get to work.
4. Members with bad credit can choose to pay their credit union on time.

He shared a specific example of successful D- and E-paper loans. One CU looked back on $83 million in subprime loans made over six years and found that 98.8 percent pay on time. “These are people who have jobs,” Christenson said, and these are reasons to make higher risk loans. “A-paper wants the whole world for free. Good luck chasing them.”

Higher-risk lending “is not rocket science,” he said. “Start with the car that takes ’em to work.” His six recommendations for success are:

1. Start with secured loans.
2. Have employees use the loan interview to build a performing loan.
3. Price the loan correctly.
4. Help underwriters know how to distinguish between high-risk and low-risk members in every credit tier.
5. Collect higher-risk loans more aggressively.
6. Get management and the board of directors to promise not to freak out when the first few D- and E-paper loans go bad.

He summarized the changes he recommended in a single sentence. “You’ve got to get better at what you do.”

Barb Kachelski, CAE, is CUES’ SVP/chief operating officer and a former newspaper reporter.