Increasing Loan Portfolio Profitability is About More Than Reducing Losses
In the book, “Seeing What Others Don’t: The Remarkable Ways We Gain Insights,” author Gary Klein points out that many organizations focus on reducing errors to increase performance, but few focus on new insights. His argument is that true performance improvement requires the opportunity for both. As consumer lending continues to be highly competitive for lenders, simply avoiding risk is not a sustainable growth plan. Think about all of the loans that your credit union will not do, or overlooks. Just a fraction of those loan opportunities would provide sufficient loan growth to provide margins for increased profitability. Instead of working harder to get the hardest to get loans, perhaps new insights into how to capture more of the existing opportunities will pay larger dividends.
I had a discussion recently with a credit union manager who was frustrated by a lending policy that prevented him from matching lower rates quoted to members at the point of sale. Here is his description of the process: “A member who is pre-approved for an auto loan calls in from a dealership who is offering a rate that is 50 basis points below our rate. We will not rate match under any circumstances, so the member ends up financing at the dealership. After a couple of months pass, we try and recapture that loan, offering to beat the existing rate by 50 basis points. If the member agrees to the offer then they must apply again and get approved. So, at the end of the process, the member has applied twice for a loan and we have ended up losing 50 basis points.”
One can surmise that the credit union’s policy for not matching lower rates is based on the premise that in doing so they are giving up interest income, and that it would be difficult to manage the constant request to match rates. After all, at some point, one has to draw the line. But, if one were to look at this from an opportunity point of view, how many times did the lender put themselves at risk of losing the member? By not matching the rate that they knew they would eventually offer the member, the credit union risked angering the member and most certainly gave up the loan. Then, when they offered the member the opportunity to refinance, they made the member re-apply for the loan. Ouch! Finally, without regard for the member in this scenario, how much time has the credit union wasted in taking two applications for the same member, only to give up more income than they would have given up initially?
Think of all of the lending guidelines that your credit union has in place: Debt-to-Income, Loan-To-Value, Time on Job, Time at Residence, etc., etc. Not to say these aren’t important risk attributes to consider, but do you know – for a fact – that the guidelines that have been set really reduce losses or do they limit profitability and growth? In other words, is there a marked difference in performance between a borrower that has been on their job for six months vs. one that has been on the job for two years? Only an analysis of your credit union’s portfolio performance against these attributes could tell you for sure. What if your performance data told you that members with a 580 credit score, who also meet a list of other criteria, never default? Could you fund more loans?
As we consider Risk Management and Analytics, we need to consider both eliminating errors and increasing opportunities. This is difficult to do unless you provide yourself with informative, real-time data that allows better, faster informed decisions.