Looking Forward to the Next Year with Resolve
If you are at all like me, then you imagine a day where you can get the things done that YOU have set as a priority, rather than spending your time meeting other’s expectations. Over the last twelve months, we have seen a number of new issues on the horizon that promise to fill out an already busy 2016 calendar. If we prepare well enough, we may find we can sneak in a few of our own initiatives.
Data-driven decisions continue to get all the buzz, and one can spend a lot of time chasing that goal without a good plan. I’ve been speaking on this topic for more than a few years now, and I’ll be honest, I’m still chasing some of my own data. But, if you can feed at least some of your decisions with good data, that is a decent starting point.
While all business decisions benefit from data, credit unions can experience a significant return on investment if they apply data to credit decisions. Over the last year, we have found that indirect loan applications that are system approved are 34% more likely to be funded than manually approved applications. The chances of funding a system approved application almost doubles over all other decision types, including counter offers. Recently, I visited with a credit union that was apprehensive about changing the decision rules to increase system approvals, because they thought that it would be necessary to change their lending practices to get an increase. But that isn’t the case; by simply doing a statistical analysis of their manual decisions we were able to increase their system decisions to include almost half of their applications. Not one policy was changed, and not one system decision was challenged under manual review.
Credit unions should also revisit their lending guidelines and test whether the things that they once thought were important are still important. Take debt-to-income (DTI) ratios for example; many credit unions’ consider the DTI to be highly predictive of default. Interestingly, after studying a couple of credit unions’ loan portfolios, we found that DTI was not necessarily a higher predictive factor. In fact, we even found that credit score was only the third most predictive factor of several studied, ranking behind whether the loan had a co-borrower, as well as the degree of change in the credit score over time. DTI never showed up on the list. However, no one should jump to any conclusions regarding their own portfolio, as every credit union’s portfolio is different. The point is, these underwriting guidelines should all be tested to see how important they really are.
If your credit union is doing indirect lending, has it ever tested applications and the current portfolio to see if there are any predictive indicators that could help you to target the right dealers for your program? Let’s face it, many lenders simply try to sign up as many dealers as they can. The more the better. But, what if you know that loans originated at a particular dealer or manufacturer were more likely to repay early? Would this information change who you choose to do business with? It should!
In this article, I have identified three things that credit unions can, and should do in 2016 that can improve efficiencies, drive more originations and lower costs. Consider the windfall in resources your credit union could experience with a few more available human resources and a little additional investment. One way to get to the things you want to do is to make the things you don’t want to do easier and more efficient. CU Direct’s Advisory Services is prepared to help you with each of them. The investment you make in your future will pay off many times over in the coming years. To that, we would like to wish you a healthy and prosperous new year!