How To Optimize Loan Performance
Rapid growth in credit union indirect lending programs has triggered more examiner scrutiny and additional emphasis on the performance of these programs. Credit unions can be more effective in mitigating risk and optimizing performance within their indirect portfolios by taking a number of steps, including implementing a series of key metrics: dealer performance scorecards, multi-dimensional portfolio analysis, static pool analysis, and profitability analysis. These practices enable credit unions to identify risk and low-performing segments within their portfolio, take corrective action in a timely manner, and maintain a sound and viable indirect lending program.
Here’s a closer look at how each of these practices can improve a credit union’s indirect loan portfolio performance:
Credit unions should develop and monitor a Dealer Scorecard for dealers with the highest concentrations of loans in the portfolio. The scorecard report should include metrics such as delinquency, cumulative losses, average LTV, average credit score, profitability by credit tier, exceptions, funding delays, and audit discrepancies. A report with drill-down capabilities allows lenders to quickly identify problem loan segments and other unidentified risks within the portfolio.
Static Pool Analysis
Credit unions should conduct an analysis of static pools (by origination tier and year) on a monthly to quarterly basis to visualize how portfolios originated during specific periods are performing relative to other pools of loans. This will help the credit union determine how policies and procedures are affecting portfolio performance, if new dealers are performing as expected, and provide predictability to portfolio performance.
Credit Score Migration Analysis
Credit unions can obtain new credit scores for loans within a portfolio on a quarterly or semi-annual basis to determine if creditworthiness is improving or degrading over time. The report can be further segmented by dealer, credit tier, time of origination, LTV, collateral value, etc. to understand how the portfolio is changing over time. The information can also be used to mitigate future losses through collections strategies or to identify new areas for growth.
Credit unions should measure profitability of the overall indirect portfolio as well as profitability at the dealer level by monitoring the average net yield, annualized losses, cost of funds, and origination costs. The credit union should determine if each loan pool is profitable, and if so, when in the lifecycle the pool became profitable.
A word on length of terms
Extended length of loan terms also seems to be a hot button issue with NCUA according to the Supervisory Priorities published in NCUA’s letter to credit unions (17-CU-09) in December, 2017. At CU Direct we’ve found the average length of term for all indirect loans funded through our network has not changed in the past three years (2016-2018). Looking at the 1,100 CU lenders, 14,700 dealers, and 1,505,154 of loans funded through CU Direct’s indirect lending platforms (YTD December 2018), the average loan term has remained consistent at 70 months.
Credit unions have valuable data at their fingertips, and effectively harnessing that data to minimize risk and uncover new opportunities will be a difference maker in today’s ever-evolving and growing competitive landscape.
CU Direct’s Lending Insights loan portfolio management system provides credit unions with a comprehensive set of solutions to quantify data into interpretable results, minimize risk, uncover new opportunities, and improve overall loan performance.