Transcript Lending The SCE Way - Credit Union National Association

Lending The SCE Way
New FSC Training
Revised October 2005
Agenda
Laws and Regulations
Lending The SCE Way
Economic Conditions
Risk-Based Lending
Open-End Lending
Credit Scoring
The Five C’s of
Credit
Loan Policies
Laws and Regulations Affecting
Credit Unions
We get our laws and regulations from many
areas.
federal laws, some of which have implementing
regulations;
state laws;
laws and regulations pertaining specifically to
federal credit unions (the Federal Credit Union Act
and NCUA Rules and Regulations);
laws and regulations pertaining to California statelicensed credit unions (California Credit Union Law
and California Credit Union Regulations).
Laws and Regulations Affecting
Credit Unions
State laws that affect Federal Credit
Unions:
Community Property laws
Probate codes
Collection laws
Automobile Sales and Financing Act
Many others…
Regulation B
Regulation B implements the Equal
Credit Opportunity Act. Simply put,
its purpose is to promote the availability
of credit to all creditworthy applicants.
Regulation B
Key Points of Regulation B
Prohibits discrimination in taking and
analyzing credit applications.
Provides specific guidelines in taking credit
applications.
Provides specific guidelines in the evaluation
of applications.
Regulation B
Key Points of Regulation B
Requires notification of credit denial and
provides guidelines for such notification.
Outlines record retention requirements.
Outlines information for monitoring
purposes.
Regulation B
Cannot discriminate against applicant based on:
Age
Race
Color
Religion
National Origin
Sex
Marital Status
Income from
Public
Assistance
Exercise of
rights under
Consumer
Credit
Protection Act
Regulation B
Regulation B requires the Credit Union to:
Notify applicants of any action taken on their
applications
Report credit history in the name of both
spouses on a joint account
Retain records of applications
Collect information about an applicant’s race
and other personal characteristics in
applications for certain dwelling-related loans.
Regulation B
Regulation B requires different action
for applications that filter through the
Credit Union:
Completed Application
Incomplete Application
Withdrawn Application
Regulation B
Completed Application
Within 30 days of receiving a completed
credit application, Regulation B requires a
financial institution to let the member know
if he/she is approved or denied.
If the member is denied, you are required
to share the reasons why.
Regulation B
Incomplete Application
You may make the request for additional
information orally or in writing.
We must inform the member that failure to provide
the information will result in no further
consideration being taken on the application
We do not need to send an adverse action notice.
We must respond to the member within 30 days.
Regulation B
Withdrawn Application
Approved applications are considered withdrawn if
the member does not respond to the approval
within 30 days of applying. No notice needs to be
sent. (At SCE FCU we typically hold the application
for 60 days as a courtesy.)
If a member changes his/her mind and withdraws
the application within 30 days of applying, you do
not have to send out a notice.
Regulation B
Can we run credit on a non-signature
spouse?
Yes, under Regulation B it is allowed in a
Community Property State – California
Community Property = “what’s yours is mine,
what’s mine is yours”
Regulation Z
Regulation Z implements the Truth in
Lending Act (TILA) to promote the
ability of consumers to shop for the
best credit.
It was adopted by Congress to increase
consumer understanding about the
actual cost of credit.
Regulation Z
TILA imposes the following through
Regulation Z:
Lenders must make disclosures available with
appropriate terms and costs of loans.
Certain credit transactions involving a lien on a
consumer's principal dwelling.
Regulates credit card practices and provides for
timely resolution to credit billing disputes.
Provides limitations on certain H/E transactions.
Regulation Z
Exempt Transactions
TILA does not apply to the following:
• Business, commercial, agricultural or
organizational credit
• Credit over $25,000 not secured by real
property or a dwelling
• Student loan programs
NCUA Rules and Regulations
Section 701.21 – Loans to Members and
Lines of Credit to Members
This regulation describes the types of loans a
FCU can offer.
Regulates the rates, terms, terms of
repayment and other conditions of FCU loans.
Requires that the Board of Directors establish
written policies.
Regulates credit applications and overdrafts
And more…
What do we mean by Lending
The SCE Way?
We always look for ways to say “yes” to a
good loan and make a good loan better
Excellent service and fast processing
Cross-selling to member’s needs
Evaluate the Five C’s of Credit, especially the
“character”
Look for ways to serve the underserved
communities
What do we mean by Lending
The SCE Way?
SCEFCU underwrites consumer loans using a
combination of judgmental review and an
empirically derived, statistically sound scoring
model (Experian).
The model in conjunction with judgmental
review allows FSC’s to make good sound loan
decisions.
Risk Based Lending
Risk based lending is a process by which
credit unions can more effectively meet the
credit needs of all its members
Increases the pool of potential loans (broader
member base)
Increases loan-to-share ratio
Potential to increase loan yield
Makes more money
Improves our competitive advantage
Risk Based Pricing
The purpose of using a scoring system
is to “price” the potential loan
appropriately to reflect default risk.
The ultimate decision to grant or deny
loan is still judgmental
The score will be one of several tools
utilized in the evaluation process
Risk Based Pricing
Pricing based on market conditions, risk
and expected yield
Risk level “A” is considered the baseline
rate
Margins added or subtracted from the
baseline are used to determine the
offering rate for each risk level
Risk Based Pricing
As market conditions and other circumstances warrant, the
baseline and margin are adjusted through ALCO.
Risk Based Lending
Why would a very low delinquency ratio
be negative for the Credit Union?
Might not be approving enough loans
Policies might be too restrictive
CU may only be approving low-risk (A
paper)
• Because of low rate, may not be as profitable
as higher rate and risk loans
Economic Conditions
What are some economic conditions
conducive to increased lending?
Very low rate environment
Hyper competition
Continued auto manufacturers incentives
Very savvy consumers
Diverse demographic
E-market emergence
Unprecedented BK filings
Open-End Lending
Open-End Credit Defined in Reg Z as:
Consumer credit extended by a creditor
under a plan in which –
• The creditor reasonably contemplates repeated
transactions
• The creditor may impose a finance charge on
an outstanding unpaid balance
• The amount of credit extended to the
consumer during the term of the plan is
generally made available to the extent that any
outstanding balance is repaid.
Open-End Lending
Why are open-end loans better for the
member and the Credit Union?
Immediate disbursal upon approval
capabilities
One-time loan plan signature
One set of disclosures
Credit Scoring
Credit Scoring, in basic terms, is an
empirically derived, statistically sound,
oriented system that predicts the
likelihood that a specific person will repay
a debt.
Credit scores base decisions on the
assumption that:
Past performance = Future behavior
Credit Scoring contd.
Credit scores are used to:
Approve or decline applicants
Determine loan/line amounts
Determine term and conditions
Determine pricing
Cross-sell other products
Determine initial collection strategy
Credit Scoring contd.
How does credit scoring work?
Credit scores (scorecards) assign value to
different criteria that is demonstrably and
statistically sound.
Can measure only credit bureau
characteristics or include application criteria
The end score assigns a value of probability
that the customer will or will not do what the
score is evaluating
Credit Scoring contd.
Credit scores are designed to evaluate
different aspects of a borrower.
For example:
Probability that an individual will file BK
Probability that an individual will become at
least 60 days delinquent in a 12 month period
of time
Probability an individual will pay back a
mortgage according to terms.
Credit Scoring contd.
SCE FCU uses a FICO scoring model that
relies on credit performance reported to
the bureau
In order to rely on the data completely,
the card scores must be validated against
our specific experience
Credit Scoring contd.
Advantages of Credit Scores
Fast evaluations
Can increase portfolio profitability
Assess applicants equally and consistently
Can provide more accurate forecasting
Can be an early indicator of change
Credit Scoring
Disadvantages of Credit Scores
Will not eliminate all bad accounts
Cannot predict future changes
Does not evaluate character
Does not evaluate specific member
circumstances
Deviations from the score must be quantified in writing
Debt Ratios
Debt Ratio: Pre-Loan
Liabilities divided by Income
Debt Ratio: Post-Loan
Liabilities divided by Income (but including
new loan payment)
Disposable Income
Disposable Income: Pre-Loan
Income, minus liabilities, minus dependent
cost
Disposable Income: Post-Loan
Income, minus liabilities, minus dependent
cost, minus new loan payment
Credit Scores
Credit Score
FICO – Derived directly from credit report.
Risk Score
Taken directly from credit report.
Represents the likelihood member will be 60
days delinquent once in the next 12 months.
The Five C’s of Credit
The process of evaluating a loan is
called “underwriting”. The “how” starts
with the Five C’s of Credit:
Credit
Capacity
Collateral
Conditions
Character
The Five C’s of Credit
Credit
This is a measure of the type of credit you
have been extended in the past and more
importantly, whether you have paid that
credit back in a timely manner
Credit should also be evaluated based on
importance
The Five C’s of Credit
Capacity
Capacity is a measure of a person’s ability
to pay the loan. How much income the
applicant(s) have vs. the amount of debt
An important point to remember is that the
evaluation is not just a point in time but
over the life of the loan
The Five C’s of Credit
Collateral
Collateral is simply what, if anything, the
applicant(s) pledge on a loan.
Underwriting collateral may involve
evaluating the market value as well as the
value to the member
Collateral Does Not Make A Bad Loan Good!
The Five C’s of Credit
Conditions
Stipulating specific performance by the
member as a condition of making the loan.
(i.e. collateral, payroll deduction, paying a
debt, obtaining a signature, etc.)
Be careful to ensure that the conditions will
increase the chance of the member
repaying our loan.
Make conditions that make sense!
The Five C’s of Credit
Character
Defined as a description of a person’s
attributes, traits, or abilities as well as their
moral or ethical strength.
Clearly the hardest to determine, but may
be the most important!
SCEFCU Loan Policies
Co-Borrower vs. Co-Signer/Guarantor
A co-borrower receives beneficial interest
in the loan
Co-borrowers must be members of the
Credit Union
A co-borrower is making payments on
the loan, therefore can be used to qualify
Debt Ratio or Disposable Income (do this
when it makes sense!)
SCEFCU Loan Policies
Co-Borrower vs. Co-Signer/Guarantor
A co-signer does not receive beneficial
interest in the loan (are used to improve
creditworthiness)
Co-signers do not have to be members
A co-signer is not making payments on the
loan, therefore cannot be used to qualify Debt
Ratio or Disposable Income
SCEFCU Loan Policies
Financing over purchase price or high
blue book
If member qualifies, make an unsecured loan
together with car loan. But:
• Make clear comments describing reasons
• Financing up to 100% of retail or MSRP, plus tax,
license, warranty, etc. not to exceed 120% of
retail (for A+, A, B paper only).
Note: Sometimes it’s good to keep them separate!
SCEFCU Loan Policies
Things to look out for
New members – Must use 411 to verify
company info. Verify employment and salary
too.
Match addresses on credit report and
applications. If different, member must explain
D.L. must be verified including addresses
Insurance policies must be valid for at least six
months or verify history with agent
SCEFCU Loan Policies
Negotiating rates
It is legal, as long as not more detrimental to
a protected class
General rule is, we can match a rate if it
makes sense and we will not loose money
This holds true when offering to refinance. If
offer is beyond your rights, ask your manager
Loan Policies
A complete copy of the loan policies is
located on the intranet under:
Operations, Policies & Procedures,
Lending
Making Decisions
Wrong reasons to decline a loan
automatically
Bankruptcy
• Are they paying us? Have they re-established?
Was the BK for a good reason?
Small collections/charge offs
• If a good loan offer to pay it with proceeds!
Debt to income ratio too high
Any others????
Making Decisions
What do you review when making a loan
decision and pricing a loan?
What observations and recommendations do
you make to the member when reviewing the
credit score and credit report?
When you have completed loading an
application, what do you review with the
member before ending the conversation?
What Kind of FSC Do We Want?
What are some important traits of a
loan officer?
The ability to think and look at the big
picture
Knowledgeable
Possessing a genuine desire to help
Good personality
Sales ability
Others???
How do I obtain lending
authority?
The FSC Certification Exam
FSC I
FSC II
FSC II/Manager
The Certification Exam
When is it?
Will be scheduled during the next few months
What is it?
Three sections to complete
How long?
A few hours. It is self-paced, not timed.
Where will I take it?
CUEST Center, Training Room, HR
Can I use notes during the exam?
No, the exam is closed book. You may use a
calculator if you like.
The Certification Exam
Why is it necessary?
Provides an assessment of your knowledge and
understanding of the lending process
Provides documentation for auditing
Allows us to recognize and build on areas where
additional training/coaching is needed
Who grades the exam?
Reviewed by Alison and Shannon and/or George P.
What is considered a passing grade?
Overall score of 85% or better.
Questions?