NCUA Webinar: Loan Underwriting – Back to the Basics! Looking Beyond the Credit Score (11/9/2016)

Kathryn Baxter: Good afternoon. Welcome to our November webinar on Loan Underwriting Back to the Basics. This is a phenomenal
webinar. We think you’ll all enjoy it and we’re happy to have you here with us this afternoon. My name is Kathryn Baxter. I will be your moderator for today’s event. Please adjust your attention to the administrative slide in front of you. What we’d like you to do is to make sure
the volume on your computer is high enough so that you can hear this webinar clearly. You may also resize the slides by dragging the bottom right corner. From this webinar, you also will need to allow pop-ups. You’ll notice, too, on the left corner of your console, there is an Ask a Question
feature. We’d like you to use that feature throughout the webinar to address your questions to our speakers. In fact, once the speaker is giving their part and you know the speaker’s name, please address the question directly to our speaker. That will help us to make sure that
the question does go to the right person. And also, before we end our webinar, we’re going to push out on your screen a brief survey. And we really would like you to complete that survey, because we value your opinion. And this will help us improve our webinars. And as always, in approximately
three weeks, we will close caption this webinar for on demand viewing. I did mention that this is a phenomenal webinar. We’re really happy to present it. I’m joined by Tom Penna. He’s an economic development specialist and is going to be our host for today’s event. So, we’re talking about Loan Underwriting Back to the
Basics – Looking Beyond the Credit Score. For this particular webinar, we’re offering a certificate of training. Tom is going to tell you what the requirements are. We’re going to repeat it more than once so that you’ll stay on the call. And there are some widgets at the bottom of your screen. The two to the
right are magenta color and that’s where you will find your progress. The one immediately to the left will give you your progress, whether you stayed on the line for 45 minutes, which is a requirement. Whether you’ve answered four of five poll questions, and also, once you’ve passed the
test. The test is going to be the icon I believe on the right. They’re both magenta colored. Once you pass the test, you’ll see an icon at the bottom of that screen that you can click on to print your certificate. So, I’ve given you that information once. Tom is going to repeat it
again. So, I’m going to turn our console over to Tom Penna. Tom? Tom Penna: Thank you, Kathryn. Hello, all. It’s once again my pleasure to host the Office of Small Credit Union Initiatives monthly webinar. Today, we’re emphasizing the principles of safe and sound lending policies and practices to help you build your consumer loan
portfolio and overall income. A little about myself. I’ve been an Economic Development Specialist with the Office of Small Credit Union Initiatives for the last four years. I’ve been with NCUA for over 30 years now. And prior to that, I spent five years with USDA Office of Inspector General. During this webinar we intend to provide you with information
that may help you look at loan applicants a little differently when they have a weak credit score or debt ratio. Are there ways you can safely make more loans without taking unwanted risks? If so, these loans may help you improve your overall loan income, your overall net income, and help
you build lasting relationships with your members. As always, we have to give our NCUA disclosure. And with this webinar is offered for your informational and educational purposes only. NCUA does not endorse any particular
credit union vendor, any particular credit union, or their employees, products or services. Our webinar team today is pretty incredible. They have several years involved in consumer lending program. And so, let me go ahead and
introduce them to you. We have Julie Wooding. She’s a principal consultant with the Fair Isaac Corporation. Julie, would you give us a hi out there? Julie Wooding: Absolutely. Hey, Tom. Thanks so much. Tom Penna: Absolutely. Then we have Lin Li. Lin comes to us from the NCUA Office of Examination
Insurance. She’s going to give you a program aspect of what we expect in a good program so that you can understand what the examiners are going to be asking for when they come to review your operation. Not to put a fear in you. It’s just that it’s better for you to know what the credit unions might be – the examiners
might be asking before they get there. We also have Tyler Valentine from Laramie Plains Federal Credit Union. Tyler, will you give us a shout out? Tyler Valentine: Hello. Tom Penna: Okay. Thank you. Leslie Johnson’s our clean up person. Leslie comes to us from CALCOE Federal Credit Union.
So, Leslie, how you doing? Leslie Johnson: Good morning, everyone. Tom Penna: And I don’t want to leave Lin out, too. Lin, you still out there? Lin Li: Yes. Hi, Tom. Tom Penna: Hi. She’s sitting right next to me. So, today’s agenda. We hope to address a couple of things with
you. We want to help you plan for what you want to accomplish with a lending program that reaches out to maybe a non-prime type member. We want to help you build your loan volume, increase income by charging loan rates that are based on the level of risk in the loan – with the loan applicant.
We want to help you improve the understanding of the credit score makeup and what it really means. Help understand the need to complete a detailed loan analysis to identify creditworthy borrowers, even though the credit score or the debt ratio may not be the best. We’ll help you identify the need to document
your loan decisions and approval decisions that offset the weak credit scores or debt ratios to help you in the audit and exam process. We also plan on doing a couple more things to help you develop the need for a monitoring reporting system to show your program successes or not. And then, we want to
help you understand the need for a good strong collection program before expanding to higher risk loans to your members. One important step to remember is that we’re emphasizing that NCUA’s encouraging credit unions to manage risk. Not eliminate your risk. Each applicant that you get should
be evaluated based on their individual circumstances and their needs. So, of course, we have our poll questions. The certificate of completion, again. Let’s go through that. To get the certificate, you’re going to need to stay on the
website for 45 minutes, answer four of five poll questions, and pass eight of ten questions on the test. Not a hard test, but it’s encouraged for you to draw down the slides and print them out so you actually have them available if you do need to refer back
to them. So, we’ll start with our first poll question. And we always ask this one. We like to know what asset size credit unions we have listening today. So, take a few minutes out of that. We’re doing a little bit different on this one. We have credit union examiners, whether they’re state or federal. We’d like you
to identify yourself as an examiner on this presentation. It’s not for any purpose other than to know who we have on. And then, if you’re not a credit union employee or an examiner, please fill out Number 7, which is not applicable. Give you a few minutes. Okay.
And Kathryn, how’d we come out? Kathryn Baxter: Well, let’s take a look and let’s see. Oh, we have a nice spread here on our poll question, the first one. Our $10 million to $100 million target group is almost at 50%.
So, that’s good. And we have 17% almost 18% that’re up to $10 million. And we have a few of the larger guys with us as well, about 8%. And a few state and federal examiners, Tom. Tom Penna: All right. Sounds pretty good. Okay.
We’re going to move right into a second poll question now. And before we get started, let me ask you this position. If you’re a credit union examiner, answer – if you’re an examiner, please answer like a credit union. Everybody else answer question four, not a credit
union, unless you’re a credit union, of course. You get an application for a $20,000 loan to purchase a car. The applicant comes with a 410 credit score and a 47% debt ratio. Would you reject the loan, approve the loan, defer a loan decision pending more information, or number four
if you’re not a credit union, go ahead and use that. And we’ll give you a few minutes – few seconds to fill that one out. And let’s see how the results go on that. Kathryn? Kathryn Baxter: Let’s take a look.
All right. Oh, okay. So, we have most of our audience defering their loan decision, Tom. And then, another portion, almost equal, would reject the loan application. I think they need to hang around and see if they would change their mind. What do you think? Tom Penna: I think that’s a good
mix. Kathryn Baxter: Right. Tom Penna: We only have 1% would actually approve the loan. Kathryn Baxter: I’m with them right there. Tom Penna: That’s Kathryn’s answer. Kathryn Baxter: There you go. Tom Penna: All right. So, moving forward. Okay. So, what exactly is credit scoring? Well, credit scoring is a mathematical model
consisting of numerous variables that’re used to estimate one’s probability of default or condition of a model being used. Okay? Most of them are default models, which does not necessarily mean that it’s going to be a loan loss, but it might be a delinquency. For example, several risk
models identify a 60-day delinquent account, a 90-day delinquency, a bankruptcy, or chargeoff. Today, there are several companies that will produce a credit score. The most common, of course, is FICO. There’s also the Vantage scoring system developed by the three credit bureaus. That’s also
used by Credit Karma. There’s also a company called LexisNexis. They do look at trade lines, but they also add in some behavioral practices to gather their scoring system. And I believe there’s others. I’m just not familiar with them. But today,
we’re going to pretty much concentrate on the FICO system and how they calculate their scores and what the scores mean. So, it’s now my pleasure to turn the console over to Julie, who’s going to give a presentation – talk to you about the credit scoring and identify what the score
ranges really mean. Julie, all yours. Julie Wooding: All right. Thank you so much, Tom. I appreciate that. Absolutely. So, as Tom said, I am Julie Wooding from FICO. I’ve been here for many, many years. I work in our scores group and more than happy to be here with you today. So, thanks so much for joining us. So, I’m going to share some
information with you about FICO scores. And of course, we’ll have time later to answer any questions. All right. So, to start off, just a little bit about FICO and FICO scores. So, FICO scores are, as Tom mentioned, the most widely used credit bureau score in the world. FICO scores are used in over 90% of US consumer credit lending decisions. And the FICO score
is used by 90 of the top 100 largest US lenders. And then, around the world, FICO scores are used today in more than 20 countries. I bet you didn’t know that. All right. So, this slide’s really important. And the title here is a very important point. So, I’d like to draw your attention to it. FICO scores are designed to rank order risk. So, the FICO score
generally ranges from 300 to 850. Although the industry versions have a broader score range. And of course, the FICO score is based on the information in a consumer’s credit bureau file. And what we expect of the FICO score is that it will rank order risk. So, as we discuss this further, let’s examine this set of stair steps here. On each score band, there are
green and blue people. All right? The green people represent future good payers while each blue person represents a future bad payer. Now, based on this example, and this is only an example, you can see that in the 640 range, there are 5 green people and 1 blue person. You can think of this as representing good/bad odds of five
to one. That is if we had six applicants who scored 640, and we accepted all of them with good/bad odds of five to one, we could expect about five of them to go on and be good payers and one to go on and be a bad payer. Now, as we move up the staircase to the higher score ranges to the right, you can see we
expect more future good payers for each bad payer reflecting better good/bad odds and better risk at the higher score levels. And this is truly what we expect a FICO score to do. It will predict the relative future risk of a population and score the better risks higher in the distribution and the worse risks lower in the distribution.
So, regardless of what population you’re scoring, whether it’s a prime mortgage portfolio, or a subprime auto applicant population, what we expect of the FICO score is that it will evaluate the risk of a population and rank order the risk level. A lender then using the FICO score will know the predicted relative risk of
each applicant or account. So, a FICO score is based on the information contained in a consumer’s credit file at one of the three main credit bureaus, Equifax, Experian, and TransUnion. And the five categories in this chart reflect the categories of information and relative proportions of them that’re used in the FICO score
models. So, the first category of payment history makes up approximately 35% of the predictive information in a FICO score model. Now, in this category, we would include characteristics or variables that examine a consumer’s payment history from three different perspectives, severity, recency, and frequency. All right? So, that
is how bad was the consumer’s delinquency, if any, how recently did it occur, and on how many accounts did the delinquency occur? Now, the second category of outstanding debt at 30% is looking to evaluate, in essence, how much of the available credit is a consumer using. This includes both revolving and installment credit. Although,
the revolving credit use is an important factor in the FICO scores. Now, a way to calculate this is to examine the sum of a consumer’s balances on their revolving trades divided by the sum of the credit limits on those same revolving trades, which give you an overall level of revolving utilization. The third category is
credit history length at 15%. Here, we’re looking to evaluate relatively how long the consumer has had credit experience and how many accounts they’ve opened recently. Category four is pursuit of new credit at 10%, where we’ll be evaluating how much a consumer is seeking new credit by indicators such as the number
of recent credit inquiries or the number of recently opened accounts. And category five, the last one, at the last 10% is credit mix. And here, we’re looking to evaluate how well rounded a consumer’s credit experience is. I also wanted to share with you some helpful information about FICO score odds charts. So, you’re going to
hear me talk a lot about these. First of all, they’re created each time we develop a FICO score model, and they are produced on a variety of industries and account types. The main purpose of these odds charts is to demonstrate that the newly developed FICO score model indeed rank orders risk on each industry and population. So first, let’s look
at the information on this chart. All right. So, the title of the chart tells us we’re looking at consumers with bank installment loans and we’re defining negative performance or a bad as 90-days delinquent or worse. And we’re looking at the population of consumers who had a bank installment loan on their bureau file as
of April 2006. Now, the first column shows the FICO score ranges, right? We’re going to go through all of the columns here. The next two columns show the base category or you can think of this as the number of consumer files. We see the number of consumers who had a bank installment loan as of April 2006
as well as a cumulative percentage by score range. So, the next two columns refer to the negative performance or the bads. And this reflects those consumers with the active installment loans who went bad during the performance window of April 2006 to April 2008. And you can see, for example, that
of the 894 consumers with bank installment loans in the lowest score range, that 391 of them went bad during the performance time window. Now, the next column that we’re going to take a look at is the percent negative to base or really it’s just a bad rate. Again, of those
894 consumers in the lowest score range, we know that 391 of them went bad. And this reflects a bad rate of 43.7%. And then, the last column is the good/bad odds or just another way of examining the risk within a score range. In the first range, the good/bad odds of
1.3 or 1.3 to 1 mean that there are about 1.3 goods for every bad in that score range. Now, you can see the rank ordering capability on this chart by looking at that last column. You can see that the odds increase for each and every score band or the good/bad odds get better as there are more and more
goods for every bad. So, the data for these charts on which the FICO score was developed reflect the national population of consumers and are based upon the lending policies, of course, of all US lenders who report to the credit bureaus. Now, for this example shown here for FICO Score 8, the data set for the development came from the snapshots
of data from 2006 and 2008. And you can see in the title of the chart that it’s based on consumers with bank installment loans. This chart reflects the relative proportion of consumers with installment loans as well as the proportion within each score range who exhibited the bad performance. Now, it’s important for each lender to examine
the good/bad odds and the risk level of their own portfolio of accounts as it likely does not match the US consumer population. So, let’s take a closer look at that. All right. So, here we have a chart. And now, this chart is based on the odds chart that we were just looking at, right? We see the score ranges across the bottom and the
good/bad odds up the left-hand side. All right. You can see that the good/bad odds improve as we move up in FICO scoring range from left to right. Again, this chart merely reflects what was observed on the consumer population with bank installment loans from the period of 2006 to 2008. This chart shows us that FICO Score 8 does a good job of
rank ordering this risk, which is what we would expect to see. Now, what this information tells us is that for the population of consumers who had a bank installment loan on the 2006 development data, for those who scored between 600 and 649, they had overall good/bad odds of approximately 11 to 1, or you can see
there, 11.4 to 1. That is, for approximately every 12 people in that score range, about 11 would go on to be a good payer in the next 24 months and one would go on to be a bad payer on one of their accounts in the next 24 months. All right. You’ll note this is the green line. We’re going to add a new chart here. We’re going to add
additional information to it. So now, we have the new line. The green line still reflects the good/bad odds of the national consumers who had a bank installment loan and their performance. Now, the blue dashed line that I’ve added reflects the good/bad odds that were observed for the population of consumers who had an installment loan with a credit union.
So, the actual performance of these two groups is similar at those lower score levels up to just below 600. However, from 600 and up, the performance differs and the consumers with an installment loan with a credit union are demonstrating better performance than their peers in the national population. In the higher score
ranges of 700 and above, this difference in performance is significant. So, what does this mean for you? It’s still important to keep in mind that you, as a lender, should be evaluating your own performance on your own portfolio. However, if a credit union lender is leveraging a FICO score odds chart to help set an initial score
cutoff, it’s also important to ensure that you’re reviewing the correct version of the chart, the one that most closely reflects your portfolio. All right. So, still staying with the same chart. Now, I’m going to add a new line to it. Now, we’ve added the new red line. And what the red line represents is the broad all industries population,
which reflects the good/bad odds of the national consumers who had any credit obligation and their performance. Now, you can see that the performance of the broader population in red is even worse than the other two from the score range of 550 and up. In the highest score range of 700 and up, this difference in performance is really
significant. So, this provides further evidence that it is so important to keep in mind that a lender should be evaluating their own performance on their own portfolio. All right. So, I also wanted to share some information with you about some recent exciting innovations at FICO. First of all, FICO Score 9. It’s
the most recent version of the FICO score with numerous enhancements and improvements that make it the most predictive FICO score ever. FICO Score Open Access is the program through which we enable lenders who are purchasing FICO scores for account management purposes to turn around and share those scores with their
customers. It’s a win/win situation for everybody. And the consumer response to the program has been phenomenal. And we have our launch of FICO Score XD, which is a FICO score that leverages alternative data sources so a lender can get a FICO score on a consumer who would not be scorable on the FICO score. We’ve partnered
with Equifax and LexisNexis on developing this exciting new FICO score. And you can find out more information about any of these at www. fico. com. So, one last piece of information I want to share with you is how do I get those odds chart, right? If you want access to the odds charts, all you need
to do is send an email to [email protected] com. And Tom, I’ll turn it back to you. Tom Penna: Great. Thank you, Julie. And now, another poll question. Adding to the previous poll question where we received that application for $20,000 to purchase a car and the score was 410 and debt ratio was 47%,
the credit report shows the applicant filed bankruptcy 9 months ago and had an auto repossessed 11 months ago. In addition, the credit report also shows four credit cards reported as 60 days delinquent, having a $24,000 outstanding balance. These creditors were also included in the bankruptcy
filing. Would you reject the loan, approve the loan, defer a loan decision pending more information, or if you’re not a credit union, please answer not a credit union? Give you – Kathryn Baxter: Tom, let’s remind our audience. Don’t send your answers through the
Q&A. Answer on your screen by selecting one of those radio buttons. Tom Penna: Okay. And Kathryn, how’d we do on that? Kathryn Baxter: Well, let’s see. How did we do? Oh, you know what? We still have people rejecting this application. I think they need to hang
around, Tom, because they might change – 74% would reject the application, period. Tom Penna: Yep. Kathryn Baxter: There’s a nice bold 2% that would approve it. And then, about 23% would defer that loan decision. Tom Penna: Yep. So, we have some consistency in those that would approve the loan, but it looks like a
number of them that wanted more information, got more information, and reject the loan. Kathryn Baxter: Hang around though. Let’s see if you change your mind. Tom Penna: Yeah. All right. Now, it’s my pleasure to turn it over to Lin Li, who’s going to give you the NCUA expectation on what should be included in your operation to manage your non-
and sub-prime lending activities. Lin? Lin Li: Hello, everyone. This is Lin Li. I’m Senior Credit Specialist in the Office of the Examination and Insurance at NCUA. The Office of the Examination and Insurance is responsible for NCUA’s supervision programs, which insure the safety and soundness of federally insured
credit unions. Today, as Tom mentioned, I’m going to focus on what NCUA would be looking for, from a program perspective, if a credit union is engaged in subprime or non-prime lending activities. Before I start, I just want to note that this does not apply if your credit union only originates a few
subprime loans or originates such loans very infrequently. However, if your credit union’s subprime portfolio is a significant portion of your assets or capital, or if you plan to grow your subprime portfolio significantly, our examiners would be looking at various aspects of your program to
determine if you understand the risks you’re taking and whether you manage those risks appropriately. When talking about consumer lending, we often hear that borrowers are categorized into prime borrowers and non-prime or subprime borrowers. Sometimes you may hear a more granular categorization.
For example, prime borrowers split into super prime and prime, and non-prime borrowers split into near-prime, subprime, and deep subprime. Prime borrowers are generally defined as those with strong credit history and repayment capacity. The likelihood of prime borrowers default on their loans
is relatively low. As a result, lenders generally charge a lower interest rate on the loans, assuming everything else equal. The competition is pretty intense for this customer segment. Non-prime borrowers, on the other hand, are those with weak credit histories and reduced payment capacity.
They may have payment delinquencies, chargeoffs, bankruptcies, judgments, high debt to income ratio, et cetera. They usually have low or no credit scores. There’s not a uniform credit score cutoff to define non-prime borrowers, but generally speaking, we have seen lenders using 660 or below to
define non-prime or subprime borrowers. Non-prime borrowers have higher likelihood of default, which means higher risk. So, they’re usually charged a higher interest rate and/or fees to offset the risk. Before engaging in subprime lending activities,
a credit union needs to ask itself three important questions. What is your field of membership? And do you have the member needs? If a credit union’s serving low income communities, the credit union may be able to reach out to members that may have
been mis-served by predatory lenders or underserved by traditional lenders. Secondly, what is your risk appetite or risk tolerance? Risk appetite or risk tolerance is the types and amount of risk a credit union’s willing to pursue and retain. If your credit union has a lower risk appetite, then subprime
lending is probably not something you want to engage in. Lastly, how much capital do you have? Do you have sufficient capital that could offset the risks you plan to take on? There are both risks and rewards of subprime lending. Subprime lending allows a credit union to provide credit to
those underserved members. This may help those members to rebuild their credit and hopefully maintain a long-term relationship with the credit union. Also, if properly managed, responsible subprime lending can provide growth opportunities and offer attractive returns for the credit
union. However, as we mentioned earlier, making loans to higher risk applicants increases credit risk. You may see an elevated level of losses, which requires more intensive risk management. A credit union needs to have a strong lending program to manage the risk appropriately.
So, what are the characteristics of a strong lending program? It is more than just the policies. It includes the five elements that’s on the slide. We will discuss each of these areas in more detail. Planning. Planning is critical to
success of a subprime lending program, actually, to any lending program. On a high level, the business or strategic plan should identify what the credit union wants to achieve with the program and how it will get there. Specifically, the plan should identify the types and levels
of risk the credit union is willing to take. The risk tolerance can be expressed in different terms such as levels of delinquency, chargeoff, subprime loans as percent of total assets, or net worth, et cetera. The plan should also establish clear goals and expectations for the program. For example, what kind
of member growth, loan growth, earnings, return on assets, and return on capital do you expect to achieve? How frequently are you going to evaluate whether you’re on track to meet those objectives? Also, what is the capital need for the program? Do you have sufficient capital to cover the
potential losses? Take a simple example. What if the losses were two times your expectations? Would you still have sufficient capital? What if growth rate is significantly higher than what you expected? The plan should also take into account staffing considerations. Their experiences and training
needs, et cetera. Finally, do you have systems that capture sufficient data to allow you to monitor the risks and assess the overall performance of the program? Policy. The policy should identify what types of products you’re offering to the subprime members. For example, a credit
union may decide to offer auto loans but not mortgage loans or signature loans to its subprime members. Underwriting guidelines. The debt ratio and credit scores are commonly used in underwriting, but it is very important that the loan underwriter looks beyond credit scores
and the debt ratios of the applicant in evaluating whether the loan will be repaid. Higher debt ratio generally means lower ability to repay. But other income in the household not showing up on the application may affect the actual ability to repay. Is it reasonably assured the income will
continue for the foreseeable future? Also, as discussed earlier, the credit score rank orders risk. The lower the credit score, the higher the risk. However, two applicants with the same credit score may not have identical risk. The knowledge you have in reviewing their credit report and/or
interviewing the applicants may help you know their risk better. Some negatives in the past credit history but a borrower is managing credit today could mean a score on the way up and lower risk. For the negative items, how far past due are they? What has been happening in
the past 12 months? For secured loans such as auto loans, LTV should be part of the consideration. For example, a credit union may offer 100% LTV auto loans to its prime borrowers, but may offer a lower LTV for its subprime borrowers. I want to note, however, if a borrower
cannot afford the payment, a bad loan is a bad loan regardless of LTV. Repossessions incurs a lot of additional expenses. And there’s no guarantee a credit union is going to get the principal back. Along with these financial factors, there’re other factors that
might support the loan decisions. For example, stability in the applicant’s residency and employment, automatic payroll deductions, the time of membership with the credit union, also, if there are any membership deposits. So, it is extremely important that credit unions
know their subprime borrowers and understand the risks. For higher risk applicants, a credit union may want to have extensive verification of employment, income, address, phone numbers, references, et cetera. In some cases, interview the applicants may be necessary. Pricing.
Pricing the loan product based on risk is a common practice today. The higher the risk tier, the higher the pricing should be to cover higher losses and increased collection expenses. Don’t price just based on competition. For each risk tier, the credit union should estimate
potential losses, the cost of underwriting and servicing, and the cost of funds. The credit union should measure profitability per risk tier to evaluate whether the loans are priced appropriately to offset the risk. The loan policy should also identify what loan officers are authorized to
approve the higher risk applicants. This loan officer should have the training to understand where the risks may be and what the positive factors are when approving the loan. Credit unions can approve the loan outside of their policy guidelines. However, policy exceptions should
be tracked and monitored. If there are a significant percent of exceptions, it may mean you’re either taking more risks than what your policy dictates or your policy is not aligned with your risk appetite and needs to be revisited. Finally, there needs to be concentration
limits on how much subprime lending activities you want to engage in. It needs to align with your risk appetite. Monitoring. For subprime lending, frequent monitoring is a key so that you can understand the level and trends of risks and respond promptly. Delinquency
and chargeoffs should be monitored at the portfolio level and at more granular levels, broken down by loan type, credit score risk tier, loan date, et cetera. Static pool analysis may be helpful. It’s a method used to analyze a pool of loans that have similar characteristics
and track the performance of that pool over time. Vintage analysis groups loans by origination time period. Performance indicators such as delinquency and charge offs are then tracked for each vintage and compared to other vintages over the similar timeframe on book.
Monitoring reports should be shared with management and board regularly. If risk increases, you may want to revisit your underwriting guidelines. Governance and control. There should be adequate governance and control in the overall program, either through internal functions or third parties.
The control function should help answer a series of questions. Has the credit union been in compliance with all relevant laws and regulations? Have the policies and procedures been followed? Are policies and procedures adequate? How effective is the servicing and collection
functions? And is the credit union managing the risk properly? The findings should be presented to the senior management and the board. Finally, the credit unions engaged in subprime lending activities need to have a strong servicing and collection functions. You need to have experienced and
sufficient number of collections personnel, depending on the amount of collection activities. Take collection efforts early. Contact should begin within a few days after the missed payment, long before the loan ever shows up on the monthly delinquency report. Early collection efforts enhance
the success rate of collecting delinquent loans. When collateral is available, repossess quickly is also important to minimize losses. The credit union needs to charge off loans timely and ensure it has adequate ALLL. So, in conclusion, a credit union
needs to understand the risks it is taking and manage them appropriately to ensure it is safe and sound. This concludes my section. I will hand it back to Tom. Tom? Tom Penna: Thank you, Lin. That leads us to our next poll question. Remember we received the
application for $20,000 to purchase the car? The applicant had that 410 credit score, 47% debt ratio. Filed bankruptcy nine months ago. They had a repossessed car and $24,000 outstanding balance on the credit cards that were still showing in the credit report but were in the bankruptcy. But
now, our loan review also shows the borrower’s credit report has a $3,000 car loan outstanding with our credit union that had an original balance of $17,000. The account has never been delinquent. The applicant is employed at the same job for 18 years. They have lived in the same residence for 24 years.
They have a mortgage loan which is currently 60 days delinquent, but was 6 months delinquent. The member has four children ages 8, 10, 12, 15. Would you reject the loan? Approve the loan, defer a loan decision wanting more information, or if you’re not a credit union, answer
Number 4. Kathryn Baxter: So now, you can see this is getting a bit deeper. So, I’m not going to give away the answer, but let’s see what they come up with, Tom, on the results now. Tom Penna: We’re not going to say there’s any correct answer here. Kathryn Baxter: No, it’s not that there’s any correct answer, but – Tom Penna:
What the results are showing is – Kathryn Baxter: Yeah, there’s more to this than what we see. Tom Penna: We’re looking a little different now. Kathryn Baxter: We are. Yes. There we go. Tom Penna: All right. Rejection is down to 25%. We’ve increased those that want to approve the loan to 24%. And 40- Kathryn Baxter: Almost 50%. Tom
Penna: 50% still want more information. And we still have that less than 1% that’s a non-credit union personnel. So, let’s move on. So, it’s now my pleasure to turn it over to Tyler. Tyler’s going to tell us a little bit about his credit union and what they do in the non-prime market.
Tyler, all yours. Tyler Valentine: Thanks, Tom. As Tom said, I am Tyler Valentine. I’m the CEO of Laramie Plains Credit Union. I think it’s important to give some context. My credit union is about $45 million. We’re in a rural area in Wyoming. It’s about 50 miles between me and
any other population center. So, very geographically isolated and especially during the winter. But we have been involved in non-prime lending. I think it’s always been a component of our loan portfolio. But began to be widely acknowledged and tracked
in the mid-1990s as we began to use credit scoring. They weren’t coded then and monitored to the same degree that we need to today, but it’s evident that the board and management at the time recognized that it was an important component of our loan portfolio. We’ve also been doing indirect lending since about the
mid-1990s. At first, it was simply a way for us to capture members that were going and shopping at the dealership. And as we began to add new members through the indirect process, non-prime loans were a component of that. So, more guidelines from an underwriting standpoint existed and still exist today. The indirect relationship worked well
to grow our loan portfolio. And of course, there’s non-prime loans within that. When the financial crisis hit, loan losses began an uptick. There was new management. Myself and my team at the credit union at the time. And we began reviewing where those loan losses were coming from, indirect versus
direct, credit score and tier. And we increased our reporting to the board and management and ramped up our collection efforts on the non-prime loans. As with most credit unions, our loan losses increased during the financial crisis. Our losses were not, though, coming from that D and E tier, but rather
from those in the C tier. And more specifically, those in the low 600s. This led us to creating what we call a C minus tier for pricing and underwriting. We also created separate more detailed underwriting criteria. But we didn’t want to get too conservative, because we knew it was still part of our product mix and something that would
benefit our membership. This is when we became familiar with SIDs or service interruption devices. We looked at a couple companies and found the best fit for us. And we have now a way to mitigate some of the collateral risk that we take on in the non-prime market. We began offering those SID loans in February of 2011. And since
that time, have originated over $3 million in these loans. And it’s important to note, I think, that not all non-prime loans are qualified as SID loans or service interruption device loans. To qualify, there’s several parameters. And it is just a tool that we use to mitigate
the risk. I want to stress that it does not take away all risk. It helps mitigate some collateral risk and is not a magic bullet to doing non-prime lending. However, it’s a tool to allow for online payments and quick recovery of collateral if a payment’s missed. It does help
members build credit quickly as they’re never allowed to be more than 5 days late before service is interrupted on their auto. In order to underwrite these loans soundly, we use several key elements in our underwriting process. First, an analysis of the collateral. It must have a determined value of at least $5,000 to
qualify. And our lenders are trained to look for other factors that may impact value beyond just an NADA or Kelley Blue Book, looking for high mileage, damage, age, all of those considerations. Second, the borrower must have one year job time at the same employer in the same line of work or an
average of one year if there’s a co-borrower. Down payment varies depending on credit history. If there’s past auto issues, generally we require 2% down. And if there’s no past auto issues, that there is obviously other credit issues, we do require 10% down or at least generally require that. A
rate adjustment is typically added to the loan to compensate us for the cost of those devices. And lastly, we use a hard close technique on all of these loans. This is an important element. I’m going to go through all of the factors that influence that. All loans are closed face to face. eSign is not an option when we close a
non-prime loan. We go through their credit report with the member and talk about how they can improve their credit standing and what the cost of credit will be to them over their life if it doesn’t improve. We explain payments, due dates, late fees, with a lot greater emphasis than on a normal loan. And we overemphasize the importance of
timely payments and how, if they don’t make their payment, it could affect the lender or the loan officer that’s granting them the loan. Trying to create that bond between the lender and the member. We review the – Kathryn Baxter: Tyler, can you speak up for us, please, a little bit? Tyler Valentine: Sure. Kathryn Baxter: Thank
you. Tyler Valentine: Yeah. So, we review any terms or conditions of the SID agreement, if applicable to the situation. And we talk about the importance of letting us know right away if they’re struggling and if they’re not able to make a payment. And that we have options before there’s a delinquency, many more options than we do if the
payment is already missed. Lastly, we talk about how the loan is a partnership between us and the credit union. And we congratulate them on the purchase. And leave it on a good note with the member. Some challenges to be aware of in doing this type of loan. Things that we had to overcome were increases in staff time with
more in depth underwriting process, longer closing appointments, greater monitoring, and ongoing SID management. Training all staff in underwriting and the hard close. Making sure we were consistent in our approach and mitigating risk as much as possible. Training our dealer partners on elements of the hard
close, if we weren’t available to do it, and on the SID agreement. And making sure to budget for the upfront cost of those SID devices. And have a process in place to manage that inventory. And I think it’s really important to work with a reputable installer to ensure proper device management. And the SID manufacturer has strong agreements
with cell companies in their area. So, it runs on cellular service. And if they don’t have those strong agreements in place, it could render your device unusable. And obviously, undermine the intent of the device. Our program performance, we currently have about four and a half million dollars in
outstanding non-prime loans with an average weighted yield of 11.56%. Creates about $525,000 in annual interest income. Our three-year average losses in the program are $115,540. With annual device costs of about $6,500 a year. The staff costs, we estimate
based on increase in underwriting time, ongoing management, and tracking, and staff training, and the collection effort. Obviously our cost of funds is a factor. And an annual net income in the program of $337,000. I think
some key elements to be aware of. Start slow. Non-prime lending has always been a component of lending for us. We’ve been strategically lending in the non-prime market for 25 years. Spent most of my time here referring to our auto program. However, that is just
one component of what we call our Fresh Start. This includes secured and unsecured loans with a savings component, credit cards, and checking accounts. All elements of a hard close are used in closing unsecured loans as well. We evaluate job time, debt ratio, and credit to a higher degree to determine stability and
where the credit challenges are in order to properly evaluate risks, especially when looking at unsecured. Our overall non-prime portfolio performance that I just went through is for a program that I consider to be in a maturation phase. We don’t intend to add any additional concentration in non-prime loans and growth will
only happen in a proportional component to overall lending growth. Having a SID vendor that works with you, and is a true partner, and provides you with the highest quality service as well as sells a quality device is critical in making these types of loans. Also critical is having strong and lasting relationships with your dealer partners for
installation of the devices and overall program development. We market our non-prime loans as a component of that much larger Fresh Start program. So, it’s one component of several that we use to help people being to use or rebuild credit relationships with our financial institution. Lastly, I think it’s important to be flexible. We’re
constantly retooling, refining, and looking for the best ways to underwrite these loans, which help members and the credit union. And lastly, looking at other impacts. This type of program greatly impacts members’ lives in a very real way. Oftentimes, these members have been denied for financing, they’re embarrassed about
their financial situation, and they struggle on a daily basis. Not having a vehicle, especially in our rural community with no public transportation can stop people from remaining employed and taking care of their family. For us, non-prime lending is a way that we embrace the principles and philosophies of credit unions by providing access to
those that may have not had it or would have been taken advantage of paying excessive fees or rates by predatory lenders. We’ve found members in this program are incredibly loyal. We have several examples of members that started with a Fresh Start auto loan and then added a Fresh Start checking account. Now, they have prime credit scores, regular
checking accounts, and prime auto lending rates. They’re referring family and friends, and we’re able to help entire families on a path to better financial security. Turn it back to Tom. Tom Penna: All right. Thank you, Tyler. If my calculation’s right or near right, that means your credit union is
netting about 8% working with a non-prime borrower. So, for the rest of you, wouldn’t you like to have a loan product earning 8%? Okay. It is now my pleasure to turn it over to Leslie Johnson to give a little bit of background on her
credit union and her process in the non-prime borrowers. Leslie? Leslie Johnson: Thank you, Tom. I am the CEO of CALCOE Federal Credit Union. In 2004, we expanded our charter to serve all of Yakima County, here in Washington State. We were one of those credit unions that lost
our SEG group due to changing times. We expected the community charter to be our savior. It has helped, but it’s been a road well traveled. We expected our loan volume to grow because we added a large pool of potential members. At the onset of our new charter change, it was working. But starting around 2009/2010, we
started seeing our loan portfolio shrink. In 2011, we continued portfolio compression. We decided to build a branch. Things picked up for a while and we saw our financial trends improve for both branches. But unfortunately, we also recognized our loan volume was not growing as needed. Even with the branch, we saw that members were
not coming in for the loans as we had anticipated. Our current and potential members were getting their car loans at the dealers and we were not the necessity we thought we should be. We realized we needed to change. With a lot of trepidation, as this was going into an unknown world, we would need to get into the indirect market. We saw
dealerships had already built relationship with larger credit unions and other Fls in our area. So, we researched the market and found what was available and suitable for us. We recognized the non-prime and subprime borrowers as a group of people we felt we could help. Many of them are the unbanked and/or
under banked people of our community. Two things we were hoping to get from this program; loan growth and to help the unbanked and under banked people. Our senior management team spent several months researching and building this new lending product to serve this market. What we did to start this program. We updated a lending
policy, added a new pricing section for this group of borrowers. We began to set aside ALLL funds strictly for this program. We began to build a relationship with just one dealer, as we believed in starting small. And communicated our plan to the NCUA. Things we didn’t take care of. There was no outside training for loan staff in
the subprime lending. We didn’t have a full-time committed collections department. We did not have a repossession company that was dependable. And when it came to reports, we continued with the ones that we had been doing for the last 20 years. What we didn’t except. Loan
losses. We saw anywhere from 25% to 80% in losses per charged off loan as the vehicles came back as junk and/or trashed. Delinquency jumped anywhere from 1.25% to over 2%. New members only wanted the car loans. Less than 5% became a full use member with more than one product
or service. Policy review and adjustments became a monthly event instead of an annual event. Staff time and commitment was taking away from the normal day-to-day operations. We went from 3 to 4 basic reports to 10 to 15 more complex reports that ranged from
back office to lending departments to collections. What we didn’t do well. Understanding that the financial and insurance people at the dealerships were driven by the volume and would put a lot of pressure on your lending department to make a deal. Some of the indirect loans were
taking up more of our time than the direct ones. Always be cautious. Professional lending and collection training should be a must for your staff. More training on credit report scoring is also a great avenue. Don’t forget to prepare your board for the realization of what this program may bring.
More staffing, higher delinquency, and higher chargeoffs. Impact. Fortunately, we were able to maintain a strong net worth position through this learning process by controlling growth. But we did take hits to our year to date earnings. This happened, because we were having to grow our allowance, while at
the same time, replenish it from losses. As discussed earlier, we were not able to build a relationship with the new members. Even though many of them came in to make their payments, they are not interested in making financial changes. We were just the place to pay for their car loan. The dealers are not our partners. They are looking to us as a
source of funds only. This is a lending process where we must keep our guard up. And the NCUA brought some areas to our attentions we were inexperienced to. We did not expect the number of corrective actions needed to eliminate the problems that had surfaced. One by one, we worked through these and became a much stronger
credit union. Under your due diligence. Understand the risk of the program. Untrained staff and board can cause you even more problems. Delinquency, just understand it will happen. Dealer mistreatment and pressure, it’s real. Loan product needs to be price – your loans need to be priced correctly. Training, training, training.
In the last year, we were fortunate to hire some lending staff who had some background in this arena. Talk to other credit unions and learn from their successes and failures. There are plenty of us out here. There are also great consultants to assist in this area. Keep your examiner up to date in your changes and happenings.
I would say this is one of the best things we ever did. I cannot stress enough to you the importance of training. Formalized training will help identify when and why a loan can safely be made when the credit scores indicate low or high risk. They teach you to look behind the numbers and find positive
or negatives in the score makeup. You cannot make loan decisions using the score alone. To us, we look at the credit score now as a good starting point. There is more to the credit score than just pricing. The score now helps us focus on the why it may be low. Could it be debt repayment practices, credit utilization,
or inexperienced credit? We also look at the person. Their time on the job and their capacity to repay. We spend more time analyzing their debt load to see if it’s increasing, maintaining, or getting lower, which could affect their repayment. Our collection department. One of the critical steps we learned was that
the credit union venturing into the non- and sub-prime market must have a good collections program ready to manage the possible increase in delinquency and loan losses that will surface. We were not prepared with the delinquencies rose so quickly and for so long. We had to get staff hired and trained to protect the credit
union assets. This took some time. Experienced and trained collection staff has allowed us to recover and reduce losses and control our delinquency. We were lucky. We had an employee that stepped up and wanted to handle collections. And they have done a great job. Having this employee attend training and working with our local attorney for
those more difficult cases helped improve our delinquency levels and lower our loan losses. I can’t emphasize enough. Have somebody already trained or starting to get trained on board. There are a lot of rules and regulations the need to be aware of. Corrective actions. We have been working diligently to continue to improve our lending
process to make this program a productive part of our offering. Changes have included underwriting adjustments. We continue almost every three or so months to evaluate our lending model and see if it needs to be reworked. Questions we may ask. Are we lending too much to a certain group of people? Are they on the job long
enough? And are our loan rates working for us? We also have a completely new lending team and our learning from them right now. We meet regularly with dealers to maintain that relationship. And our collection efforts. Know you will not get the top dollar at auctions. Also, repossession companies are in it to make money. That’s their job. We now
have three different repossession companies we use. They each have specialties to assist our cause. Know collection laws. You may be waiting too long to repossess. We have had a lot of vehicles disappear on us. Other options are GPS units and maybe a lender’s insurance program. Data processing. Make sure your data
processing system can identify your loans from direct to indirect, which dealer they went through, and reports that contain your credit risk score. Have all of this working before starting, as it makes report creation much easier. What went well? 95% of this went
well. That’s approximately the percentage of members in this program that have been paying on time and not caused a loss. That’s a large percentage and tells me that we have helped out a lot of hardworking people. Those are the ones we need to remember when we started this program and who have
benefitted from the lower interest rates. That is why we have continued to fight through these tough times so we can continue to lend to good hardworking people. Working on the 5% that cause us problems is a challenge every day. We have been risk based lending for 10 or so years, but just not to an indirect subprime group. It is a
very different type of lending. Price correctly to cover your potential losses. If you don’t have a good calculation in place to determine if you’re covering your costs, hire a consultant. Some words of wisdom. First and foremost, the most important word of advice I can give is to be cautious. Whenever making loans to those
having weak credit scores, understand you will not win them all. Some decisions will be made and a loss will occur. Be prepared and have your staff well trained. The credit score is a great start, but you need to have the training to understand what it’s telling you. Have a strong collection program ready. Lastly, your reporting process
must be complete so you can provide senior management and the board the information necessary to understand the successes and failures of the credit union loan program. Thank you. Return it back to you, Tom. Tom Penna: All right. Thank you, Leslie. Leslie gave us some great understanding that sometimes plans don’t always go as expected. So,
it’s extremely important to have the collection program in place and ready to roll as you being to enter any non-prime lending programs, whether they are auto secured, or unsecured. And that leads us to our next poll question. Aren’t we having fun with this? Okay. Following
up on our same $20,000 loan and the fact that the member now has 18 years experience in its current job. We now learn there’s more to the story. In talking to the member, you learn that his spouse was diagnosed with breast cancer 16 months ago. She became
terminally ill and passed away 12 months ago. The auto repossessed was a family van financed at another bank. The borrower was purchasing the $30,000 van having a $10,000 down payment plus the sales tax. They will be trading in the car that has the $3,000 balance with us. He has been a
member with the credit union for over 20 years. Would you reject the loan, approve the loan, defer the loan for more information, or you’re not a credit union? And we’ll give you a few seconds there. Kathryn Baxter: This is a very interesting scenario. Isn’t it? Tom Penna: It’s more common than we all
know. Kathryn Baxter: Exactly. It really is. Tom Penna: So, that should be sufficient. So, Kathryn, let’s see what it says. Kathryn Baxter: All right. Let’s take a look. Tom Penna: Well, the number that reject the application has now gone down to less than 6%. Those are now willing to approve the
loan has gone up to 81%. And those that still want some more information, 11%. Well, like I said before, there’s no right or wrong answers. The kind of risk you’re willing to accept. But I look at this as when you look at the member’s needs versus their wants, it may help you really look
at the decision. This person needs that van. He’s got to carry the kids around. He needs to get to work. He’s always paid you. These are some strong factors to take into consideration when you look at making a loan to a subprime member. Moving on a little bit. I’ve added a resource for you.
Here’s a video clip on YouTube. It’s a result of a study completed by the Filing Institute and the National Credit Union Foundation. And it talks a little bit about the positives and some of the weaknesses in the subprime model lending program, if you venture into that market. Please look at
it at your own leisure. I wanted to include it, but you can see this went – we provide a lot of information and didn’t have the time to let you view the clip, but you can do it on your own and you’ll be amazed at some of the things that are said and how members take advantage of it. Okay. That concludes the narrative
of the actual presentation, but we have some housekeeping things to do before we move on. Some of you may have received notice from NCUA that we’ve initiated a program with the Treasury CDFI program, Community Developed Financial Institution, to help you generate a streamlined process to
get approved for a certified financial institution. If you have received a letter or a call and haven’t yet responded, we kind of wish you would, because you can learn more about the advantages that’s out there for the CDFI. Those are reaching out to target market areas of Treasury.
Generally a low-income credit union may be required, but some non-low-income credit unions may also qualify, because they reach out to target market of Treasury. These grants that you can get from CDFI are a little different than NCUA’s. They allow you to get, in some cases, more than $1million to
build a loan program to help the members or the – that’re located in the lower income target market investment areas. So, if you did get a letter and you want some more information, please respond back to NCUA at oscuimail dot com. Also, I provide you with a list of
resources. Some of the information I used to prepare this webinar for you. There’s also a whitepaper on the NCUA OSCUl website called basically serving the credit invisible that also reaches out to members that generally don’t have a credit score and how
you can service them, which also relates into serving those that have the weaker credit scores. We also have the upcoming webinar for the remainder of the year, which is Vendor Management and Due Diligence. And we’re also going to move in to – remind you that frequently asked
questions is available on the OSCUl Learn Center. That’s where if you need information about any particular topic, you can type it in just like you would Google or Yahoo when searching information. If we don’t have an immediate answer for you, let us know in the comment section and an EDS, or Economic
Development Specialist, will get back to you within generally 24 to 48 hours. At this time, I’m going to give it back to Kathryn so we can – well, I’ll give you the contact page to reach NCUA OSCUl if you have questions. And now, I’ll give it back to Kathryn to open up the floor. Kathryn Baxter:
Okay. Thank you, Tom. So, what we’re going to do, we’re going to move right into our Q&A. I’m sending – pushing out to you right now the survey that we’d like you to fill out. At this particular time as well, while we’re doing the Q&A, you may feel free to take
the quiz if you want to receive a certificate. And use one of those magenta icons to – that has the quiz in it, on the right-hand side at the bottom of your page. So, let’s see if we can start with Julia. Are you there, Julia? Julie Wooding: I certainly
am. Kathryn Baxter: Okay. Great. You had quite a few questions here. So, one credit union asked this question. They said that the credit score model that they use is FICO Score 98. They wanted to know if that model was similar to what you were displaying. Julie Wooding: Okay. Yeah. Good question. So, yeah. A couple things about FICO score versions. So, every few years, we redevelop the FICO score model at each bureau. So, I believe FICO 98 is a prior version – model version from TU, from TransUnion. I think that’s correct. And so, what we were looking at was FICO 8. So, it just so happens that FICO 8 is two versions newer than FICO 98. So, after FICO 98 at TU came FICO 4. And then, FICO 8. So, yes, it’s similar in that we have odds charts for FICO 98, just like we have them for FICO 8, the one we were looking at. The issue or concern that I would have, if that credit union is about to say, Gosh, I need to go find those odds charts from FICO 98,” the odds charts are produced on the development sample. So, the development sample and the timing of that development sample from FICO 98 was many, many years ago. So, I don’t know that a odds chart of FICO 98 today, given that it’s going to be on data from many, many years ago, is going to be useful. I think the helpful thing to know is that each time we redevelop a FICO score model, we scale it to the same odds to score relationship as the prior model. So, it’s kind of hard to say. So, yes, it’s similar. There are some changes that we’ve made in our FICO scores over time. And there are odds charts available on FICO 98, but again, they would be, at this point, pretty old. So, I hope that helps. Kathryn Baxter: Okay. So, they had a little bit of a follow-up question to that. So, here’s what they said after that. So, why does the FICO score differ from what members – when they get their free credit score, why does it differ from what they see on, for example, credit card statements? Why are they different? Julie Wooding: Okay. Well, I’m curious. When you get a free credit score, did they say anything about where they’re getting that free credit score? Kathryn Baxter: No, they didn’t. You know, some credit card companies, as an added feature, will give you a credit score on your statement. Julie Wooding: Yeah. Kathryn Baxter: Or wherever you log in. So, wherever they’re getting it from, I would imagine. MasterCard, Visa, or whomever. Julie Wooding: Yeah, really good question. So, there are – you’re right. There are lenders out there that are part of a program that we call FICO Score Open Access. And the FICO Score Open Access program basically gives the right to that lender, who is purchasing FICO scores to manage their portfolio. We give that lender the right to turn around and share that FICO score with their customers. So, for example, if you’re thinking Discover – I think Discover’s probably the most well known one that’s participating in the Open Access program, but there are a lot of other lenders who are providing a FICO score. So, they are sharing that FICO score with consumers. However, it’s important to be careful, because there are some lenders out there that are sharing the Vantage score with their customers. So, in the very beginning, Tom talked about the FICO score, the Vantage score, that sort of thing. So, for example, the Vantage score is a score that you would get on the website called Credit Karma. I think Cap One is sharing the Vantage score. USAA is sharing a Vantage score. So, the trick is, if you want to know whether you’re really getting a FICO score is to look at the information that your lender or your bank gives to you on your statement. If it’s called a FICO score literally. If they use the word FICO, then you’re getting a FICO score. If it doesn’t say FICO, if it just says, “HHey, here’s your credit score,” then it’s likely a Vantage score. So, a couple things to know about that. The FICO score is the score used by more than 90% of US lenders. So, if it’s important for you as a consumer or for your customers to understand what their lender is likely using to evaluate them on credit decisions, most often, it’s going to be a FICO score. So, Kathryn, does that answer the question? Kathryn Baxter: It does. As a matter of fact, you answered another question that I was going to give you. You addressed the Credit Karma score. Julie Wooding: Oh, okay. Yeah. Let me just add one more thing there. The FICO scores are absolutely obviously built by FICO. The Vantage scores are built by this other company that is made up of the combination of the three bureaus. An entity. There are similarities between FICO and the Vantage score. They both have the same score range, 300 to 850. They’re both based on bureau data and only bureau data. But the similarities between that, between those, after those are somewhat limited. They’re built by an entirely different company. Certainly a higher score is better risk. But I would absolutely not say that anyone should expect that if they get their FICO score and they get their Vantage score, I would next expect them to be similar. Kathryn Baxter: Okay. Great. Thank you. Stay on the line, Julie. We’re going to bounce over to Lin. We have a question for your, Lin. So, this credit union says that – they said, “DDo we know whether enforcing automated payments helps reduce risk? And can we enforce that?” Lin Li: So, in terms of automatic payments, we have seen or heard from lenders. Everything else equal, it certainly mitigates risk somewhat as well as makes the customer or member more secure, meaning they may not take the loan somewhere else. Well, in terms of – that’s why some lenders incentivize borrowers to sign up for the automatic payment by through either reducing the pricing a little bit. Some incentive to the borrow. Well, I’m not not – I don’t know – I think it’s probably the credit union’s decision to require or not. I’m not sure if there’s any consumer compliance regulation that prohibit you doing that or not. I’m not a compliance expert. So, I guess you have to do the research on compliance part. But encouraging or incentivizing borrowers to sign up for that service certainly helps from a risk mitigation standpoint. Kathryn Baxter: Okay. So, all right. I think that answers that question. I’m going to bounce over to Tyler. Tyler, you have a few questions. I’m still – I’m going to ask you two questions really quickly. One, we had quite a few people ask to define what an SID vendor is. Tyler Valentine: Okay. So, service interruption device is what it stands for. There’s a few companies that I’m aware of on the market. One is PassTime USA and one is Loan Plus. And it is a device that’s installed. It has wires that go into the starter of the vehicle. And when you remotely send from a – at least what I’m familiar with, is you log into a website. You send a deactivation signal to the device. And then, it interrupts the ability of the vehicle to start. And that’s what service interruption means. It won’t have any impact when the vehicle is currently running and in motion. It’ll only have impact once it’s been shut off. When they go to start it again, it won’t start. Kathryn Baxter: Okay. So, you had a few questions on that issue. Let me ask you one more before I pop over to Leslie. So, another credit union said, “lls your SID lending all direct or do you offer SID as part of your indirect as well?” Tyler Valentine: It’s with both. So, obviously, we use it in direct, but we also, if there’s a deal structure that we’re comfortable with coming from an indirect source, we will approve it with a contingency or with a stipulation that the device has to be installed as a requirement of the loan. Kathryn Baxter: Okay. All righty. So now, I’m going to jump over to Leslie. Leslie, you there? Leslie Johnson: I’m here. Kathryn Baxter: Okay. Here’s your question. So, the credit union said, “FFor indirect lending, if the credit union doesn’t risk base price, would you create an indirect program if you didn’t? Leslie Johnson: Well, I personally would create its own program with risk based pricing involved in it. I think that’s critical so that you can keep a well balanced portfolio and mitigate your risk by pricing it correctly. Kathryn Baxter: Okay. I’m going to ask another question to the credit unions. Leslie and Tyler, let me ask you this question. And certainly, Julie, you can bounce in, too. One credit union asked about what is the normal day or time that repossessions should be done. I just want to throw that out there. For the credit unions, for Tyler and for Leslie, with your indirect program – not your indirect. With your subprime program for your vehicles, when did you start the repossession process? Leslie Johnson: Tyler, you want to start that? Tyler Valentine: Sure. So, for – this is Tyler. For us, with repossession – so, they – part of the agreement on the SID. So, if it’s a SID loan versus non-SID, it’s a little bit different. But the 10 days grace period is waived within that. It is not part of the contract or the agreement. So, by the time they’re five days delinquent on a typical basis, the vehicle has been shut off. And within two days, they haven’t
paid or haven’t contacted the credit union, that’s when we’re looking for repossession. So, we’re looking for repossession between 15 and 20 days. So, it depends. Otherwise, it’s going to be, in the other instances, from a repossession standpoint, if there’s not a device present, we’re looking at 30 to 50 days before we initiate repossession, depending on the situation. Kathryn Baxter: Okay. What about you, Leslie? Leslie Johnson: Ours depends on pretty much the risk that we’re looking at, per the credit score. The higher the risk, the quicker we’re going to be picking them up or communicating. On the 11th day, we’re always making phone calls to anybody who hasn’t made a payment. If we start finding that we’re not getting communication with members, they become higher on our radar. And if we’ve had problems with these folks in the past, they’ve made payments, but they’re continually being slow or communication goes away, we may, if they miss after one day of the next payment, we may repossess. So, it has a lot of different factors. There’s no one perfect plan. We just try to eliminate our risk as much as possible. When we do repossess, we do give the member the option to cure the past due amount, but the only way they’ll get their vehicles back is we now add in, as Tyler calls it, his SID or we call it a GPS unit. And that way, we then have the ability to monitor if the people are around or we can let them know that they’re delinquent by disabling their vehicles also. So, there is no real magic number, but we have picked it up from the 60 to 90 days of old traditional. And we can be repossessing anywhere from one to days of past due. Kathryn Baxter: Okay. Yeah. That’s what I think the credit union was trying to find out. Was there an industry standard. And you’re right that there isn’t. It depends on your portfolio. And of course, you have to abide by state law as well that affects loans. Leslie Johnson: Right. Kathryn Baxter: So, thank you for putting that – sealing that up for me. So now, Julie, I’m going to bounce to you. I have a question for you. Ready? Julie Wooding: I’m ready. Kathryn Baxter: So, here’s – a credit union wants to know, “WWhat would be the best FICO score model to predict the performance of credit cards at the time of origination? Which model?” Julie Wooding: Yeah, absolutely. It’s a great question. The good thing is – the great thing is about FICO scores is that, again, we redevelop them every couple years. Each time we redevelop the score, we are building a more predictive model. Not only because it’s built on fresher data, but it’s more reflective of recent consumer behavior. So, each and every time we redevelop a FICO score, it’s going to be more predictive and stronger than the one before. So, the current version or the most recent version of the model out there is called FICO Score 9. It became available just over a year ago, in about summer of 2015. That, without a doubt, is the most predictive FICO score model you can buy and use. I would absolutely recommend using that one, particularly if the credit union is using an older score version. So, for example, if we think about the generations, current version is FICO Score 9. The one before that was called FICO Score 8. Before that, the generations were called either FICO 3, FICO 4, FICO 5, depending on which bureau you’re talking about. But again, FICO 9 is the most predictive FICO score. And that’s the one I would definitely recommend using. Kathryn Baxter: Okay. All righty. Have another question for you. So now, I have another credit union that wants to know, “lls the Beacon score different from a FICO score. ” Julie Wooding: Ah, really good question. No – easy answer is, a Beacon score is a FICO score. So, interestingly in years past, we would certainly build the FICO score models. And then, they were named by the bureaus. So, for example, at Equifax, they used to be called Beacon scores. At Empirica – sorry, at TU, they were called Empirica. At Experian, they call them actually Fair Isaac Experian Risk Models. So, a Beacon score, an Empirica score absolutely is a FICO score. Kathryn Baxter: Absolutely great. Wonderful. Tyler, here’s a question for you. Tyler Valentine: All right. Kathryn Baxter: Actually, this question is for both you and Leslie. So, the credit union wants to know how many employees you have in your collection department. That’s the first part. Leslie Johnson: We have one. Tyler Valentine: We have one, also. Kathryn Baxter: Okay. Here’s the second part. Do you offer a financial counseling program? Leslie Johnson: We don’t have – we do have some certified financial folks on staff. Find that we’re having a tough time having the members sit down with us to go over the plans. Tyler Valentine: Yeah, ours is much less – yeah, it’s not as formal. We do have certified folks, but it’s not – the people that want to go through it, and are interested, and listen to it, we provide it. And it’s an element of the hard close, but it’s – but no, we don’t have a formalized program. Kathryn Baxter: Okay. So now, here’s the – another question for you, Tyler. The credit union wants to know, “HHow do your members feel about the SID?” That device. Tyler Valentine: Yeah, we haven’t had any issues with it. People understand that they’re in a credit challenged situation. They’ve been very open to it. We talk about how it’s a condition of the loan. How if they make on-time payments, they’ll never even know it’s there. We’re very open with them. There’s 14 different sections on the agreement. And they have to sign in each section. So, they sign the agreement 14 different times understanding each of the sections of the agreement. We never – I think there’s one instance where somebody was uncomfortable or chose not to do the loan because of the device and the GPS component of it. Kathryn Baxter: Okay. Go ahead. Tom wants to ask a question. Tom Penna: Julie, what is the difference between an industry credit score and the classic FICO scores? And how are the scoring systems different? Julie Wooding: Yeah. Another really good question. So, you’re right. Every time we redevelop a FICO score model, we develop several different versions. So, there is what we would call the classic FICO score or the base model. And that’s the model that it has a score range from 300 to 850. If you think about it, what that model’s purpose is is to determine what is the likelihood that a consumer is going to go delinquent, or bad, or 90 days or worse on any of their accounts, right, on any of their trade lines or accounts on their consumer file? It’s a broad based score. Now, on top of that, or in addition to the base score, we create the industry scores. So right now, the industry scores that’re available are the auto score and the bank card score. And what those models do is, first of all, they’re based off of the base score. And then, we add additional elements, or characteristics, or variables to the score to adjust it. So, for example, what the bank card score is going to do is be focused on what is the likelihood a consumer’s going to go bad on a bank card trade, right? And the auto score is going to say what is the likelihood a consumer’s going to go delinquent on an auto trade. So, they’re more focused on a specific type of performance rather than that broad based performance. They’re going to be focused on what is the likelihood of bad or delinquency on an industry-specific trade. So, they are based off the base score. So, they’re very similar, but they have this additional information which is going to turn it basically from a broad based model into industry specific. And like we said, it does have a broader score range. So, instead of 300 to 850, the score range is going to be 250 to 900 or basically it goes up and down an additional 50 points from the 300 to 850 range. Does that help, Tom? Tom Penna: Absolutely. So, when someone goes to a car dealer, they’re going to get a different score than primarily if they go to a credit union? Julie Wooding: Probably so. I would say that most auto lenders and dealers are using the auto version. So, you’re right. If you go and go to an auto dealer, they’re likely going to be pulling a FICO Auto Score on the consumer. So, you’re right. If a consumer walked into a credit union, and the credit union was pulling a base model, they could be different. Tom Penna: Okay. Thank you. Kathryn Baxter: All righty. Thank you, Julia. Well, we are fresh out of time. Those of you that’re still taking the quiz, you may stay on the console. But we’re done with our webinar for today. We’d like to thank all of our speakers for the wonderful information. We’d like to thank Franz Ayento, who’s our behind the scenes tech person and also Em’mia Hughes, who’s been helping with our Q&A. This is Kathryn Baxter. We’re going to leave you today. And hopefully you’ll join us on December 7 for our Vendor Management & Due Diligence webinar. So, that’s going to be the last webinar possibly for this year. We hope you’ll join us. Have a wonderful afternoon and a great week.

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