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1. How do you test the
tier levels?
In
order to maximize the effectiveness of this
program, it is essential that you "test your
tier levels". The suggested ranges in the manual
are "average ranges" and will work fine for most
credit unions. Those tier levels also represent
a safe starting point for those who want to jump
right into the program. But to maximize both
income and member service, you must "fine tune"
the tier levels in order to complement your
credit union’s unique membership base. This is
especially true if a large part of your lending
base consists of low-risk borrowers.
So how do you fine-tune the tier levels? It’s
easy. Simply record the information from your
loan officer log onto a spreadsheet program
(Excel, Lotus, etc).
Approval Rate: Sort your loans into 2
categories (Approvals and Disapprovals). Divide
the total Approvals by the Total Loans to arrive
at your "Approval Rate". This rate should be at
least as high as your pre-risk based lending
approval rate. If it is not, analyze your
disapprovals for possible reasons. To further
refine the approval rate, you can do the same
review by loan type (i.e. for unsecured, auto,
RV, etc.)
Score #1 Tier Levels: Next sort the
"Approvals" by the Score #1 column. Now divide
the number of loans in each tier range (L,M,H)
by the total number of approvals. This will give
you the % of approvals for each tier level. How
close are you to 20/60/20?
Score #2 Tier Levels: Now re-sort the
"Approvals" by the Score #2 column and find the
tier percentage for each risk level under that
score. Record the L/M/H mix for this score.
Tier Deviations: Most of the time
your two scores should be within 1 tier level of
each other (LM or MH).If you have a significant
number of LH scores, look at the score groupings
for each score. Sometimes scores will cluster
around a tier cutoff point. Simply moving that
tier level a few points one way or the other may
help.
If you have a significant number of low-risk
borrowers, you may find the need to increase the
middle score range (for example,you might need
to increase the top point value for the FICO "M"tier
level from 729 to 735 or 740, etc.). If you
choose to keep a large low-risk score
population, you should monitor loan interest
income.
Loan Interest Income: Again, if you
have a large low-risk population, you can also
reduce the rate spread between your "L" and "M"
tiers levels. By increasing the "L" rate
slightly, it will help offset any drop in loan
interest income.
Periodic Review: You should monitor
your scores on a regular basis to insure that
you are meeting your objectives. I prefer
quarterly. The absolute minimum review is
annually. Periodic reviews will often provide an
early warning of changes in the economic
environment or the make-up of your lending base. |
