The Top 6 Concerns about
 Risk Based Lending...

1.  "We prefer to keep our loan program simple" 

2.  "We're concerned about our members reactions"

3.  "We have a limited lending staff" 

4.  "We're concerned about discrimination” 

5.  "We have concerns about regulatory compliance" 

6.  "Risk based lending stands in opposition to the credit union philosophy—since it charges a higher rate to those who are least able to afford it. 

1.  "We prefer to keep our loan program simple" 
Risk based lending can be as difficult or as easy as you make it. If you start from scratch—risk based lending can be very difficult—as well as costly, time consuming, and confusing.    

This lending package is the result of extensive research, development, and testing. The foundation is in place and the basic parameters are established. You can either start immediately (using my suggested start-up parameters), or easily customize the program for your own membership.

As far as “simplicity” is concerned—the very heart of this program is that it is a complete, tested, and simple solution.
 

2.  "We're concerned about our members reactions"
When our credit union adopted this program, we felt there may be some initial member resistance. Instead, we found immediate support from our members as they quickly recognized our increased ability to level the borrowers playing field for the entire membership.

• Low–risk borrowers returned to the credit union for their borrowing needs  -- as they now received the lower interest rate that they had earned and deserved;
   
• Average-risk member still received the same competitive rates—but with improved and faster service. Plus, they now had the option to qualify for even lower rates in the future.
   
• Higher-risk members had a much better chance of loan approval at the credit union—as risk based lending allowed us to offset higher risk levels with rates that were still significantly below finance companies.

3.  "We have a limited lending staff" 
Then you definitely need this program.  The guidelines are already established and standardized -- thereby reducing the pressure on your loan officers. 

Your loan officers will process more loans -- in less time -- with greater consistency and accuracy.  Plus, you will have the ability to better monitor and control your loan default risk factors.   

4.  "We're concerned about discrimination” 
Discrimination, in any form, is wrong.  But, here’s some food for thought…

Which type of lending program leaves you open to potential abuse and/or charges of discrimination?  

• A program that relies on the subjective decisions from individual loan officers.  Loan officers with different personalities, training, and/or hidden bias’. Or,
   
• A program with clearly defined parameters and tiers.  One that uses a nationally based scoring system that was developed by a professional credit evaluation organization. A program that allows exception approvals within clearly established guidelines.

Also consider which system is actually discriminatory?

• A single-rate program that, by its very nature, can only serve the needs of your “average member”,  or
   
• A tiered-rate program that offers the flexibility and options that allow you to “level the playing field” and better meet the needs of your entire membership?

5.  "We have concerns about regulatory compliance" 
Regulations are usually enacted to either:  protect the credit union from acts that lead to insolvency; or, to protect its members from acts of discrimination (intentional or overt) due to race, gender, age, etc.

In regards to solvency:  this program provides the tools that will help you better monitor and manage your loan portfolio. Since loans make up the largest portion of your asset base -- any measures that reduce loan default risk will have a positive impact on over-all solvency.

Regarding discrimination—although risk based lending charges different members—different rates, it is not discriminatory since all members are required to meet the same predefined, standardized credit underwriting requirements – which are within the reach of each and every one of your credit union members.  Risk scores ignore all discriminating factors and focuses on how the applicant has handled past credit.
In contrast, traditional single-rate programs, which depend on loan officer “subjectivity”, are more prone to personal bias and therefore more likely to violate anti-discrimination regulations.
 

6.  "Risk based lending stands in opposition to the credit union philosophy—since it charges a higher rate to those who are least able to afford it. 
I originally thought that also—until I dug deeper. Traditional one-rate lending mandates that higher risk loan applications are denied in order to limit potential write-offs. These members are then forced to seek other lenders -- who charge a much higher rate of interest.

Risk based lending allows your credit union to charge a slightly higher interest rate so that you can serve their borrowing needs—and still do it at rates that are significantly below those charged by many other lenders.

When we think of fairness in the credit union,
we must focus on equal access to credit
rather than equal rates.

Now consider your savings program. Do you use a tiered dividend rate?

Some credit union managers consider this as a form of discrimination against low income members.  Since many of these members lack the financial resources to reach the higher dividend tier requirements – they are being denied the opportunity to earn a better rate of return on their savings.  On the surface—it may seem so—but when you dig deeper—you get a different picture.

Tiered savings rates encourages "savings oriented" members to maintain a higher savings balance—thereby insuring the availability of loan funds for those members with the greatest borrowing needs (the low balance saver).

In other words, although the low balance saver receives less in dividend payments—they receive a greater value through reduced borrowing costs.
The reduced loan interest expense usually more than offsets any difference in dividend tier rates.  As a result, the entire membership benefits from a tiered rate savings program—some directly (your savers) and others indirectly (your borrowers).

By the same token, a tiered-rate lending program serves the needs of a greater portion of your credit union membership. Through risk based lending, you are able to issue a greater number of “managed risk” loans—thereby meeting the borrowing needs of a larger segment of your membership.

The increased loan volume, in turn, results in additional income (when compared to alternative investments), which provides funds for higher dividends and additional reserves for the credit union—thereby benefiting the entire credit union and insuring its continued survival. Once again, we arrive at a win-win-win situation. Your savers benefit—your borrowers benefit—and management benefits.

Please Click Here for the "Bottom Line"