By Shana Richardson, CEO, Ser Technology Corporation

Opportunity abounds for credit unions to expand auto lending to non-prime and subprime members.

Auto default rates hit a 10-year low in June, dipping to 0.82%, according to the S&P Experian Consumer Credit Default Indexes. If your credit union is a subprime lender, S&P Global Ratings showed that in May 2017, loss recoveries and delinquencies worsened month-over-month and year-over-year. Some would argue that those losses are not reflective of the subprime market overall and should be attributed to the composition of the index.

It is true that record volumes of auto loans have supported strong growth in new vehicle sales in recent years. According to Equifax, a record 29 million auto loans and leases were originated in 2016, helping the industry achieve record levels of new and used cars sales.

New data available from credit and data bureaus can assist credit unions to gain a holistic view of their members’ financial lives, from both an underwriting perspective as well as account management.

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Credit unions have been incorporating both new credit bureau and alternative data into their underwriting process as they seek to approve more loans to members who do not have a FICO score. Because these lenders have invested heavily in their own custom scoring models that take into account numerous attributes of a potential obligor, the vehicle to be financed, and the potential loan structure, in theory they are better able to assess the member's ability and willingness to pay than in the past. Many of these members lack the credit history required for a meaningful credit report because they are new to the workforce or are re-establishing credit after a period of dormancy, and yet they need transportation to gain or maintain employment. While these members may not have a traditional FICO score, it does not necessarily mean that they pose a greater credit risk than those who do have a traditional credit score. Overall, new data and technology have been developed to allow for more in-depth credit application reviews beyond FICO scoring, suggesting that nontraditional or "alternative data" have become increasingly important.

Read these important past blog posts about credit unions and subprime lending:

• Credit Unions Are Subpar on Subprime
• Credit Unions Are Subpar on Subprime? Bummer!

Alternative data sets are considered public information that are not typically gathered by the credit bureaus. These data sets are collected and made available by various third-party aggregators and include everything from cell phone payments to home and apartment to car insurance claims.

Data, combined with new sophisticated algorithms can calculate a credit union’s cost of funds and expected CECL loss ratios, make a powerful argument for being able to truly lend to those most in need without running up delinquencies and charge-offs. Of course, even with these new options, lenders will still have to employ the human touch, back-end account reviews and strong management oversight to create a profitable, yet responsible program.