By Randy Karnes, CEO, CU*Answers

Can tools help credit unions increase subprime lending success? Only if a CEO is really ready to make the case that being in-the-business of subprime lending is more than a passing fancy! 

I generally do not talk to many credit union leaders about subprime lending; it’s just too hard to pin down what most credit union CEOs mean by it. Subprime lending is always based upon eye-of-the-beholder pricing strategies, and what they choose to call below-the-line risk modeling, meaning lending where losses are projected with high probabilities, collections are aggressive, and the short-term interest margins are high.

Subprime lending is not credit rebuilding. It is living with members who, in most cases, will be subprime borrowers for most of their time with the credit union. If you are going to be successful at subprime lending, you must take the position that it’s sustainable, repeatable and culturally acceptable when it comes to pricing, servicing, and recovery tactics. It is a business, not a social mission, and if you have any chance to be effective in helping people you have to see it that way in the board room, through management, staff, and even out into the direct delivery channels that touch the borrowers.

Learn more about subprime lending and discuss hot-button topics as a member of the Underground Community!

I spent my time borrowing as a subprime member-owner of a credit union. I was redeemed not by the good intentions of a lender’s social mission, but by the chance to go on with my life based on the practices of a subprime lender. Thank goodness for the opportunity to borrow at higher rates, being coached to stay on top of my payments, and to be encouraged by the fact that I had a chance to rebuild. Much like with college professors, I knew that I had to do the work, and that professors did their job even when they might flunk me without a second thought. And now as a graduate of subprime lending coaching, I do hope that more credit unions will look harder at the practices in the future for the long term.

As a tool provider wanting to encourage subprime lending, I think the most important approach to the tools is that they allow the credit union lending designer to blend them in all lending channels, and serve the member smoothly and effectively without stereotyping and labeled too publicly as a poor credit risk, below the line borrower. Subprime lending programs are not necessary to prove a point that the credit union has a heart or is doing good works; they must have effective, streamlined lending programs that are valued and seen as “just business” to give the borrower a sense of worth and sense of moving in the right direction.

And now as a graduate of subprime lending coaching, I do hope that more credit unions will look harder at the practices in the future for the long term. - Randy Karnes

Keys to One-On-One Origination Processes

1. Automated risk-based pricing schemes embedded in loan application processes – fit the situation to the borrower and collateral circumstances quickly and without fuss.
2. Easy shopping tactics for member borrowers that get turned down a lot – take the stigma out of being turned down; use online and mobile channels and filter the opportunities at low cost. 
3. Design online tools to say ‘yes’ early and often that encourage the member to hang in there and push toward the next step. Do not say ‘no’ too early: you’re coaching and negotiating not pushing for the easy stuff. Send qualified applications to call centers and loan channels that can take the extra care to negotiate a working situation with difficult borrowers. 
4. Think carefully about online closings – subprime lending needs to be candid about special collections and servicing commitments, automatic payments, and the like. Be transparent and take the time to verify the member with a coaching session even if only on the phone or via chat.

Keys to the Servicing Processes

1. Aggressive and strong, variable-rate control automation – build in rate management and make sure the loan stays profitable over time. Even in low rate, slow to change rate environments hedge and make sure the low is ready to reprice effectively.
2. Easy payment processes – text, A2A, and low authentication tactics that make it easy for members to pay. Of course, you want easy automated payments, but plan for one-off payments and make sure that you have high-convenience, low-barrier payment channels ready to take the excuses away from members with bad payment habits.
3. Turn on all communication channels – frequent notices, coaching communications, refinance offers for success, high penalties for less than successful moments, and automate your communications and your fee collection. Keep the co-borrowers engaged and make sure your tools can automate here as well. Take the excuses away – use tools that help member keep your payment top of mind.
4. Data, data, data – engage dashboards and special data tracking tools to see the big picture trends in your subprime lending pools. Help your management and board stay focused on the big picture business line here. Subprime lending can get pretty depressing in the weeds, and boards that fixate on losing loans might not always have the counter arguments of those who are paying out based on margins designed to offset future losses effectively. Trend these loans over time and design data reports with the net gain perspective.

Credit unions must commit to investing in their communities and be in to for the long game, as Randy writes here. Check out the story of SCE FCU.

Use Peer Networks

As much as you look for a vendor to help you, look for an expert who can teach you. While your credit union might see subprime lending as an option, look for credit unions that have no other option than to lend below your line, outside your risk tolerances, and without you and your board’s sensitivity to loss. Find someone that lives it, not just chooses it. They will provide perspective.

Seek out tools that constantly update what the network is doing, such as pricing tables, risk-based pricing configurations, variable rate designs, and other systems. Be fluid and stay with the pack. Look for participation opportunities and for tools that make it easy to distribute and service loans for investors.

Finally, and probably before all of this, work your board. Survey their concerns and match tools to their hot points. Build a business approach that stands alone and is clearly a tactic separate from your prime borrowers. Just like indirect lending, this is not about every member being the same. Break it out and remind them that these members need opportunities and choices. It’s good business when you design it as a business – and it can change lives. It changed mine.