For State Employees’ Credit Union ($26.5B, Raleigh, NC), being a reliable source of credit means throwing the idea of risk-based pricing out the window. This southern powerhouse and second-largest credit union in the United States considers every loan application on a case-by-case basis. No small feat considering as of March 31, 2013, it held more than $13 billion in loans.
“Credit unions are there for two purposes: to help create thrift and to provide lending,” says SECU CEO Jim Blaine. “It’s something we need to provide every day at a fair rate.”
SECU loan officers take more than a credit score into consideration when deciding whether to approve or deny a loan. They also look at why members are where they are financially and the reasons that support why members can, or can’t, repay a loan. Members that have good reasons for credit blemishes and are otherwise acceptable credit risks can earn the chance to repair their history and re-establish, or begin establishing, clean credit. It’s one way the credit union uplifts its members and puts them on a level playing field with those “A” paper, high-credit-score consumers.
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Despite SECU’s willingness to work with borrowers other institutions would turn away, its role in providing credit does not come at the expense of member financial health.
“We give members options and provide guidance, but we don’t push them to get a loan when they might not need it,” says Spencer Scarboro, senior vice president of mortgage lending at SECU.
That kind of respect resonates with the credit union’s million-plus membership. The average loan balance at SECU is $21,820 versus $14,286 for credit unions with $1 billion or more in assets, $16,403 for all credit unions in North Carolina, and $12,702 for all credit unions nationally, according to CreditUnions.com's Search & Analyze Scorecard.
The higher loan balance is a reflection of the strong presence of mortgages in SECU’s portfolio. As of March 31, first mortgages comprised 81.57% of SECU’s loan portfolio, whereas they represented 45.68% in the portfolios of credit unions with $1 billion or more in assets, 41.54% for all credit unions nationally, and 66.76% for North Carolina credit unions. Not surprisingly, SECU’s first mortgage penetration of 5.47% is more than twice the 2.39% of credit unions with $1 billion or more in assets, and the 2.08% for all credit union nationally. It’s even much higher than the 3.66% first mortgage penetration for all credit unions in North Carolina.
Reliable lending? Check.
Fair rate? Check.
At the end of the first quarter, SECU first mortgage rates stood at 2.75% versus 3.71% for credit unions with $1 billion or more in assets, 4.69% for all credit unions nationally, and 4.93% for credit unions in North Carolina. Granted, providing that fair rate for members does leave its mark on the credit union’s income statement.
SECU’s average loan yield of 4.68% is slightly lower than its asset-sized peer group, which averaged 4.87% in the first quarter, according to CreditUnions.com's Search & Analyze Scorecard. Compare this to credit unions in North Carolina and nationally, whose first quarter average loan yields were 6.68% and 6.44%, respectively, and the cost is even more evident.
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Still, the credit union holds steadfast to the idea that if a member qualifies for a loan, then they deserve the best rate the credit union can offer.
“When you charge a higher rate to somebody who is struggling, it’s like throwing a drowning person a cement block.” Blaine says. “Our system helps those that may have had some difficulty regain their stature.”
SECU has a decentralized lending program that empowers individual financial service officers to make lending decisions. To do that, though, they conduct face-to-face interviews and take a holistic view of members’ credit situations. Because the credit union holds its loans in portfolio, it can establish its own set of guidelines. And because it doesn’t sell loans on the secondary market, loan officers don’t have to rely on automated underwriting mechanisms.
“We have the ability to do whatever is necessary to help members without following someone else’s rules and procedures,” Scarboro says. “Not every credit union has the luxury of doing that, but it has served us well in offering unique products.”
The ability to hold loans in-house has helped the credit union become a formidable force in first mortgages. Rather than going head-to-head against the market’s larger mortgage lenders — Bank of America is headquartered only 275 miles away in Charlotte — SECU has carved out its own mortgage niche. Since the 1980s, the credit union has almost exclusively offered adjustable rate mortgages, this despite the bad reputation ARMs have earned since the housing meltdown. ARMs provide a path to homeownership for members while giving SECU a tool to manage its assets and liabilities. And by attracting mortgage-seeking members, ARMs also bring the credit union one step closer to becoming a member’s primary financial institution.
SECU introduced its two-year ARM in 2003. The two-year ARM offers low origination fees and does not require private mortgage insurance, even when the loan-to-value exceeds 100%. Interest rate changes are indexed to the one-year constant maturity treasury and interest rates cannot increase more than 1% every two years or 8% over the life of the loan. Currently, rates start as low as 2.75%.
Introduced originally in 1988, SECU’s five-year ARM was brought out of retirement in 2007 to serve as an alternative for members who had subprime loans through other lenders. As with the two-year, this ARM offers low origination fees and does not require private mortgage insurance, although members cannot borrow more than 100% of their home’s worth. Interest rate changes are indexed to the one-year U.S Treasury and interest rate cannot increase more than 1.5% every five years or 6% over the life of the loan. Currently, rates start as low as 4.75%.
And members that find themselves in a tough financial situation can always request a rate reduction. SECU’s board bases modification guidelines on a loan’s original loan-to-value. This can mean big monthly savings. For example, the credit union will reduce a rate of 6.03% on a 1-year ARM with an original LTV of 90% or less to 2.75%. It offers the same rate to members who are paying 4.65% on a two-year ARM with an original LTV of 90% or less.
The idea of empowering lending staff to make tough decisions and think about loans in a different way is a take-away the entire industry can learn from. When loan officers can treat borrowers as individual members and not try to make them fit into pre-defined loan parameters, the difference even one credit union can make starts to take shape.
“A nonprofit cooperative credit union is the correct answer to consumer finance,” Blaine says. “It’s not just warm and fuzzy. It is the best, most logical, most viable financial model for consumers.”