Western Federal Credit Union ($1.8B, Manhattan Beach, CA) is that rare cooperative with a coast-to-coast reach. The credit union serves primarily Toyota and Northrup Grumman employees in California, the Midwest, and East Coast and has a broad network of indirect lenders. Even within the confines of its own membership, Western must appeal to a national audience if it is to expand a $1 billion loan portfolio.
Unfortunately, like many Americans, a large portion of that membership is still too overextended to lend to. So Western is remaking its auto and mortgage lending products so that they are flexible enough to attract new members but not so accommodating that caution is thrown to the wind. The credit union is also setting ambitious goals for speedy lending decisions to compete with the big banks that it views as its primary rivals.
“The way we’re going to grow our portfolio is to get members from Wells Fargo, Chase, and Citibank, so we try to have products that are on par with them.” says Jonathan Oliver, Western’s vice president of branches and lending.
Casting a Wider Net
To lure those new members in the door, the credit union offers a 5.99% credit card. Although the 2.74% spread is a tad narrower than the 3% Western prefers, the card has broad appeal, even for overextended existing members looking to consolidate debt at a lower rate.
Western is also targeting Gen Y with underwriting standards that help younger borrowers qualify for auto loans. Because no credit is not the same thing as bad credit, Western uses a different underwriting standard for these young borrowers that emphasizes whether a reliable income exists to repay the loan. Western even throws in a carrot for this gadget-loving generation by folding into the loan the cost of installing GPS. Borrowers may see that as a boon at first, but Western views it as an added insurance policy. “If I know my credit union can track my car, I might be more inclined to scrape together my payment,” Oliver says.
The credit union doesn’t just make exceptions for Gen Y but has broadened its standards for other borrowers to capture more auto loans with members who aren’t overextended. Because the car serves as the loan’s collateral, many lenders scrutinize the vehicle’s characteristics even more than the borrower’s. Like many lenders, Western used to reject loans for used vehicles older than 10 years or with more than 100,000 miles even if the borrower had excellent credit. Now the credit union is willing to make such a loan. The rationale is simple: “A good-paying borrower is going to repay the loan even if the collateral is subpar,” Oliver says.
Where Caution Still Reigns
That philosophy doesn’t extend to real estate loans. Burned by plummeting California real estate values, the credit union treads more cautiously with mortgages and home equity lines of credit. The latter especially is a bubble that Oliver believes could still pop. Consequently, Western sets strict limits for home equity credit lines, which can’t go above $250,000 or 80% of appraised values.
With mortgages, the credit union’s underwriting standards mirror Fannie Mae’s and Freddie Mac’s, but Western scrutinizes the borrower’s claims. The credit union requires full documentation, even for information it once was willing to take the applicant’s word for. Western used to allow stated incomes but now requires borrowers to back up their claims with pay stubs. The policy applies to everyone, even members with top-tier credit.
Still, Western offers enough flexibility in other areas that might stymie a borrower’s chances of getting the loan at a big bank. For instance, the credit union is willing to weigh certain characteristics, such as length of employment, more heavily to offset a mortgage applicant’s lower credit score. And because Toyota frequently moves employees around to different locales, Western also makes allowances for applicants with good credit who have changed jobs or residences often.
Speedy loan decisions are another way Western wants to distinguish itself from the big banks. “Anything less than an instantaneous decision means that someone could leave or not close the loan,” Oliver says. “So you have to get them while they’re in the branch or on the phone because good luck getting them back.”
Currently, the maximum wait for a decision from the credit union is 10 minutes, even for applicants requiring a second review. To maintain that standard, Western has hired new people to augment a centralized underwriting team that reviews most of the loans submitted; only 30% are approved through an automated system.
And with other employees who also have underwriting authority even though they serve in another capacity, Western has a go-to team of pinch-hitters whenever extra help is needed.