Psychologists believe the best predictor of future behavior is past behavior. Many credit unions approach the lending process with a similar attitude, using credit scores and past credit performance to predict the probability of whether a borrower will default on their financial obligations.
America’s Credit Union ($400.0M, Fort Lewis, WA) prides itself in the convenience it provides to members. In terms of lending, it displays its commitment to convenience through an efficient, rapid loan request process in which it completes underwriting and makes loan decisions within 10 minutes.
The credit union, located halfway between Seattle and Olympia on Joint Base Lewis-MccHord in Fort Lewis, WA, uses a variety of tools to achieve its 10-minute target. It considers the loan structure as well as the borrower’s income and history with the credit union. More importantly, it uses bankruptcy scores in conjunction with credit scores. Unlike credit scores, where a high number indicates desirable performance, low bankruptcy scores suggest the borrower has a low likelihood of declaring bankruptcy. Using both scores together helps the credit union make effective, efficient lending decisions.
“If we see a low credit score with a low bankruptcy score, that still means it’s a strong credit opportunity for us,” says Diane Branson, executive vice president and chief operating officer at America’s. “If we see a high credit score and their bankruptcy score is high, then that means in the next 24 months they have a high probability for filing for bankruptcy. We are going to look at that [loan] a little harder.”
What Is The Bankruptcy Score?
America’s has included bankruptcy scores in its decision-making toolkit for more than a decade and currently uses Experian’s MDS bankruptcy model score. Experian’s data provides “shockingly” accurate bad rate cumulative numbers and bad rate interval numbers, says Branson, with the credit bureau’s performance charts virtually mirroring America’s charge-offs.
The captive data stretches back 24 months, giving the credit union a snapshot of an applicant’s financial picture. The bankruptcy score model reviews a person’s score at a given time and considers that score in the context of the frequency of bankruptcies that were filed within that score range. This method provides a cumulative predictor of future bankruptcy and allows the credit union to offer competitive products and services, especially auto and credit card loans, to its primarily military membership.
“Our core membership group is seeking good auto loans, good rates, good terms, and good Visa cards,” says Branson, who has worked at America’s for 13 years.
As of June 2013, auto loans comprised 64.24% of America’s loan portfolio. For credit unions with $250-500 million is assets, auto loans comprised 32.12% of the portfolio, and for all credit unions in Washington state, auto loans comprised 30.19% of the portfolio. Likewise, credit cards comprised 13.21% of America’s loan portfolio compared to 5.27% for asset-based peers and 8.06% for state credit unions, according to Search & Analyze data on CreditUnions.com.
The Benefits Of The Bankruptcy Score
Despite the preparation and research that goes into each approval, no loan is immune to risk. According to Search & Analyze data, America’s percentage of delinquent loans to total loans is 0.77%, lower than the 1.04% posted by its asset-based peer group. As of June 2013, America’s had $1,728,033 in delinquent loans. This is the credit union’s third straight quarter with less than $2 million in delinquent loans and represents a nearly 54% decrease from the $3,756,449 high it reported in March 2010.
Despite the benefits of using bankruptcy scores for loan decisioning, bankruptcies, charge-offs, and delinquencies are still a part of the lending process. As such, at midyear America’s reported $1,508,401 in bankruptcies; that’s a 153.6% increase year-over-year. Branson attributes this high total to residual effects from the recession. “Some of that spike is in our credit card portfolio from pre-approvals we made as early as 2008,” she explains.
Branson admitted the credit union has charge-off and delinquency goals but declined to share them.
“At this point we are going to continue to evaluate and compare bankruptcy scores to charge offs as we do credit scores to charge offs just to validate that our assumptions are true and correct,” she says.
Protecting The Member And The Lender
The use of bankruptcy scores quickens the decision-making process and contributes data that helps the credit union make sound decisions and mitigate risk. However, bankruptcy scores benefit members as well. With additional information at its disposal, America’s can avoid putting members into a situation where they would have a payment on something they ultimately couldn’t afford.
“We like to look at how we can forecast and hedge against the odds and protect against losses for the credit union and its members,” Branson says.
Bankruptcy scores allows the credit union to approve more loans than it would have otherwise, but Branson stresses that America’s is not a subprime lender. Military members face different credit challenges, from unexpected relocation to late paychecks, which can negatively affect their credit scores. In such cases, credit scores are not indicative of one’s ability to repay a loan, Branson says. They are simply a reflection of past performance and not necessarily a predictor of the future.
“I’m not sure [credit scores are] are as indicative of the borrower’s ability and commitment to pay as they used to be,” says Branson. “[Bankruptcy scores] give you a better snapshot of [a member’s] propensity to manage credit overall.”