A Tiered Approach To Underwriting

How TruStone Financial’s tiered pricing matrix facilitates instant loan decisions for autos and recreational vehicles.

Minneapolis is a city of outdoor enthusiasts. With access to water Minnesota is the land of 10,000 lakes camping, and trails, the city and surrounding suburbs offer a fruitful market for recreational vehicles.

TruStone Financial Federal Credit Union ($963.2M, Plymouth, MN) headquartered just outside the metropolis capitalizes on the opportunity to make recreational vehicle loans. In the past two years, the credit union’s portfolio of motorcycle, boat, and RV loans has increased $1.5 million, to $7.5 million.

There’s plenty of business, but there’s also risk.


TruStone financial federal Credit Union
data as of 12.31.14

  • HQ: Plymouth, MN
  • ASSETS: $963.2M
  • MEMBERS: 87,083
  • BRANCHES: 11
  • 12-MO SHARE GROWTH: 1.47%
  • 12-MO LOAN GROWTH: 19.91%

Recreational vehicles are luxury vehicles, and people will stop paying on them before they stop paying on their car, says Jeff Smrcka, vice president of lending at TruStone.

In underwriting these loan applications, the credit union enforces stricter standards than it would a general auto purchase or refinance. Loan-to-values are lower and interest rates are higher. Rate terms are generally longer as well.

TruStone uses a two-step process for its auto and RV underwriting. Loans first go through an instant electronic approval system, which TruStone implemented in March of 2014. The automated system reviews the loan through the lens of a tiered pricing matrix and decisioning matrix. If it cannot reach a conclusion, then TruStone’s team of four experienced underwriters make the decision, sometimes making pricing exceptions to compete with competitor offers.

The credit union currently approves 30% of its loan applications instantly, according to Smrcka, but would like to see that increase. As TruStone works toward that goal, its tiered pricing matrix will take on added importance.

A Tiered Pricing Matrix

The tiered pricing matrix sets standards for applicants based on the following four criteria:

  • Borrower credit score.
  • Loan-to-value range.
  • Loan term.
  • Vehicle model and year.

Together, these categories allow the credit union to organize borrowers into five tiers based on risk: AA, A, B, C, and D.

Want To View The Matrix?

Click here to view TruStone Financial’s tiered pricing matrix for autos and recreational vehicles.

Click Here

To determine its risk thresholds and interest rates the latter are redacted for privacy on the document provided to Callahan Associates TruStone consulted similar loan programs and credit tiers across the industry. This helped the cooperative remain competitive in the market.

In addition, TruStone analyzed its own loss history to verify the delinquency rate of similar loans and determine how long the collateral i.e. the vehicle holds value.

The credit union receives 400 to 450 direct auto loan applications per month three-fourths are for autos and one-fourth are for motorcycles, boats, and RVs. Because the instant electronic approval process is less than one year old, TruStone remains conservative and funnels a majority of the decision-making to its underwriters. In the future, TruStone hopes to turn that ratio around.

When we see the performance, we can start to loosen up some things, Smrcka says. Our goal is to get to the point where we’re comfortable with a higher instant approval ratio. Efficiencies and decisioning speed improves if you can approve through the system without getting another area involved.

Using The Matrix To Decision Loans

The pricing matrix is one piece of the credit union’s larger underwriting process and complements the decisioning matrix that analyzes late payment history, credit history, and debt-to-income, among others factors.

When underwritten correctly, motorcycle, boat, and RV loans are not inherently riskier than auto loans, Smrcka says. For TruStone, its new and used auto portfolio delinquency is 0.0% and 0.28%, respectively. According to the Smrcka, RV delinquency is 0.34%, several basis points lower than the credit union’s overall loan delinquency of 0.41%. By comparison, the average loan delinquency of its asset-based peers is 0.78%.

TruStone’s own decisioning data supports Smrcka’s forecast. Based on the matrix’s pricing tiers, 85% of borrowers with a recreational vehicle loan fall into the top two tiers: AA and A. For auto lending, Smrcka says the credit union does a significant amount of volume in its B tier.

As TruStone works to better automate its system and turn around application decisions in minutes rather than hours, it will adjust its pricing matrix to meet service and speed demands. Still, there will always be value in the underwriting of experienced staff members.

We want to hold onto that human element and be able to look at any file where we think there’s merit in making the loan for the member rather than having the system say yes’ or no,’ Smrcka says.

March 9, 2015

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