"You may fool the whole world down the pathway of years, And get pats on the back as you pass, But your final reward will be heartache and tears, If you’ve cheated the man in the glass." -From The Man In The Glass by Peter Dale Wimbrow Sr.
When you work in the credit union business, you can always be proud of how you make a living. As a movement, credit unions do not aim for profit or charity, but for service. Credit unions offer affordable interest rates members may need to get through a rough patch and improve the quality of life for families across the country. Credit unions make small loans that replace a broken air conditioner in the summer or help warm a home in the dead of winter. The positive impact credit unions make on middle-class families is astounding, and business is done with members’ well-being top of mind.
As a millennial, I intuitively know that our generation wants to make a difference in our communities. The Telefonic Global Millenial Survey found that 62% of millennials worldwide believe we can make a local difference, and 52% of American millennials believe we can make a global difference. As people who are passionate about service, we must invite more business- and community-minded millennials into the credit union movement because it is a business where loving your neighbor and building a stronger community is a part of the job. The credit union philosophy and the overriding mindset of our generation tremendously coincide. The person in the glass smiles back when we help other people.
At SWBC, we partner with credit unions to help them better serve their members. As part of our focus on supporting lenders and their bottom lines, our company designs programs to accomplish three goals:
- Increase efficiency
- Reduce cost
- Enhance the member experience
In my last post, I discussed three strategic advantages credit unions could gain by increasing efficiency. Today, I want to delve into a few ways to reduce costs, and we’ll tackle enhancing the member experience in my next blog post.
Goal 2: Reduce Costs
One of the hardest pills to swallow as a lender is the cost of loan-risk management. This is especially true for auto lending since the collateral regularly barrels down highways at 70 MPH, whizzing past other independently moving hunks of metal.
Credit unions have been stuck in a false dichotomy between blanket and lender placed insurance for far too long. Traditional blanket policies significantly increase in cost with every claim. “Old school” lender-placed insurance is a well-known nightmare that ultimately results in repossession and charge offs, directly related to loan payments re-amortized for exorbitant insurance premiums. Although these older-generation insurance products have been helpful in the past, they are not optimal in today’s market. Creative people, fueled by a desire to better partner with credit unions, have designed a cutting edge loan risk management strategy that unburdens members and reduces the cost to our lenders. Here are three ways to reduce costs in your loan risk management program.
1. Reduced Member Noise
Lender-placed insurance is a product with good intentions. It helps to ensure borrowers have access to auto loans with affordable interest rates, while mitigating the credit union’s risk. The best way to protect the credit union’s interest is for the member whose insurance has lapsed to pay for a short-term policy that keeps the member in their automobile and protects the credit union’s collateral in the event of an accident. We offer a flat-rate, monthly CPI product, Hybrid CPI, that averages $64/month. This monthly cost is the same for every uninsured borrower so it is non-discriminatory, and is based on the loss history of the credit union’s loan portfolio. This is a drastic reduction in cost. Members who require older generation CPI pay an average of $240/month. This drives up member noise and leads to voluntary repossession. Not only does this make it difficult for employees to explain the payment increase to their members, but it takes significant time to make the necessary manual adjustments on each member’s account. As a lifelong credit union member, I would hope my credit union would consider another option that removes this unneeded burden from membership when a more balanced, member-friendly approach is available in the market.
2. Automate Premium Posting
Most credit unions that have a CPI program require a staff member to manually add CPI premium to each uninsured loan. Every data processor is different, and not every core can accommodate a posting file. Yet, many can automate premium posting and refunding. This is, at minimum a 100+ hour/year cost savings. Credit union employees’ time is better spent making loans, helping people, and serving the underserved than sitting at a desk, staring at a computer, and changing loan payments by hundreds of dollars just to collect on those loans the next quarter.
Premium posting automation reduces the cost of administering CPI, drastically reducing the unseen costs of having a loan risk management program. This is especially important for a monthly CPI program because the premium isn't added once annually. The premiums are added monthly behind the scenes with a simple flat file.
3. Practically Eliminate Charge Offs Due to Premium Add-On
When borrowers do not pay back their credit union for incurred CPI premiums, the premiums can add up quickly, especially on an annual basis. When credit unions have to charge off the CPI premiums, it can unduly affect the bottom line. Hybrid CPI practically eliminates these charge offs because the cost to the member is much more affordable. Many credit unions treat it like a skip-a-pay and do not even choose to change the loan payment. Our average Hybrid CPI account only lasts for five months—or approximately $320 total.
Following Pops into the credit union business is a pleasure because every day I can look at myself in the mirror and know that I can be proud of our industry. The credit union industry is the most consumer-friendly business in America. At SWBC, our intent is to partner with lenders to help them achieve their goals. Our Hybrid CPI program reduces costs to the lender and borrower, while making a positive impact to the credit union’s bottom line.
Stay tuned for my next post, where we will dive into the practical ways that lenders can enhance the member experience.