By Ray Birch
SCRANTON, Penn.—Many credit unions have only themselves to blame when it comes to limited growth, especially in lending, according to one CEO.
These credit unions often limit themselves through complex, rule-ridden lending programs that have not been updated in years, he adds.
Clarence Baltrusaitis, CEO at the $185-million NET FCU, said that is exactly what occurred at his shop. In completely reworking its loan policies with a focus on giving decision-making power to experienced loan officers—as opposed to flipping through pages of rules and getting managers’ OKs—the credit union has increased its loan portfolio from $49.8 million at the close of 2014 to $64.1 million by mid-year 2016.
That effort landed the credit union a CUNA Mutual Group Excellence In Lending Award for CUs under $250 million in assets.
Too Many Rules
Baltrusaitis said that a lot of rules that limited the credit union’s ability to make sound loans crept into the lending process over the years and kept the portfolio from growing at all.
“The loan policy had to change,” said Baltrusaitis, who arrived at the NET FCU in 2013. “We were encumbered with a lot of exception rules. I guess over time some the credit union moved away from allowing loan officers to make judgement calls and put hard rules in place.”
Baltrusaitis said the rules kept piling on top of each other over a two-decade period, and because it happened slowly the credit union failed to clearly see what it was doing to its lending program and to its members. He said when he arrived the credit union was 25% loaned out.
“That was appalling,” Baltrusaitis observed.
He said that loan officers were forced to take into account so many rules exceptions that it eliminated a large segment of the credit union’s eligible borrowers. Before the changes, 80% of the CU’s loans were for A-plus and A paper.
“What I determined in looking at what we were doing is that if you came in for a loan with a 700 credit score or lower, there was going to be something in your history that would eliminate you from getting a loan from us,” said Baltrusaitis. “There would be some little thing from your past that would trigger an exception—like being late on a payment one too many times for our guidelines—that would kick you out.”
Policies Excluded Many
Nothing illustrated for Baltrusaitis just how poor the credit union’s lending process had become more than when a friend, a wealthy doctor with good credit, told the CEO he had been rejected for a $150,000 home equity loan, despite the member having most of his $500,000-plus home paid off.
“He told me our polices excluded him,” said Baltrusaitis. “I knew then we had to change. I knew we had to serve more, and different levels of credit.”
NET FCU finally moved to completely rewrite its policies to make them more streamlined, focusing on three key factors: FICO score, debt-to-income ratio, and loan to value.
“And as I said, we empowered loan officers—many of whom had been here ten years and know a good loan from a bad one—greatly increasing their decision authority,” said Baltrusaitis. “Now, about 70% of the loans we book are granted solely by decisions from our loan officers.”
He said policies had become so tight that the approved limit for a first mortgage was $75,000.
“That tells you how long things had not been changed here. We increased that limit to $300,000, and above that a manager has to be contacted,” said Baltrusaitis. “We also increased the total debt a member could be loaned out to a half million dollars from $100,000. That rule had eliminated a lot of high-net-worth members from doing a lot of business with us.”
Since the CU started the new lending program in 2015, delinquencies and charge-offs have only slightly increased.
“We still maintain a delinquency ratio under 1% and charge-offs are at about 50 basis points,” said Baltrusaitis. “That has been pretty consistent for us over the last 21 months. That is a very small price to pay when you increase the portfolio as we have. In fact, we doubled the size of the auto loan portfolio under the new program.”
Helping more members was as much a focus of the change as was boosting the loan portfolio.
“One of the changes we made is when members improve their credit score by one tier we lower their loan rate,” said Baltrusaitis.
Plight Of Many Small Shops
Baltrusaitis believes the situation at NET FCU is reflective of many small credit unions, which he thinks is a problem.
“Small credit unions become very risk averse,” said Baltrusaitis. “And sometimes that can be due to their boards. No one likes to see losses.”
Baltrusaitis advised CUs that may be mired in the same situation that faced NET three years ago to work with an outside consultant before making any changes.
“Bring a consultant in to look at your program,” said Baltrusaitis. “Don’t take on that job yourself. This is an extreme culture change. Don’t simply get a good idea from one area of the credit union, and an idea from another and try to meld those into a new program. When you are inside an institution for so long you can become institutionalized, get tunnel vision, and focus on the week-to-week or month-to-month. Consultants are a new set of eyes and they see the clear picture.”