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Lending The SCE Way New FSC Training Revised October 2005 Agenda Laws and Regulations Lending The SCE Way Economic Conditions The Five C’s of Credit Loan Policies Risk-Based Lending Open-End Lending Credit Scoring Laws and Regulations Affecting Credit Unions We get our laws and regulations from many areas. federal laws, some of which have implementing regulations; state laws; laws and regulations pertaining specifically to federal credit unions (the Federal Credit Union Act and NCUA Rules and Regulations); laws and regulations pertaining to California statelicensed credit unions (California Credit Union Law and California Credit Union Regulations). Laws and Regulations Affecting Credit Unions State laws that affect Federal Credit Unions: Community Property laws Probate codes Collection laws Automobile Sales and Financing Act Many others… Regulation B Regulation B implements the Equal Credit Opportunity Act. Simply put, its purpose is to promote the availability of credit to all creditworthy applicants. Regulation B Key Points of Regulation B Prohibits discrimination in taking and analyzing credit applications. Provides specific guidelines in taking credit applications. Provides specific guidelines in the evaluation of applications. Regulation B Key Points of Regulation B Requires notification of credit denial and provides guidelines for such notification. Outlines record retention requirements. Outlines information for monitoring purposes. Regulation B Cannot discriminate against applicant based on: Age Religion Marital Status Race National Origin Income from Public Assistance Color Sex Exercise of rights under Consumer Credit Protection Act Regulation B Regulation B requires the Credit Union to: Notify applicants of any action taken on their applications Report credit history in the name of both spouses on a joint account Retain records of applications Collect information about an applicant’s race and other personal characteristics in applications for certain dwelling-related loans. Regulation B Regulation B requires different action for applications that filter through the Credit Union: Completed Application Incomplete Application Withdrawn Application Regulation B Completed Application Within 30 days of receiving a completed credit application, Regulation B requires a financial institution to let the member know if he/she is approved or denied. If the member is denied, you are required to share the reasons why. Regulation B Incomplete Application You may make the request for additional information orally or in writing. We must inform the member that failure to provide the information will result in no further consideration being taken on the application We do not need to send an adverse action notice. We must respond to the member within 30 days. Regulation B Withdrawn Application Approved applications are considered withdrawn if the member does not respond to the approval within 30 days of applying. No notice needs to be sent. (At SCE FCU we typically hold the application for 60 days as a courtesy.) If a member changes his/her mind and withdraws the application within 30 days of applying, you do not have to send out a notice. Regulation B Can we run credit on a non-signature spouse? Yes, under Regulation B it is allowed in a Community Property State – California Community Property = “what’s yours is mine, what’s mine is yours” Regulation Z Regulation Z implements the Truth in Lending Act (TILA) to promote the ability of consumers to shop for the best credit. It was adopted by Congress to increase consumer understanding about the actual cost of credit. Regulation Z TILA imposes the following through Regulation Z: Lenders must make disclosures available with appropriate terms and costs of loans. Certain credit transactions involving a lien on a consumer's principal dwelling. Regulates credit card practices and provides for timely resolution to credit billing disputes. Provides limitations on certain H/E transactions. Regulation Z Exempt Transactions TILA does not apply to the following: • Business, commercial, agricultural or organizational credit • Credit over $25,000 not secured by real property or a dwelling • Student loan programs NCUA Rules and Regulations Section 701.21 – Loans to Members and Lines of Credit to Members This regulation describes the types of loans a FCU can offer. Regulates the rates, terms, terms of repayment and other conditions of FCU loans. Requires that the Board of Directors establish written policies. Regulates credit applications and overdrafts And more… What do we mean by Lending The SCE Way? Excellent service and fast processing We always look for ways to say “yes” to a good loan and make a good loan better Cross-selling to member’s needs Evaluate the Five C’s of Credit, especially the “character” Look for ways to serve the underserved communities What do we mean by Lending The SCE Way? SCEFCU underwrites consumer loans using a combination of judgmental review and an empirically derived, statistically sound scoring model (Experian). The model in conjunction with judgmental review allows FSC’s to make good sound loan decisions. Risk Based Lending Risk based lending is a process by which credit unions can more effectively meet the credit needs of all its members Increases the pool of potential loans (broader member base) Increases loan-to-share ratio Potential to increase loan yield Makes more money Improves our competitive advantage Risk Based Pricing The purpose of using a scoring system is to “price” the potential loan appropriately to reflect default risk. The ultimate decision to grant or deny loan is still judgmental The score will be one of several tools utilized in the evaluation process Risk Based Pricing Pricing based on market conditions, risk and expected yield Risk level “A” is considered the baseline rate Margins added or subtracted from the baseline are used to determine the offering rate for each risk level Risk Based Pricing As market conditions and other circumstances warrant, the baseline and margin are adjusted through ALCO. Risk Based Lending Why would a very low delinquency ratio be negative for the Credit Union? Might not be approving enough loans Policies might be too restrictive CU may only be approving low-risk (A paper) • Because of low rate, may not be as profitable as higher rate and risk loans Economic Conditions What are some economic conditions conducive to increased lending? Very low rate environment Hyper competition Continued auto manufacturers incentives Very savvy consumers Diverse demographic E-market emergence Unprecedented BK filings Open-End Lending Open-End Credit Defined in Reg Z as: Consumer credit extended by a creditor under a plan in which – • The creditor reasonably contemplates repeated transactions • The creditor may impose a finance charge on an outstanding unpaid balance • The amount of credit extended to the consumer during the term of the plan is generally made available to the extent that any outstanding balance is repaid. Open-End Lending Why are open-end loans better for the member and the Credit Union? Immediate disbursal upon approval capabilities One-time loan plan signature One set of disclosures Credit Scoring Credit Scoring, in basic terms, is an empirically derived, statistically sound, oriented system that predicts the likelihood that a specific person will repay a debt. Credit scores base decisions on the assumption that: Past performance = Future behavior Credit Scoring contd. Credit scores are used to: Approve or decline applicants Determine loan/line amounts Determine term and conditions Determine pricing Cross-sell other products Determine initial collection strategy Credit Scoring contd. How does credit scoring work? Credit scores (scorecards) assign value to different criteria that is demonstrably and statistically sound. Can measure only credit bureau characteristics or include application criteria The end score assigns a value of probability that the customer will or will not do what the score is evaluating Credit Scoring contd. Credit scores are designed to evaluate different aspects of a borrower. For example: Probability that an individual will file BK Probability that an individual will become at least 60 days delinquent in a 12 month period of time Probability an individual will pay back a mortgage according to terms. Credit Scoring contd. SCE FCU uses a FICO scoring model that relies on credit performance reported to the bureau In order to rely on the data completely, the card scores must be validated against our specific experience Credit Scoring contd. Advantages of Credit Scores Fast evaluations Can increase portfolio profitability Assess applicants equally and consistently Can provide more accurate forecasting Can be an early indicator of change Credit Scoring Disadvantages of Credit Scores Will not eliminate all bad accounts Cannot predict future changes Does not evaluate character Does not evaluate specific member circumstances Deviations from the score must be quantified in writing Debt Ratios Debt Ratio: Pre-Loan Liabilities divided by Income Debt Ratio: Post-Loan Liabilities divided by Income (but including new loan payment) Disposable Income Disposable Income: Pre-Loan Income, minus liabilities, minus dependent cost Disposable Income: Post-Loan Income, minus liabilities, minus dependent cost, minus new loan payment Credit Scores Credit Score FICO – Derived directly from credit report. Risk Score Taken directly from credit report. Represents the likelihood member will be 60 days delinquent once in the next 12 months. The Five C’s of Credit The process of evaluating a loan is called “underwriting”. The “how” starts with the Five C’s of Credit: Credit Capacity Collateral Conditions Character The Five C’s of Credit Credit This is a measure of the type of credit you have been extended in the past and more importantly, whether you have paid that credit back in a timely manner Credit should also be evaluated based on importance The Five C’s of Credit Capacity Capacity is a measure of a person’s ability to pay the loan. How much income the applicant(s) have vs. the amount of debt An important point to remember is that the evaluation is not just a point in time but over the life of the loan The Five C’s of Credit Collateral Collateral is simply what, if anything, the applicant(s) pledge on a loan. Underwriting collateral may involve evaluating the market value as well as the value to the member Collateral Does Not Make A Bad Loan Good! The Five C’s of Credit Conditions Stipulating specific performance by the member as a condition of making the loan. (i.e. collateral, payroll deduction, paying a debt, obtaining a signature, etc.) Be careful to ensure that the conditions will increase the chance of the member repaying our loan. Make conditions that make sense! The Five C’s of Credit Character Defined as a description of a person’s attributes, traits, or abilities as well as their moral or ethical strength. Clearly the hardest to determine, but may be the most important! SCEFCU Loan Policies Co-Borrower vs. Co-Signer/Guarantor A co-borrower receives beneficial interest in the loan Co-borrowers must be members of the Credit Union A co-borrower is making payments on the loan, therefore can be used to qualify Debt Ratio or Disposable Income (do this when it makes sense!) SCEFCU Loan Policies Co-Borrower vs. Co-Signer/Guarantor A co-signer does not receive beneficial interest in the loan (are used to improve creditworthiness) Co-signers do not have to be members A co-signer is not making payments on the loan, therefore cannot be used to qualify Debt Ratio or Disposable Income SCEFCU Loan Policies Financing over purchase price or high blue book If member qualifies, make an unsecured loan together with car loan. But: • Make clear comments describing reasons • Financing up to 100% of retail or MSRP, plus tax, license, warranty, etc. not to exceed 120% of retail (for A+, A, B paper only). Note: Sometimes it’s good to keep them separate! SCEFCU Loan Policies Things to look out for New members – Must use 411 to verify company info. Verify employment and salary too. Match addresses on credit report and applications. If different, member must explain D.L. must be verified including addresses Insurance policies must be valid for at least six months or verify history with agent SCEFCU Loan Policies Negotiating rates It is legal, as long as not more detrimental to a protected class General rule is, we can match a rate if it makes sense and we will not loose money This holds true when offering to refinance. If offer is beyond your rights, ask your manager Loan Policies A complete copy of the loan policies is located on the intranet under: Operations, Policies & Procedures, Lending Making Decisions Wrong reasons to decline a loan automatically Bankruptcy • Are they paying us? Have they re-established? Was the BK for a good reason? Small collections/charge offs • If a good loan offer to pay it with proceeds! Debt to income ratio too high Any others???? Making Decisions What do you review when making a loan decision and pricing a loan? What observations and recommendations do you make to the member when reviewing the credit score and credit report? When you have completed loading an application, what do you review with the member before ending the conversation? What Kind of FSC Do We Want? What are some important traits of a loan officer? The ability to think and look at the big picture Knowledgeable Possessing a genuine desire to help Good personality Sales ability Others??? How do I obtain lending authority? The FSC Certification Exam FSC I FSC II FSC II/Manager The Certification Exam When is it? Will be scheduled during the next few months What is it? Three sections to complete How long? A few hours. It is self-paced, not timed. Where will I take it? CUEST Center, Training Room, HR Can I use notes during the exam? No, the exam is closed book. You may use a calculator if you like. The Certification Exam Why is it necessary? Provides an assessment of your knowledge and understanding of the lending process Provides documentation for auditing Allows us to recognize and build on areas where additional training/coaching is needed Who grades the exam? Reviewed by Alison and Shannon and/or George P. What is considered a passing grade? Overall score of 85% or better. Questions?
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