MADISON, Wis. – How to make vehicle loans to credit-challenged members while protecting themselves against loss has been a dilemma for credit unions despite an interest among many of them to move into non-prime vehicle lending. CUNA Mutual Group has begun a "controlled" rollout of a default insurance program that allows credit unions to make vehicle loans to these members while managing their own risk of financial loss if borrowers default. CMG's Lenders' Protection solution is a win-win for both the credit-impaired members and the credit unions many of whom have expressed an interest to move into non-prime vehicle lending, says Steve Martin, CMG VP, Lenders Protection Insurance. "Even with those credit unions already doing risk based lending, many of them have policies that are very conservative. Each credit union sets its own risk-based pricing level, and some are more conservative than others, so they wind up denying loans to some members who might otherwise be good credit risks," he explains. In addition, Martin says many credit unions who do risk-based lending for vehicle loans require the member make a 10-20% downpayment as a way to lower the credit union's risk while still offering the member a comparatively low interest rate. But Martin points out that, "A lot of these members can go to an alternative lender who may charge them a higher interest rate but not a downpayment. A lot of these borrowers aren't shopping interest rate. They don't care about the interest rate but how much they have to pay out of their pocket every month. They know their credit is a little tarnished, but they're less concerned with the interest rate and are even willing to stretch out the term of the loan if it means their monthly payments are lower." Even so, there are many reasons borrowers wind up defaulting on loans. The Lenders Protection Insurance program has two features that lets credit unions approve loans to these members: first the default insurance on the loans means that in case of default, Lenders Protection pays the difference between the loan balance and the greater of 80% of the NADA wholesale trade value of the vehicle at the time of the default, or the amount the credit union has sold the repossessed vehicle for. In addition, to allow the CU to recover as much of the loan balance as possible, Lenders Protection also pays up to 60 days of interest, giving the CU ample time to repossess and sell the vehicle. Lastly, to make sure each borrower receives a competitive interest rate, the cost of the Lenders Protection Insurance is calculated based on the risk each individual borrower presents – it's not based on a blanket rate across all eligible loans. Lenders Protection also offers an `Over Advance' feature for those situations where loans fall below a certain credit score and a 10-20% downpayment is required. In those cases, when members choose not to pay the downpayment or are unable to meet the requirement, they are typically forced back to the dealership to look for 100% funding. But because Lenders Protection allows for financing of 125% of NADA wholesale trade value for used autos and 125% of dealer invoice for new autos, a CU can now make vehicle loans to these members instead of losing their loan dollars to an alternative source. Martin said he didn't have exact numbers on how much credit unions lose as a result of defaulted auto loans, but he said he knew that CUs typically get as little as 50% of the NADA value on a vehicle when they sell a repossessed vehicle at an auction, "so there's considerable loss," he said. While recommending the solution to all credit unions involved with auto lending, Martin stressed that Lenders Protection Insurance is a form of risk-based lending, so the program is most suitable for CUs already involved with this type of lending. "Otherwise credit unions that don't do risk-based lending will have to do some heavy lifting to put this program in place," he said. Martin said CMG's Lenders Protection Insurance complements programs from companies such as Centrix Financial LLC which also facilitates vehicle loans to credit-challenged members, and he said many of CMG's clients are also Centrix clients. The difference between the two programs, Martin said, is CMG's program is for loans decisioned directly by the credit union or are faxed to the CU by a dealership for members with a 580 or above credit rating. Centrix's program is for members with a 600 or below rating, he said. "Research shows on average credit unions approve 60% of vehicle loan applications, but even within a particular credit union that average can range by credit rating and be predominantly for applications with higher credit ratings," said Martin, adding that CMG "is not in a position to help credit unions do subprime lending to members with 580 or lower credit ratings." CMG initially piloted Lenders Protection Insurance with credit unions in Wisconsin, Michigan and Texas. Seven CUs have already signed up for the solution, and six of them are located in Michigan – the remaining CU is in Texas. At press time, Martin said 30 CUs had agreed to move to the program and were in various stages of moving to implementation. The Lenders Protection Insurance is currently available to credit unions in 14 states – Florida, Illinois, Indiana, Kansas, Maryland, Michigan, Missouri, New York, Ohio, Oklahoma, South Carolina, Texas, Virginia, Wisconsin, plus the District of Columbia. CMG plans to take it to CUs nationwide by 2005. -

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