ALBUQUERQUE, N.M. – First Financial Credit Union is combining the high-tech power of a sophisticated credit-scoring system with old-fashioned credit union commitment to serving the underserved, and generating new business along the way. The $279 million state-chartered CU is using a new program called Alternative Lending to rule on loan applications generated both onsite at its 10 branches and indirectly through car dealers around the state. The program from Allied Solutions combines credit-scoring software and collateral-value insurance (CVI) against losses to allow credit unions to offer loans at rates lower than some credit union members, and potential new ones, may be able to get in the open market. "It gives credit unions the ability to help members re-build their credit scores with reasonably priced loans," says Dick Hetzel, executive vice president of Allied Solutions, a Dallas-based provider of insurance, lending and marketing solutions for financial institutions. "It also makes good business sense for credit unions because Alternative Lending takes some of the risk out of loaning money to so-called `high-risk' borrowers," says Hetzel, whose firm is an independently operated affiliate of Minnesota Mutual Life Insurance Co. "Of course, the NCUA has been pushing credit unions to serve the underserved for some time, and this is a way they can do that and still mitigate their risk," Hetzel adds. "These are people who otherwise would be turned down by credit unions and end up with finance companies charging them 22 to 24%, where now they can get 15 to 18%. That saves borrowers a lot of money." Those potential borrowers include a fair number of First Financial CU's 43,000 members, says its CEO, Jeff McDaniel. "We're an interesting credit union," McDaniel says. "For the past seven or eight years we've been reaching out to underserved areas in New Mexico. We currently have a couple of branches on reservations, plus branches in areas with high Indian populations. "New Mexico is by and large a poor state already and when you look at the median income in New Mexico, a lot of the areas we're reaching out to are under that level. So we really felt a need for this type of lending program." In about a year as one of the first credit unions to use the Alternative Lending software, the credit union has seen a net increase of about $16 million in sub-prime loans and has recorded only about $4,700 in losses, McDaniel said, which primarily occurred because of loans made over the insured amount, as a courtesy to the owner, and where repossession costs were higher than normal because of the remoteness of the vehicle's location. "That's almost negligible, considering our daily average balance in those loans is about $9 million," the First Financial CEO says. The biggest challenge for McDaniel's credit union has been to handle the unexpectedly large volume of loans that the program has generated, about 70 a month. He said the applications are approved in Albuquerque and then shipped to Center One in St. Louis, which handles the servicing. "That's one of the things we like about it. We grab the loan and book it and send it off, but we have to wait three to five or seven days before they post it," McDaniel said. "So we're working with the servicer to rewrite the software so we can develop spreadsheets to book and track these loans better." Hetzel, meanwhile, says that work is under way to develop an interface with core processing systems that will allow capture of information from rejected loan applications and automate their transfer to the Alternative Lending solution. On the core processing side at First Financial, the loans exist simply as general ledger entries, where they also present other marketing opportunities. "We use the CRM system we have from XP Systems to identify and market such things as our Special Opportunity checking account for financially challenged individuals, a product that we think is an ideal match for these kinds of loans," McDaniel said. The Alternative Lending solution was created by an Allied Solution partner, Capital Lending Strategies LLC, to identify members and potential members who may not have high credit scores but are probably good credit risks, Hetzel says. McDaniel says that so far, that theory has borne out. "From what I understand, Capital Lending Strategies ultimately thinks the default rate on these loans should be about 15 to 18%, but our default rate has been about 8% in the first year," the First Financial CU says. As for the servicing by an outside firm, "We think this was an excellent way for us to go," McDaniel says. "When you're servicing this kind of portfolio, you need to have the discipline to repossess quickly and unload the vehicle very quickly. "We're philosophically much more liberal than that. We nurse members along, give them chances, but when you're working with people with marginal credit, it's absolutely critical to be quick and consistent with collection, and that's what Center One gives us." -

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