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An estimated 15% of U.S. consumers have FICO scores of less than 550 (a good FICO is 700), presenting a growing opportunity for credit unions in a subprime market that is expanding because of the recession, says Tony Boutelle, president/CEO of CU Direct Corp.
“To do it right, credit unions need to hire experienced people to work with them on entering the subprime market,” Boutelle says. “You can’t just transition from prime lending to subprime lending without setting up a different service and collections approach. It’s a unique and specialized market. Credit unions need to be very careful with it.”
Boutelle cites a recent Automotive News article on subprime lending that says the segment is growing rapidly. It reports that 15% of auto loans were made to subprime borrowers during the first half of 2012, and that the percentage is now estimated to be as high as 25%.
Joe Miller cites an interesting new twist to consumers’ traditional attitudes toward debt: Many will default on a mortgage before they’ll default on an auto loan.
This has surprised many big lenders, says Miller, director of customer service at AutoIMS.
“Keeping a job becomes the most important thing for people whose mortgages are underwater. They need a car to get to work. A mortgage might take six months to foreclose on while an auto can be repossessed within 30 days,” says Miller.
Boutelle notes many credit unions believe their members’ top priority is being able to get to their jobs. Besides, it’s easier to pay $400 per month on a car loan than it is to pay $4,000 on an underwater mortgage.
“Credit unions are getting more aggressive about making auto loans to their current members regardless of their home loan status,” he says. “Low interest rates, a willingness to take risks, and lots of available cash combine to make the market attractive. They’re also betting that the catastrophic things that can kill subprime lending, such as an economic meltdown, are much less likely to occur within the foreseeable future.”
Also, many people have low FICO scores solely because of the housing market collapse. “They’re good risks otherwise,” Boutelle says.
Still, to enter the subprime market, credit unions must take service to a whole new level, says Miller.
“That means lots of phone calls, monitoring, and follow-up. It’s more of an art than a science: Are you dealing with somebody you trust to pay you back and who may become a member for life—or are you opening yourself to a liability?”
A credit union, for example, might wait up to 30 days to contact a 700 FICO borrower who’s late on a loan payment.
“But a 600 FICO borrower is somebody you should call within five days of a missed payment,” Boutelle says. “Better yet, call before the payment is due to remind the member or, best of all, set up automatic payments.”
He cautions credit unions to make subprime loans only to members with whom they’re familiar.
“Your relationship with them increases the likelihood that they’ll pay you back. But when you pick up subprime borrowers, say from a dealer, you don’t have a relationship with them. They’re less likely to pay back the loan.”
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