Loan Zone: The Match Game

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Danielle Dyer Photo

3 minutes

How to handle 'crazy low' loan rates from the competition.

What to do when the competition offers unreasonably low loan rates? A member of CUES Net™, CUES’ members-only email listserv for peer discussion, recently posed this question anonymously, wondering how other CUES Netters respond to such poaching practices.

"We are in a very competitive market, and we have one or two financial institutions offering rates so low that they cannot possibly be profitable," writes the CUES member, noting that his or her CU uses a risk-based pricing matrix for consumer lending. "We have been losing a lot of our auto loan portfolio to refinances, with a significant number at these competitors."

James Holt, CSE, CCE, CUES member and president/CEO of $274 million Mid American CU, Wichita, Kan., stands up to the competition. "We rate match for members that use us for their primary financial institution, so we make money on other parts of the relationship and maybe lose some on the auto rate," says Holt. The CU has over 300 dealers in its network.

CUES member Paul Meissner, CCUE, SVP/CFO of $720 million Credit Union of America, Wichita, Kan., recommends doing your research—both on the competition and your own system—before making a move.

"Do you have insight into the financial structure and metrics of those low-rate competitors?" Meissner asks. The ability to charge lower rates may be supported by a lower return on assets target or requirement, by lower operating expenses or cost of funds, by higher sales of add-on insurance products, or by higher fees.

Meissner notes that competitors with a low ratio of loans to deposits might also offer very low rates to increase their mix of loans, if they feel "they're better off with a low-yield loan than an even lower-yield investment."

Looking inward, Meissner suggests examining the solidity of your credit union’s loan profitability data and system. "Is your loan profitability information developed from [broad] industry or peer averages," he asks, "or something more akin to an activity-based analysis that takes into account the average life of loans, your origination costs, credit risk, applications-to-booked loans ratios, income from add-on insurance, etc.?" Credit Union of America uses an activity-based assessment from Kohl Advisory Group, Scottsdale, Ariz. "Along with our data, we see comparisons with other credit unions that have also done full activity-based product profitability studies, so it is a robust comparison to peer data developed with the same methodology."

Meissner also recommends including the applicant's loan-to-value ratio in risk-based systems to price appropriately, not just credit score. "We're seeing that risk varies significantly by LTV, where 'A' borrowers with high LTVs generate higher losses than 'C' borrowers with low LTVs."

But all that said, "There have been a few times over the years when, after considering as much of the profitability info as was available at the time, we set a floor and decided if competitor A wanted the loan, we'd let them lose money on it."

CUES member Kim Withers, president/CEO of $336 million Meridian Trust FCU, Cheyenne, Wyo., suggests looking at other loan products rather than duking it out over auto loans.

"A good read is Blue Ocean Strategy," recommends Withers. The condensed version is that competing with every shark in the same area of the ocean is a red ocean strategy. Yet, beyond the melee is blue ocean full of opportunities.

"While it takes a great deal of restraint, don't go so low that the expense of the charge-off, dealer fees or interest rates climbing causes a strain," Withers says, noting the interest rate bump in March. If auto loans are at 1.99 percent and the cost of funds is 3 percent, "is the tactic to make up the difference through service fees or keeping our savings rate low?" she asks. "Neither one is going to retain or increase market share for us."

Instead, go after other loan products like home equity lines, signature loans or RV loans. "Do something disruptive in your own market with sensible risk," Withers advises. "If you already have a 'red ocean' at the credit union, chances are the only food left is pufferfish."

Danielle Dyer is CUES’ assistant editor.

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