O'FALLON, Mo.-A new underwriting system that gives a greater understanding of members' financial situations helped drive 14% loan growth during 2011 at West Community CU here.

"We came to an appreciation that bad things happen to good people and recognized that we were out of alignment," said Gary Hinrichs, president and CEO of the 19,000-member, $147-million credit union. "There was a lot of frustration where we saw needs but we weren't fulfilling them."

West Community brought in Ed Swanson from Lending Solutions, Inc. as a consultant, in part because, "I felt like there were things that we should be doing but weren't, and we needed outside help either to validate it or push us in the right direction," said Hinrichs.

Swanson spent three weeks in the suburbs of St. Louis in January of 2011-and has been back three times since-and helped the entire West Community staff recognize the importance of members' stories and understand how to make loans based on more than just FICO scores, according to Hinrichs.

"The big thing was to get the member's stories, and we were really failing to do that," said Hinrichs. "We weren't talking to the members and trying to understand what happened to them in detail."

Fittingly, the program is called "Listening and Lending," and uses risk-based pricing.

Jason Peach, West Community's CFO, emphasized that the strategy involved more than just the story itself.


A Systematic Approach

"It's a systematic process to understand the risk beyond just looking at the core factors of the credit union and what that score reflects, such as capacity or payment history and timeliness of payments," explained Peach. "It's 26 different questions that are asked with every application now, and that provides us a rescoring from the credit bureau-not from a pricing perspective," but to better understand the members' overall situation and risk capacity for the CU.

"We might have someone with a FICO score of 600, and we might rescore them and they're more like an 820 from a risk perspective," said Peach.

Hinrichs noted that the traditional credit score looks at only about five criteria, whereas WCCU's new methodology looks five times that number. "One of the big components of that is how long they've been a member of the credit union, if they have deposits, how long they've had it and if they've had loans with you in the past," he said.

Peach noted that West Community is looking to be at the top of members' lists for repayment, "and that means forming a deep relationship, and that takes time."

The CU has invested in additional staff to make sure employees can spend enough time with members, and at times WCCU reps even call members after the initial conversation to get more information or invite them back to the branch.

"We create what we call a 'Letter of Understanding,' and we say in there that this is what we expect you to do, and if you do these things you can count on the credit union to be here for you," said Hinrichs. "We will be a lifetime resource for you for loans, we want you to be a lifetime member, but you can't open any credit cards, you can't charge any debt; you've got to agree to do these things while you're paying this loan back."


Rigorous Payment Schedule

West Community creates rigorous payment schedules so that members have to be committed to paying off the debt within a given period-payroll deduction is key, said Hinrichs-but it also works to establish a savings plan for the member and make sure that the member has money for other things.

"We'd rather give you an extra year to pay, if that means you have some money available to take a vacation or do something fun and have a life outside of repaying West Community Credit Union," he said.

The strategy is paying off. West Community saw loan growth of 14% in 2011, compared to peers that grew loans at less than 2%, said Peach, adding it has always had a loan-to-share ratio in the high 80s. Traditional loan growth ranges around 7% annually, and the long-term strategic goal is to grow loans at 10% per year.

West Community currently holds 9,685 loans and leases for a total of $116.5 million. That's 1,100 more loans ($15.3 million) more than in December 2010. Peach said that used auto lending had the highest growth rate in terms of dollars, with more than 2,100 used car loans ($21 million); in December 2010 West Community reported 1,567 used auto loans ($13.8 million). In that time unsecured loans and lines of credit have grown from 614 ($1.6 million) to 751 ($3.3 million).


Average FICO 700

Peach and Hinrichs said that examiners and excess share insurance providers have both been comfortable with its lending "because they could see it was very systematic, thoughtful, and they could see our underwriting."

The average loan score WCCU books is still above 700.

Hinrichs offered the example of one borrower with $90,000 in unsecured debt who had not missed any payments, but "they were paying $3,200 per month-$800 to four credit card companies-and there's no end in sight."

"We could take their credit card payments, in the high 20%s, bring them to our program in the 10-12% range and basically that gave us a loan that's twice our average book yield of our loan portfolio, and we cut their interest in half and they can pay off their debt in four years."

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