By Ray Birch
LOMBARD, Ill.—Don’t expect a big impact on loan portfolios from the credit bureaus’ new scoring metrics, which are raising consumers’ credit scores, say analysts who see the change as more of a marketing opportunity for credit unions.
The three nationwide consumer reporting companies, Equifax, Experian and TransUnion, have instituted new policies that have raised about 12-million consumers’ credit scores, making it easier for them to qualify for loans. The new policies in part factor in alternative credit data, such as rent and utility payments.
Bill Handel, VP of research and product development at Raddon, predicts the biggest benefit to credit unions will be when they find a member who failed to qualify for a loan in the past but now can borrow under the new scores, and then are able to tell that story.
“We don’t view this as major event. I would not say it’s a non-event, but it’s not a major event,” said Handel. “But inside this we really see a marketing opportunity for credit unions.”
Fits With CU Philosophy
Handel said Raddon sees the changes as fitting in with credit unions’ “people helping people” philosophy, always looking for ways to grant members a loan instead of turning them down.
“I think with these new bureau scoring policies that credit unions will have to look for these new opportunities to help someone who has either been turned down in the past by the credit union or another lender,” he said. “Again, they will have to look for these members.”
When they find those members, credit unions should promote the fact they have now helped a member who has struggled to borrow in the past, and how the credit union has made someone’s life easier.”
“Promote this internally as well as externally,” Handel said. “Make a big deal of it.”
Bill Handel, Raddon
But it won’t be easy to find those opportunities-- because there aren’t going to be many of them, said Handel.
“You will not see a massive surge in credit demand since the scores that are changing are really those on the margins,” said Handel. “Probably more people with moderate to low scores getting improvements, and by about a 20-basis-point increase on average, we project. So you will see people go from 560 to 580, 620 to 640, scores like that.”
7% Positively Impacted
Handel said Raddon believes those with good and high credit scores won’t be affected much by the new metrics. “And you won’t see someone go from lousy credit to very god credit. That is not going to happen.”
One of the biggest reasons that the improvements won’t effect a large portion of the population—Handel said he has seen projections that 7% of the overall population will be positively impacted by the new policies—is that those with poor credit scores often have a serious credit problem.
“The real question is how many of this 7% have been borrowing, because typically the reasons they had some kind of ding on their credit record might be something that would preclude them from borrowing in any event,” said Handel.
Since the scoring metrics are new, should credit unions be concerned about their reliability?
“There is always that risk there, risks are always inherent in any credit score,” said Handel. “People’s circumstances change, and people will never act just like their scores indicate.”
Brandon Sauer, AVP, director of mortgage and consumer lending at the $1-billion Firefly CU in Burnsville, Minn., agrees that risk exists in any credit score.
“The credit bureaus are the experts and I will defer to them, and if they think this is the way to go, I am fine with it,” Sauer said.
Much like Handel, what Sauer thinks will happen is that some of Firefly’s lower-score members will be lifted up just enough so the credit union can now grant them a loan.
“These are folks that may have fallen just outside our preapprovals,” said Sauer, who noted that Firefly will not move aggressively under the new guidelines. “In talking with other credit unions, I think a lot of lenders are taking a wait-and-see approach to these new guidelines. I do want to see the effect on how many more people we can make offers to—also, down the road, how this affects delinquencies.”
Where Is This Leading?
Sauer said the credit union hopes to soon get an understanding of just how many members are affected by the new policies so it can someday adjust its blanket loan offers.
“For example, if in the past we could do blanket offer to our membership for 15,000 people, I am curious to see, under the new scores, how many more people we can fit into an offer pool,” said Sauer. “Will it be 16,000, or maybe 15,300? I don’t know right now. But we don’t plan to alter any of our scoring methodology to adjust for the new changes by the bureaus. We will keep score cuts the same.”
Sauer said the coming months will be “interesting.”
“I am as curious as the next lender to see where this leads us,” said Sauer. “I hope to, at the very least, be able to help out a few more members because of this.”