TYPES OF RISK NGH CU recognizes that there are basically three types of risk when granting loans:

Transcription

1 Revised 5/23/05 RISK BASED LENDING POLICY The NGH Credit Union Board of Directors recognizes the importance of managed risk and is committed to offering credit (loans) to as many members as possible. The Board also recognizes that certain members represent more of a lending risk than others. The loan approval process of NGH Credit Union consists of a judgmental review along with credit report history. We review a member s loan requests for credit score (and circumstances that cause the score), debt ratio, verifiable income, job stability, and loan collateral. The credit union will not grant loans where the probability of repayment is very doubtful. Interest rates are based on the credit score provided by the credit bureau, the type of security offered, and terms of repayment. NGH Credit Union will review the efficiency of the program quarterly and make changes or adjustments to the scoring tier if needed. NGH Credit Union does not discriminate against applicants on a basis prohibited by the Equal Credit Opportunity Act or the Fair Housing Act. NGH Credit Union will abide and adhere to all regulatory acts and consumer protection laws. These include: Fair Housing Reporting Act, Truth in Lending Act, Real Estate Settlement Procedures Act (RESPA), Flood Disaster Protection Act, Open End Disclosures for Home Equity Plans, and the Home Mortgage Disclosure Act (HMDA). TYPES OF RISK NGH CU recognizes that there are basically three types of risk when granting loans: INTEREST RATE RISK occurs when interest rates rise and the loan portfolio is incapable of being re-priced. We will protect ourselves against interest rate risk by: 1. Using a tiered system on interest rates on unsecured loans. 2. Using a tiered system for interest rates on secured loans so that we offer different rates for different repayment terms. (The longer the maturity,the higher the rate. By using a tiered approach and multiple pricing by product, we can maintain our margins as rates go up or down. LIQUIDITY RISK is the possibility of loan demand surpassing our ability to fund the members' request. DEFAULT RISK. We will charge rates on loans consistent with the probability of default as predicted by the member's Credit Bureau report. The Credit Bureau assigns a risk score based on the member's credit history. It is the policy and practice of NGH CU to not discriminate against any member. Accordingly, the Credit Bureau risk score is totally nondiscriminatory and is reviewed periodically. Loan Eligibility Any credit union member who is in good standing with the credit union is eligible and welcome to apply for loans. A member is in good standing if they maintain the minimum required share balance, and have not caused the credit union a loss. A member who has caused a loss and wishes to repay will be welcome to negotiate terms of repayment with management. A nonrefundable $10 loan application/ processing fee is charged on all loans with the exception of share secured or line of credit advances after pre-approval, or annual re-approval has been granted. The credit union understands that some members have a history of not paying their obligations on time or not paying all together. These loans will be reviewed differently getting sufficient collateral, possibly inspecting the collateral, shortening the loan term and so forth. These loans will also be closed with more aggression letting the member know they are being given a fresh start and that all their payments must be made on time.

2 Advertisements NGH Credit Union will quote the A+ paper rate on all printed materials and inquiries. It will be further explained as your credit history indicates what interest rate you will pay or all loans subject to approval. Bankruptcy Indicators Although bankruptcy is not always predictable, there are certain precautions the credit union can take when granting loans to members. Loan officers will use the following scale when reviewing a member s request for a loan especially a unsecured loan. 1. High Unsecured Debt High amounts of unsecured debt is the number one cause of bankruptcy. In determining if a member s unsecured debt is too high, our loan officers will focus on the member s annual income and the level of their unsecured debt. Students loans are included in the unsecured calculations if they are not verified to be deferred past the repayment term of the loan being applied for. Safe Range 0-10% of annual income Repayment prediction is good Caution 11-20% of annual income Review closely High Risk 21-30% of annual income Review very closely, loan should probably be secured Danger > 30% Danger, bankruptcy very likely The credit union will always attempt to make secured loans to members in the High Risk Range. Loans will be approved to members whom may be a potential bankruptcy provided the credit union loan is secured and the credit union is certain of obtaining a re-affirmation based on the solid equity position of the collateral. 2. Escalating Debt The employee will be instructed to focus on how much of the member s debt was acquired over the last 18 months. If the majority of the member s debt took place in the last 18 months, this is a BIG RED FLAG and the credit union should use real caution in granting a loan. 3. Capacity Members who have maxed out their credit cards limits represent a real risk. Our employees are instructed to always focus on how much of the capacity on credit cards has been used. The higher the member is at capacity (over 50%) the greater the risk. Credit Scores Credit Scores are used to determine the interest rate for loans made to NGH Credit Union members. If a member has no credit score due to insufficient credit or no credit file, then the rate will be based on a C grade for the rate determination. In the event that there are two signers (joint borrowers or maker and a co-maker), the credit score will be based on the average of the two scores. If no score is available, the score assigned will be C. Debt Consolidation Loans Debt consolidation loans by their nature are considered high-risk loans. These loans are made usually on an unsecured basis to members who don t appear to be a bankruptcy threat and are of good credit quality. More often, members classified as D and E will require collateral. Even A+, A, B, and C members who have a high level of unsecured debt (20% - 30% of their annual gross income) may require collateral.

3 Debt Ratios A debt ratio is determined by dividing total monthly expenses by total monthly gross income. If no mortgage or rent is known, a $350 monthly payment will be used. If no average monthly utilities are known, a $150 monthly payment will be used. If student loans are present and are not verified to be deferred past the repayment term of the loan being applied for, they should be included in the debt ratio or unsecured debt calculation. As a guideline only, the credit union will use a debt ratio of 50% debt to income. If the member is outstanding in other areas, exceptions may apply to the 50% debt ratio. The credit union s debt ratio guideline applies to all members including those who wish to co-sign. Employment/Income Verification The credit union will attempt to verify employment/income on all members. Verification is done by phone or fax to human resources departments of co-operating employers, check stub within the last 30 days, current pension and/or social security, proof of direct deposit into an account, or 2 most recent years IRS return (an average of the last 2 years IRS return s adjusted gross income will be used). Self-employed borrowers are a higher risk in some instances and therefore we request income verification on those borrowers from most recent 2 years IRS returns. On credit scores higher than 675, the loan officer will make a judgment call if they feel there is a necessity of verifying the income because of possible misrepresentation. GAP Insurance GAP Insurance is offered to all members who apply for a loan in which the collateral will be an automobile, recreational vehicle, mobile home, boat, motorcycle, etc. In the event of a total loss due to an accident or theft, GAP Insurance will pay the difference between what the member owes on the loan and the amount their insurance company pays toward the loss. GAP insurance will also provide a $1000 down payment on the next vehicle the member finances with the credit union. Insurance Verification Insurance information will be gathered from the member such as the insurance company name, agent s name, phone number, and policy number. The member will be advised that they must provide proof of insurance to the credit union and that failure to do so will result in CPI (Collateral Protection Insurance) being added to the loan. As a procedure, the loan closer will inform the member that the credit union needs a Declaration/Proof of Insurance showing the credit union as lienholder within 10 days of closing the loan. This can be faxed to the credit union, and we then will forward it to our CPI insurance vendor, Insurance Systems Inc. ISI will contact the member by a series of letters at beginning around 30 days if they have not received the insurance verification. Job Stability The credit union understands the importance of stability; however, with the exception of our Payroll ADVance loan, we will not require that the member be on their job a specific time in order to get a loan. If a member has a history of frequent job changes, caution should be taken and the reason(s) gathered on why the changes are so frequent. (Payroll ADVance loans require proof of six months of full time employment and direct deposit repayment into the credit union.) Loan Denials An adverse action must be mailed to the member s address within 10 business days of the date of the application. This is done only after all options have been exhausted in searching for ways to approve the loan.

4 Loan Limits The minimum loan amount is $300 with a minimum payment of $25.00 monthly. The maximum loan limit is $500,000 per member, or twenty-five (25%) percent of Credit Union capital. No single loan in excess of $300,000 will be granted without the approval of the Board of Directors. Matching Rates The credit union reserves the right to match a competitor s rate and/or term when good judgment dictates and it is in the best interest of the credit union. This will be done on a case-bycase basis and approved by the Credit Union Manager/CEO. In most cases matching the rate will result in no more than one (1%) reduction of our rate. (If greater than 1% difference, consult with the Manager for possible approval). The competitor s rate must be verified, and presented to the credit union in writing. Membership Requirements The credit union needs to make loans and in no way wants to discourage a member from applying; therefore, the credit union will evaluate new members the same as existing members, focusing on their job and residence stability, their ability to pay, their credit history and their credit scores. New members may and are encouraged to apply for a loan anytime. Guarantors/co-signers do not have to be a member of the credit union unless they choose to take the loan as being the primary borrower. Notarization All loan documents that are sent/taken out of the office must have the signatures on said documents notarized by a notary before the documents are brought/sent back to the credit union in order for the loan to be closed. Overdrafts Overdrafts are unsecured extensions of credit subject to policies governing pre-approval, documentation, reporting, monitoring and collection. Pre-Approved Loan A pre-approved loan is a request for a specific loan amount before a purchase has been decided upon and the collateral value determined. These are generally a motor vehicle, a home, or an unsecured Personal Line of Credit, or Overdraft Protection loan. A pre-approved secured loan request will be good for a period of 90 days from the date the loan application was approved. A pre-approved unsecured line of credit limit on A+, A, or B applicants will be good for one year from the date of approval, and a pre-approved unsecured line of credit limit on C, D, or E applicants will be good for 6 months from the date of approval. A request for a greater amount, or later date must be submitted for review again. Pre-Quoted Interest Rates A pre-quoted interest rate that is determined from obtaining a credit report will be good for a period of 90 days from the date the credit report was ordered. Quality Control for loans Each loan that is closed will be reviewed for complete, correct information. If any information is in need of correction, the loan will be returned to the credit union staff for corrections and/or follow-up.

5 Rates and Terms based on Loan Types The Manager recommends and Board approves the base rates, terms, and/or conditions for each loan type, deemed appropriate to maintain the credit union's loan program in a competitive environment. See rate for current rates and terms. The loans qualifying for Risk Based Pricing include: Personal (Unsecured Signature(s) only...including single or joint signature, coapplicant or co-signed, personal lines of credit and overdraft lines of credit) Title Loans (Secured by new or used motor vehicles). UCC1 lien secured (a new purchase watercraft, lawn equipment, etc.) Real Estate (Fixed Rate mortgages on land or land and home). Home Equity Real Estate (Variable rates secured by primary residence) See separate Rate and Term schedule for details. Rates are determined by the market and will be reviewed and adjusted as needed. The maximum rate on loans will be 18.00% APR as set by NCUA. These loans are excluded from Risk Base Pricing: Share secured loans and Payroll ADVance loans are excluded from risk based pricing. (Share secured loans due to their inherent low risk are charged a low rate, and ADVance loans due to their inherent high risk will be charge the maximum rate. Real Estate Loans The Real Estate loans have a separate loan policy and should be referred to when handling real estate loan transactions. Refinancing or Add-On to Existing Loans If a member is refinancing a loan (secured or unsecured), the member will be required to add $500 or more new money to the loan, or a $50 re-refinancing fee will be charged. The rate given will be the qualifying rate at the time the member applies for the loan add-on. If the member has established credit, paid or disputed derogatory items and requests reevaluation to re-finance the balance at a lower rate, a new credit report will be pulled and attached to the new loan papers, and a new application fee will be charged. The required minimum add-on or $50 re-finance fee still applies. Staff and Volunteer Loans These loan applicants include CU staff, board members, loan officers, and supervisory committee members. Loan rates charged to staff and volunteer applicants will be approved based on the same criteria that any other loan would be processed. A+, A, or B related party loans must be reviewed and signed by one (1) Staff Loan Officer and reviewed by two (2) Directors. C, D, or E related party loans must be reviewed and signed by or one (1) Staff Loan Officer and reviewed by four (4) Directors. A loan officer may not approve a loan for themselves or any member of their family. All CU staff and volunteer loans will be reported at the next regular board meeting.

6 Repossessions The credit union will repossess a member s collateral anytime the credit union feels the loan is in jeopardy and the member s circumstances are not likely to improve. Loans to member whose credit is marginal to start with (C, D and E paper) will generally be sent one notice, given one phone call and then the repossession process will start after 60 days of the due date if the member does not respond by paying their account current. The collector will use the appropriate approach for members with different credit grades. The credit union manager has discretionary authority regarding repossessions. Residence Stability Residence stability is important, but the credit union will not require the member to have resided at an address for a specific period of time. If the member appears to move around frequently, then the member will be asked for an explanation of why to determine residence stability and the employee will use caution when approving the loan. Secured Loans Loan officers should use as a guideline; that a vehicle loan for up to 75% of a member s annual income is a reasonable amount providing the member demonstrates the ability to pay the monthly payment. The credit union s interest rates and the terms of a loan are based on the credit score provided by the credit bureau. Share Secured Loans The member must have the amount that he/she wishes to borrow deposited in their share or certificate account. If the member making the loan is depending on a third-party member s account being used as collateral then the owner of the pledged account must sign the security agreement and also sign the note as other owner. Security holds are placed on the share account(s) that have loans pledged against them for the dollar amount of that loan plus interest calculated for the term of the loan. In the event a member fails to pay his/her share secured loan payment, the credit union will transfer said payment to the loan account from the pledged account after the due date. If this transferring practice continues for 3 consecutive months, the credit union will set the account up on a batch transfer computer program. Terms The credit union will attempt to provide the member the payment the member is most comfortable with, as long as it is in the best interest of the member and the credit union. Title Information for secured loans All loans secured with the following: any motor vehicle such as autos, motorcycles, recreational vehicles involving a title, or purchases of boats, jet skis, etc., equipment must have perfected liens involving a UCC1 form, when there is no title available. Requirements: The CU staff will collect the appropriate DMV title, or UCC1 fee(s), if applicable, from the member. The CU staff will counsel the member on their responsibilities and what procedures to take in order to perfect the credit union s lien. The employee will inform the member that the credit union requires a copy of the registration reflecting the credit union as lien holder. In the absence of a copy of registration, the credit union may issue a temporary title lien, which may be at the member s expense.

7 Unacceptable types of collateral Used appliances, household furniture, animals, airplanes, limousines, stock, bonds, jewelry and junked/salvaged vehicles and/or vehicles that are in non-operable condition. Unsecured Loans The credit union will loan up to $20,000 (total) per member with no collateral for all combined unsecured loans. This includes the personal line-of-credit, overdraft line of credit, open-end and closed-end unsecured debt with the credit union. The member must be able to qualify for the amount of unsecured money and again the overall total of unsecured debt with the credit union will not go over $20,000. An example follows: 2(x) monthly gross income Example: Annual Income $48,000 Monthly Gross Income $ 4,000 Maximum Unsecured 2 (x) $4000 = $8,000 A member could have a split combination. The example below is taken from the above figures. Signature Loan: $ Overdraft LC: $ Payroll ADVance $500 Reminder to CU staff: The total unsecured amounts the credit union will have loaned out to any one member is $20,000. Also refer to the Bankruptcy scale of unsecured debt in this policy to review what percentage of the member s debt structure is unsecured debt with all creditors. Warranties This is additional protection the member may purchase to help protect their automobile. The price is determined by inputting pertinent information into the warranty software program. See warranty information for further questions. A member will have a 7 day window after the loan is closed in order to purchase a warranty..