America’s Credit Union’s decision to automate its direct lending system has paid off dramatically — the lender went from $1.97 million net income in 2020 to $7.3 million in 2021, and attributes the growth to this change in technology and sunsetting an indirect auto loan program.
The credit union replaced a manual decision-making process with technology from CuneXus, a subsidiary of CUNA Mutual. The older system led to low-quality loans, low loan approval rates, high delinquencies, and low loan portfolio growth.
In 2019, before introducing the CuneXus platform, ACU had $450 million in indirect car loans and $5 million in charge offs.
“Indirect lending added new members, but they only used us for their car loans,” said Troy Kyle, ACU’s executive vice president and chief information officer. “So we decided to focus on our existing members and stopped selling car loans indirectly.”
DuPont, Washington-based ACU’s automated lending platform offers pre-approved car loans which were previously distributed through automobile dealers and experienced heavy charge-back levels, as well as pre-approved personal loans and credit cards. Eventually, ACU plans to automate all its loan products including its buy now/pay later offering.
As ACU is a low-income designated credit union, it wanted to find a way to ensure low-income members applying for credit cards and car or personal loans didn’t get turned down.
“What had been happening was that low-income consumers would open accounts and complete the forms for loans, but would then be denied,” Kyle said.
In 2021, ACU, which has 38,000 members and assets of $672 million, implemented the system from CuneXus, a Santa Rosa, California-based provider of digital technology to 215 U.S. financial institutions. ACU primarily serves members of the U.S. military, which represents about two thirds of its membership. Residents of the Pacific Northwest can also join the credit union.
ACU faces competition from larger military credit unions such as Navy Federal Credit Union as well as from fintech lenders such as SoFi.
“Using CuneXus helps us stop the larger military credit unions stealing our military members,” Kyle said. “It also enables us to grow our non-military member base and prevents members defecting to fintechs and big banks.”
Fintech lenders have increased competition with traditional bank and credit union lenders by digitizing consumer loan origination processes, wrote Craig Focardi, principal retail banking analyst at U.S.-based Celent, in a report published in March 2022. Processes that have been digitized include loan search, loan application, credit scoring, automated decisioning and signatures.
Prior to implementing CuneXus, ACU’s loan underwriter decision-making process was manual and inexact, and sometimes led to missed opportunities with members who might be qualified for a different loan better matched to their needs, Focardi wrote in his report.
ACU eliminated the loan search, application, and underwriting process altogether, offering instead a wide menu of pre-approved retail loans. As a result of this strategy, “high-quality loan origination volume has skyrocketed,” Focardi wrote.
Like other FIs, ACU has seen a significant shift by its members from branches to digital banking.
“Only 8% of our members’ transactions involve our branches,” said Kyle. “The majority of our members’ transactions are online, with the rest being through the call center.”
CuneXus’ loan automation platform, which went live in June 2021, enables ACU to make pre-approved loan offers with personalized interest rates. It allows ACU to set up a digital storefront for pre-approved loans for individual members online, in person and over the phone.
“Our lending engine takes all the data ACU holds about its members and combines this information with pre-screened credit file data from credit bureaus,” said Barry Kirby, senior vice president at CuneXus. “We also house all ACU’s loan products along with underwriting decision criteria and rate sheets. Members just have to click on loan products they want to activate. We eliminate the whole credit application process and approval takes place within seconds.”
Moving to CuneXus’ platform and ending indirect lending led to a clear improvement in loan performance and net income in 2021, Kyle said. ACU’s allowance for loan and lease losses fell from $6.67 million in 2020 to $6.08 million, while net charge-offs fell to $402,416 from $2.39 million in 2020.
“Our net income in 2021 was the most ever at $7.3 million and we experienced a 520% year-on-year growth in loans,” Kyle said. ACU’s provisions for loan losses fell from $3 million in 2020 to negative $182,000 in 2021, while its non-performing loans fell from $3.22 million to $1.4 million in the same period.
By selling auto loan “gap” and warranty insurance products to people obtaining car loans directly from the credit union, ACU was able to generate a $1.3 million growth in non-interest income in 2021.
“80% of customers taking out auto loans buy our auto loan gap and mechanical breakdown insurance products for auto loans,” Kyle said. “Previously, we saw a 30% penetration rate.”
Low-income borrowers particularly benefit from ACU’s automated loan approval system, Kyle said.
“When we ran loan applications from low-income borrowers through our traditional rails, the criteria were too tight,” Kyle said. “We didn’t take into account data such as members’ history with us or their utility bill payments and payments they were making to merchants. We incorporated all that data into an algorithm which we run when members apply for loans through CuneXus. As they are pre-approved, members don’t have the negative experience of being declined for loans”
Employees in ACU’s retail channel also benefit from the automation, Kyle said. “Our employees don’t have to do a lot of product sales and can just show the member what they are qualified for.”