By John San Filippo
With more than $2 billion in assets, 117,000 members and a loan portfolio of $1.4 billion, Frankfort, Ky.-based Commonwealth Credit union is a major consumer lender in Kentucky. The credit union has even built its own indirect auto lending network consisting of more than 110 automobile dealers across the state. However, as the credit union’s loan portfolio has grown, the experience level of its underwriting team has likewise gone down.
“The tenure of employees today is different than when I first started at the organization,” said Chief Growth Officer Jaynel Christensen. She added that when she started at the credit union some two decades ago, it was not unusual for underwriters to have 10-15 years of experience. “Today, every person in my underwriting area is new to the area except for one person who's been there five years. As tenure continues to reduce, how do we protect ourselves as an organization with one of the riskier decisions that we make?”
In response, the credit union deployed the CuneXus digital storefront platform in 2019, creating “an incredible firm-offer experience for members,” Christensen said. That, however, put an even greater burden on the underwriters. Christensen said she had become aware of artificial intelligence (AI) scoring and decisioning provider Zest AI a few years earlier and knew the time was right.
“We have great underwriters, but Zest can approve a loan in 2.4 seconds with much greater accuracy than any of us can,” noted Christensen. “Deploying Zest has meant better decisions for the credit union and, thanks to the speed of the system, a better member experience, too.”
Instant Decisioning on the Rise
By using the tools built into its loan origination system (LOS), Christensen told Finopotamus that the credit union was able to auto-decision about 13% of its incoming loan applications. “We launched Zest in March of 2021 and in April, we hit 23.5%,” she said. She added that the average for all of 2022 was 29.3%, with a steady month over month increase to 38.53% for the month of December.
At present, the credit union only uses Zest AI’s instant approval piece, but plans to deploy the company’s instant denial component later in 2023. With that addition, Christensen said she expects to see “a good, strong number” in 2023 – somewhere in the neighborhood of 40-50%.
“I’m certain delinquency will increase in 2023 and charge-offs will increase in 2023. There's no doubt; they have to. But will we increase to peer levels? I tend to think not." -- Jaynel Christensen
“On the indirect side, we’ve definitely seen a jump in funded loans,” explained Christensen. “We're providing our dealers with a loan decision in 2.4 seconds and indirect is a model driven by who gets the dealer the information first. That lender usually gets selected to do the loan.”
She added that even though market conditions have forced the credit union to reduce dealer compensation, require lower loan-to-value ratios, and raise rates, indirect lending volumes in 2022 were “incredible” and started with “record highs” for 2023, despite these adverse market conditions. “We attribute a lot of that to Zest driving that quick decision for the dealer,” she noted.
Growth Without Adding Employees
Christensen said that there’s still plenty of work to keep the underwriters busy. “Zest has allowed us to grow as an organization without adding staff to that area,” she said. “It's important to keep in mind that every loan doesn't get Zest approved or Zest denied. Our vehicle loans were launched with Zest in March of 2021, but we didn't add our personal loans and credit cards until June of 2022.”
She added that Commonwealth Credit Union uses a more “conservative” score than what Zest AI typically recommends “because that's who we are as a credit union.” She said this results in plenty of loans for underwriters to review.
“We've continued to grow as an organization without adding people, which is what the goal was,” added Christensen. “There's always going to be a need for a live, manual underwriter. There's a lot of support that they do for team members, too. Team members call them with a lot of questions.”
Loan growth is essential for credit union growth. “What’s nice is we've continued to add volume,” she said. “We had a record year. We had 17% loan growth across the portfolio. If you know anything about lending, you know it takes an incredible number of applications to get to 17%.”
Christensen also told Finopotamus that even though loan decisions are based on Zest AI’s scoring, the interest rate offered to the member is still currently based on their FICO score. “We have plans in 2023 – it’ll probably bleed into 2024 because it's already almost February – but I'd like to change our rates to Zest,” she said. “Today we base rates on the member’s FICO score. However, it only makes sense that if we’re basing the decision on Zest, we should base our rates on Zest, too.” She added that under the current model, some members are offered rates that don’t accurately match their risk.
“The model has exceeded expectations,” said Christensen. “I’m certain delinquency will increase in 2023 and charge-offs will increase in 2023. There's no doubt; they have to. But will we increase to peer levels? I tend to think not. I think Zest is going to be stronger than we think, just based on the performance so far. The company has been fantastic to work with. I have nothing but good things to say.”