Magazine article American Banker

TEG Federal, Losing Business to Banks, Writes Riskier Loans

Magazine article American Banker

TEG Federal, Losing Business to Banks, Writes Riskier Loans

Article excerpt

Taking the lead in opening doors to new customers, TEG Federal Credit Union is lending to people it previously considered bad credit risks.

Since March, customers with poor credit ratings have been getting loans at 2% to 4% above standard rates.

TEG started the program because - pressed by its federal regulator to adopt tough underwriting standards - it was losing loans to the competition.

"We were rejecting loan applications from our members and they would go to a hank to get a loan," said Joseph Prokop, president of the $52 million-asset institution, based in Fishkill, N.Y.

TEG, which serves about 120 employee groups, is one of the few credit unions in the country with a risk-based loan program. About 6% of credit unions offer those loans, according to a 1993 survey by Credit Union National Association. That percentage has held steady since 1991.

More credit unions, awash with liquidity and faced with anemic loan demand, are considering such programs.

"There is an increasing amount of interest," said Keith Peterson, an economist for Madison, Wis.-based CUNA.

Some managers "see it as a way of competing against others that already do this, and as a way to extend credit to more people."

Some in the industry oppose risk-based lending.

"If this translates into higher rates for low-income people, that could create additional barriers to people getting affordable credit," said Cliff Rosenthal, executive director of the New York City-based National Federation of Community Development Credit Unions.

The trade group represents 120 credit unions that serve poor and minority areas.

"It too easily could shade into a kind of redlining," he said. Many community development credit union customers could be considered credit risks, but the credit unions don't charge them higher rates, he said.

Mr. …

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