Hosted by Accolade’s VP of Strategy Phil Lucas, this comprehensive webinar outlines a disciplined and data-driven approach to loan pricing for credit unions, emphasizing profitability, sustainability, and alignment with the credit union’s mission. Simplified concepts from funds transfer pricing (FTP) are focused on, which guide strategic loan pricing decisions in a changing economic landscape. 

Context and Purpose

Accolade, a wholly owned CUSO of Corporate One, provides balance-sheet consulting, including ALM analysis, CECL modeling, and loan pricing frameworks. As a fiduciary and Registered Investment Advisor, Accolade supports credit unions in making data-informed financial decisions. 

During this webinar, Lucas emphasizes the significance of loan pricing in light of 2022 market dynamics, where credit unions often captured a large share of the auto loan market by underpricing loans. Rising funding costs and delinquencies have made these loans some of the least profitable on credit unions’ balance sheets. This situation highlights the need for more accurate pricing models that respond to evolving cost structures. 

Loan Pricing Framework

Accolade proposes a profitability model where Return = Loan Yield – Cost to Lend. The cost to lend is divided into four key components: 

1. Credit Risk

Many credit unions use historical loss rates to price for risk, but Lucas suggests this is insufficient in a volatile environment. Instead, Accolade promotes: 

• Segmenting historic loss data by credit grade and loan type. 
• Using Probability of Default (PD) modeling, combining member-level and macroeconomic data to forecast future losses.
• Understanding how default risk shifts over time, using delinquency and LTV as indicators. 

2. Servicing Expense

Often underutilized, servicing data can be captured by analyzing Call Report field 280. Accolade helps credit unions categorize and study these costs to assign accurate servicing rates per loan type. Servicing costs vary by loan product and portfolio size, with credit cards often being the most expensive to service. 

3. Cost of Funds

Lucas emphasizes forecasting the cost of funds, especially amid liquidity tightening. He advises credit unions to: 

• Use the marginal cost of funds rather than weighted averages. 
• Integrate ALM forecasts and interest rate trends. 
• Consider member expectations for higher dividends in a competitive deposit market. 

4. Other Costs

This includes indirect dealer reserves and fee income. For example, a 3% dealer reserve on a 72-month auto loan can cost 1% per year when prepayment behavior is factored in. Such costs must be accurately amortized and included in the pricing model. 

Putting It Together: Pricing Strategy and Benchmarking

Once cost centers are understood, credit unions can evaluate net returns across different credit tiers. Lucas shows how middle-tier (B, C, D) loans often generate higher returns than low-risk platinum loans. These returns are benchmarked against realistic investment alternatives, not just U.S. Treasuries. 

Profitability is also assessed using operating expense (OPEX) targets, recommending that credit unions compare net interest margins to net OPEX (non-interest expense minus fee income). If the margin exceeds OPEX, profitability is likely. 

Strategic Implications

Lucas challenges credit unions to ask critical questions: 

• Are low-return platinum loans justified without a broader member relationship? 
• Are lending teams incentivized to prioritize volume over profitability? 
• Can the credit union sustain subsidizing high-risk unsecured loans in line with its mission?

He suggests implementing rate floors calculated as Cost to Lend + Operating Expense Target + Target Profit Margin, thus ensuring lending decisions align with institutional goals. 

Case Studies and Best Practices

The webinar concludes with real-world examples: 

• A multi-state credit union adjusts prime auto loan rates slightly upward to fund rate reductions for riskier but more profitable loans. 
• A mid-sized credit union successfully uses indirect auto lending by balancing lower-yielding prime loans with more profitable middle-credit ones. 
• In high-risk unsecured lending, credit unions must consciously decide whether to subsidize these loans as part of their mission, using loss projections to guide that decision. 

Lucas emphasizes that building a pricing model isn’t just about numbers but philosophy and strategic clarity. Accolade supports credit unions through every step, including data gathering, modeling, and benchmarking. 

Conclusion

Loan pricing requires tight feedback loops and strategic foresight. Mispriced loans can compromise sustainability, especially when driven by volume-based incentives. A disciplined pricing framework allows credit unions to remain mission-focused while achieving financial health. Through cost breakdowns, credit modeling, and benchmarking, Accolade empowers credit unions to make pricing decisions that are both profitable and purposeful.