I’ve talked before about the difference between banks and credit unions. One thing that I’ve always said about credit unions is that they are a little more lenient in their lending guidelines, which is ironic since they are not the ones in trouble with the current crises. The reason for that is even though credit unions are more lenient to an extent, they did not participate in the subprime lending, which was the root of the mess.

But, the point of this post is to truly show where we stand in the midst of these crises.

I recently told you a story about my friend who called me up and needed some advice on debt consolidation. She wanted to get all of her credit card payments down into one easy payment and hopefully save some money doing it. She banks with a credit union and a bank, so I told her we should go to both and see who could help her out.

We stopped by the bank first. We spoke to the banker and he explained what they could possibly offer her. He printed out a quote sheet and laid it in front of her. She asked what her chances of getting the loan would be and he said that he didn’t know because they sent it to their underwriting group who then made the determination. He didn’t even see a credit score. My question was about the debt-to-income. In most cases, when you’re talking about a debt consolidation loan, lenders will consider just the loan in your DTI ratio, excluding those you plan to pay off. I wanted to make sure the bank would do the same. The banker assured us they would.

I explained to my friend that she could apply at both places to see what she was approved for and as far as her credit report was concerned, she’d only have one hit. The way it works is when you apply for a loan, if it’s for the same purpose (i.e. two hits from auto dealers, or for a consolidation loan) and it’s within 14 days, that is only one hit against your credit. She wasn’t sure that she wanted to apply with her bank though because the worst-case scenario rate was a lot higher than her credit card rates.

She decided she’d at least talk to the credit union first and see what their rates looked like. So we went to the credit union. It turned out that the rates were a little bit lower than what she was being quoted with her bank. My friend decided to go ahead and submit the application just to see what she’d get. With credit unions, we can typically give you an answer right away or within an hour, tops. This is because in most cases, if it goes to underwriting, it’s an in-house group. And, we also have access to credit scores.

So, my friend’s score was in the 680+ range. She wasn’t doing too bad and it seemed to me that her biggest challenge was the DTI ratio. We chatted a moment while the banker called up her underwriting group to see what my friend could be approved for.

Initially my friend asked for $13,000, and that included all of her outstanding debt. But, because we’re talking about an unsecured loan, I knew anything over $10,000 was going to be tough to get. I prepared her for that, so she knew walking in. When the credit union gave us their decision, it could have been worse. They agreed to finance $8000 rather than the original $13,000. At least they were willing to make an effort to work with her. And her interest rate was a fairly decent one, coming in below all of her credit card rates.

However, my friend decided she wanted to see if her bank would do the full amount requested. So back to the bank we went to submit the application with them. She told them what she was approved for with her credit union and they submitted the application, letting her know they’d be in touch by the end of business that day. As it turns out, she was automatically declined from the bank, and there were no counteroffers waiting in the wings for her, either.

When the banker called back to explain to her that she’d been declined, he informed her that the primary reason was because her DTI ratio was too high. Apparently, the underwriter was not willing to take into consideration that she was planning on paying off those credit cards. They were not satisfied that she could sufficiently handle the credit card debt and the loan, should she run the credit cards up again. My friend didn’t understand that, though. She thought they were supposed to consider the fact that she was CONSOLIDATING. According to the banker, six months ago this type of loan would have been approved with no problems. But since the housing and credit crises, unsecured loans have gotten harder to approve.

As you can see, a lot of banks are simply refusing to do business if you’ve got a credit score below 700 and a DTI ratio above 50%. Banks are tightening the purse strings because their methods are reactive. They’ve been burned, therefore they’re not venturing out to help people right now. Credit unions, on the other hand, are not closing off their lending entirely. They are cautious, though. Someone wanting more than $10,000 in unsecured debt is a high risk. They want substantial reasons to lend that money. A debt consolidation is not a good enough reason, and so most won’t typically lend over that unless you’ve had numerous loans similar in nature and have always paid back on time.

However, credit unions are happy to work with their members, as they did with my friend. They offered her a lesser amount, which will still help her – though not exactly what she wanted – and she is freeing up quite a bit of her DTI ratio now. But, she’s establishing a great relationship in the process, because as she pays on this loan, she builds internal credibility which will help her with future loans, should she need them.

Have you guys experienced similar situations? Are your banks turning down loans despite being a creditworthy borrower?

Related posts:

1. The Lending Game: Part 1
2. A Tale of Two Financial Woes
3. Debt Consolidation: Is it the right move?
4. The Lenders Strikeback Pt. 2: More Credit CARD Act Loopholes
5. ‘Interesting’ News about the FDIC