A program developed by the Filene Institute's i3 initiative has won a $300,000 grant from the Center for Financial Services Innovation to roll out a program that will reward CU members who have low FICO scores for making loan payments on time.
The i3 initiative gathers credit union executives and experts into targeted efforts to develop new products and services.
In this case, the executives forming the innovation team Shelly Berryman from SchoolsFirst Credit Union, Jackie Edwards with Connexus Credit Union, Matthew Henry with Elevations Credit Union, Mike Kenzie with Patriot Federal Credit Union and Lisa Randall with Vermont Federal Credit Union.
This group accepted the challenge to develop a product for credit union members whose credit score and financial history had been damaged by the recession. The solution they developed was the "Lower Interest for Timeliness" program, an effort that would allow consumers with subprime credit scores to lower their interest rates by paying on time.
"In today’s tight credit market, it often requires a score of 760 or higher to be considered a good credit risk and obtain that ‘as low as’ rate," the program team wrote in a package explaining LIFT. "On the low end of the scale, many lenders are now shying away from consumers with a credit score below 680. Even if consumers with a low score obtain credit, it will cost more–often more than twice the interest rate paid by an individual with a higher score. Those with poor credit often feel beaten down and taken advantage of. They feel their choices are limited."
The program beat out 246 competing programs from 44 states to win the award.
The research organization that specializes in credit union issues described the program as "a loan feature that provides incentives for healthy financial habits," adding, "as users make timely payments on their loan, they are rewarded with a lower interest rate. This pioneering concept allows users to pay off their loans faster and reduce the amount of interest paid. It also helps them establish healthy financial behaviors and earn the opportunity to bring down their interest rate."
As developed by the team, the LIFT program rewards qualified credit union members to earn interest rate reductions on a loan for 12 consecutive months of on-time loan payments. This could, for example, drop the interest rate on a five-year used car loan by 200 basis points over the life of the loan and effectively shorten the loan term and allow members to improve their credit scores.
The grant will allow Filene to move the program to eight to ten other credit unions in a formal roll-out, according to Filene CEO Mark Meyer.
"We are honored to receive this substantial and intensely competitive grant award," he said, adding that this was the biggest grant that Filene had received in a decade.