Piloting Service to Subprime Borrowers
It's been a year since CALCOE Federal Credit Union rolled out its Credit Builder program to help some of it members rebuild their damaged credit scores.
Since May 2013, the $23 million cooperative in Yakima, Wash., has approved more than 140 loans totaling $2.4 million, said Ryanne Nesary, marketing director at CALCOE. The credit union was looking to expand the Credit Builder program when it heard about a new project that could make it happen, she added.
Announced in April, the National Credit Union Foundation's Non-Prime Auto Lending program aims to help lenders fairly price and manage non-prime auto loans, incorporating the LIFT idea introduced by the Filene Research Institute's i3 team in 2011.
LIFT – which stands for Lower Interest for Timeliness – is a loan feature that reduces loan interest rates when members make on-time payments, according to Filene. By giving borrowers a chance to earn their way to more affordable credit, LIFT helps credit unions drive down delinquency, improve member satisfaction and gain confidence in lending to seemingly riskier borrowers.
In September 2013, Filene launched its Accessible Financial Services Incubator through a $700,000, 30-month grant from the Ford Foundation. The non-prime auto loan project is one of five products that will be tested by at least 25 credit unions and 5,000 customers in the U.S. Filene said it will test, package, and scale innovative, viable financial products in the incubator to benefit those of low- and moderate-income means.
“We thought it would be a great chance to improve our product and gain insights from other credit unions,” Nesary said of the non-prime auto loan pilot project.
CALCOE is one of 14 credit unions that will participate in the program, said Cynthia Campbell, director of innovation labs at Filene. In terms of asset size, the financial institutions are over the gamut with CALCOE being the smallest and the $9.8 billion SchoolsFirst Federal Credit Union in Santa Ana, Calif., being the largest. The other pilot program participants run the range between $35 million to $1.9 billion in assets.
“We went after credit unions of various sizes and geographical locations to test the program because we are looking to see if it is truly scalable,” Campbell said.
While auto loan originations are increasing at a rapid pace, the percentage of non-prime accounts still remains low, according to analysis from TransUnion. In fact, the percentage of non-prime borrowers for all auto loan accounts was lower in the fourth quarter of 2013 than it was in 2012. The share of non-prime, higher risk loan originations with a VantageScore 2.0 credit score lower than 700 grew by 16 basis points from 32.37% in Q3 2012 to 32.53% in Q3 2013, TransUnion's more recent data showed. This percentage is still much lower than what was observed pre-recession, which was 36.97% in Q3 2007, for instance.
“We expect share of non-prime, higher risk loan originations to continue trending upward due to the growth of competitors in this segment,” Pete Turek, vice president of automotive in TransUnion's financial services business unit.
Meanwhile, CALCOE definitely saw a need to come to the aid of those members who may have had a few bumps in their credit histories but still craved a vehicle to get to and from work, said Nesary.
“Buy-here, pay-here lots sometimes charge 30%. Credit unions are capped at 18% so they’re a much better deal,” Nesary explained. “Credit Builder has been doing very well and we work with local, reputable dealers.”
It is estimated that families can increase their income by as much as 25% with access to reliable transportation, said Gigi Hyland, NCUF executive director.
“We’re excited to work with not only Filene on this project but also such a wide array of credit unions across the country to give affordable, safe and reliable used cars to those that need them most,” Hyland said.
Indeed, members in the non-prime category are getting more attention across the industry. CU Solutions Group announced in March that it had teamed up with wireless carrier Sprint and mobile resource management provider Spireon.
Through the alliance, the Livonia, Mich.-based CUSG, which is owned by the Michigan Credit Union League & Affiliates, added Spireon's LoanPlus collateral management system. Sprint played a key role in facilitating the alliance that aims to increase a credit union's ability to lend in the non-prime auto loan market, according to the partners.
In 2005, the NCUA issued an alert on a sharp increase in outsourced, indirect, subprime auto lending, concerned that credit unions offering these types of loans likely did not have effective controls and monitoring systems.
The regulator reminded credit unions to exercise due diligence especially if they allow a third-party vendor to perform activities related to subprime auto loan underwriting, servicing, repossession or insurance processing.
Hyland encouraged credit unions in an April op-ed published in CU Times to break out of the status quo.
“Take a hard look at what you are doing. Are you just getting ‘butts in seats’ for seminars or are you measuring the impact of your work – (for example), improved credit score, eligibility for a lower rate loan, etc.,” Hyland wrote. “Everyone, regardless of age or demographic, needs financial education resources for where they are in their financial lives.”