2/20/2012
Lending Solutions
Serving the Underserved Market and
Building Productive Borrowers
MCUL Lending and Marketing Conference
February 14, 2012
Presented By:
Beth Troost
Financial Education Coordinator
[email protected]
(800) 262-6285, ext. 453
Overview and Agenda
 Community Reinvestment Initiative (CRI)
 Helping modest-means and low-wealth consumers
 Market potential and alternative providers
 Consumer
Consumer-friendly
friendly lending products and solutions
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MCUL’s Community Reinvestment Initiative
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MCUL’s Community Reinvestment Initiative (CRI)
 CRI challenges credit unions to elevate their social mission to a
strategic level, to operating policies.
p
gp
products,, p
programs
g
and
 CRI assists credit unions in implementing
partnerships to help members in building their assets.
 CRI focuses on financial services and community outreach efforts for
the un- and under-banked, low-wealth and modest-means consumers.
 MCUL gathers data on credit union CRI activities and highlights these
to consumers and lawmakers in the annual CRI report.
 Why? Primarily,
Primarily it is just what credit unions do
do. It fits our mission
mission.
Secondarily, CRI helps to combat mandatory CRA and save our taxexempt status.
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CRI Strategy
With CRI products, programs and
partnerships, the credit union is able to
assist a member in building personal
assets.
Objective: Use credit union solutions to
move consumers from being a transactor
(one who uses payday lenders, check
cashers) to one who is able to save through
products like Save to Win and free tax
refunds through Just File It, to becoming a
responsible borrower through products
such as small dollar loans, and credit
rebuilder loans.
Moving the member along the “asset
building path” is assisted by financial
education and counseling.
From Alternatives FCU, Ithaca, NY
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How Credit Unions Can Help
Strategy for Financial Success
CREDIT UNION
Assets
FINANCIAL
EDUCATION
TRANSACTION
SERVICES
SAVINGS
FINANCIAL
COUNSELING
STAFF TRAINING
CHECK CASHING
FEE-FREE CHECKING
MONEY ORDERS
REMITTANCES
TAX PREPARATION
LOW MEMBERSHIP FEE
SAVINGS AWARENESS
SAFE ACCOUNTS
LONG-TERM SAVINGS
CREDIT
PAYDAY ALTERNATIVE
SMALL LOANS
USED CAR LOANS
LOAN POLICIES
STAFF AWARENESS
Long Term
Asset Planning
PURCHASE HOME
RETIREMENT
PLANNING
Model from NCUF REAL Solutions www.realsolutions.coop
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The Business Proposition
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Opportunity for Credit Unions
Serving the underserved is a business opportunity
 Considered one of the fastest growing market segments in the
U S and represents a significant potential for credit unions
U.S.
willing to offer relevant products and services.
 Market represents 88 million individuals with $1.3 trillion in
income
 Market is growing quickly, millions of wage-earning adults are
moving
i ffrom th
the “average”
“
” credit
dit score tto th
the “d
“damaged”
d” credit
dit
score category due to negative life events.
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Untapped Markets = Big Business for Credit Unions
Source: FDIC “Alternative Financial Services”, 2009
Research Your Market
http://www.census.gov/acs/www/
Or
factfinder2.census.gov
Michigan
state, city,
county data
What are the
needs in your
community?
How can you
help?
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Click
here
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Research Your Market
A comprehensive look
at wealth, poverty and
the financial security of
families in the United
States.
The Scorecard
provides state-by-state
performance and policy
measures across five
issue areas:
Financial Assets &
Income, Businesses &
Jobs, Housing &
Homeownership,
Health Care,
Education.
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Lending Opportunities?
Assets and Opportunity Scorecard
Michigan Data
http://assetsandopportunity.org/scorecard/
Credit Union Lending
Solutions to help, not hurt
• 39.8% liquid asset poverty rate
• Payday loan alternatives
• 54.3% of consumers have subprime credit
• Credit rebuilder loans
• $9,112 average credit card debt
• Debt consolidation loans
• 14.3% no health insurance in Michigan,
14% out of pocket medical expenses if
insured
• Used car loans
• 25% have four year college degree, 60%
of college grads have debt (average of
$25,675)
• Lifestyle loans with partners
(medical, dental, funeral home,
apartment down payment,
payment etc)
• Mortgage refinancing, relief
programs, TDR
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Target Market Segments
Customer
segmentation is
critical
Each segment
requires a
disciplined and
strategic
approach
Risk
Management
i kkey and
is
d mustt
be addressed in
the assessment
phase
Unbanked (age 18 - 40; income of $12,000 - $35,000): Typically recent
immigrant and hourly workers required to prepay most expenses. They
are predominantly users of cash and money orders and may regularly
transfer funds to a foreign country.
Rebuilder (age 30 - 55; income of $50,000 - $150,000): Typically
recently experienced a negative event such as unemployment
unemployment,
foreclosure or bankruptcy, but held an above average credit score
before this event. They use at least one checking account, lack
savings or monetary resources, use payday loans, and have limited
access to credit cards.
Work-to-pay (age 18 - 30; income of $18,000 - $40,000): Typically an
hourly worker that has a low credit score and difficulty maintaining a
consistent job. They regularly use payday lenders to meet cash flow
needs, buy and use stored value cards, pay cash for cars or have high
interest loans, and are comfortable using a debit card.
Emerging retail (age 18 - 26; income of $25,000 - $60,000): Typically a
recent high school or trade school graduate with limited access to
liquidity and a paid-off older car or high interest car loan, but diligent in
paying bills on-time and at saving. They use mobile phones and online
services heavily, are receptive to advice and new ways to manage
their money, and are willing to pay fees for conveniences.
www.prnewswire.com
KPMG Study: Underserved Market Represents Opportunity for Banks
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Lending Solutions
Target
Helping consumers and the credit union.
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Lending Solutions
Credit Union Lending Solutions
Help members become more
financially stable, build assets and
avoid expensive alternative services.
Contribute to credit union growth,
reduced losses, increased income
and membership stability.
 Refund anticipation loans the credit union way
 Nonprime auto loans
 Short term, small amount loans
 Credit builder loans
 LIFT loans
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Tax Refund Loan Alternative
Target
Convert RAL borrowers into loyal,
productive members.
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RAL’s
 RAL = Really Awful Loans for consumers
– 149% for a $1,500 RAL this year
(from Republic B&T through Jackson Hewitt)
 Refund Anticipation Checks: $30
$30-$32
$32 bank fee plus tax preparer
add on fees ($25 – several hundred)
– Prepaid cards carry significant fees also
 This is big business. In 2010 an estimated five million taxpayers
received a RAL and 14.6 million received RAC’s
 Next year no RALs allowed, but RACs and alternative partners for
tax preparation services will continue
– Advance America’s “fast” refund and others from payday lenders
– Tax Season Cash Advance” by TaxWorks (owned by H& R Block)
(Source: National Consumer Law Center)
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RAL’s the CU Way
 Designed to safeguard both the consumers financial assets
and the credit union’s risk exposure
– Decrease number of families using expensive tax prep sites and
RALs
– Connect families to mainstream financial services and wealth
producing strategies at the credit union
 Montana CU’s pilot Alternative Refund Anticipation Loan
– New and existing members applied through VITA site partner
– Included financial review session for member
– Follow up after tax season to cross sell other CU services and other
loans such as refinancing high interest auto loans
– One CU reported 80% member retention rate for 3 years and < 1%
loan losses.
www.realsolutions.coop
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Non Prime Auto Loans
Target
Increase credit union loan portfolio and meet the needs
of borrowers with limited options.
Not having a car is the single biggest barrier to escaping poverty Annie E. C
Casey
s y Foundation
ou
o
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Non Prime Auto Loans
 CUs can help provide “economic mobility” through loans
for reliable, affordable cars.
 New and used car loans have declined from 37% of CU
loan portfolios in 2005 to 28.8% in March of 2011
– But used loans are 2nd largest share of loan portfolio at 18% in
March of 2011.
 Used car loans to B and C credit offer greater
opportunities in pricing structures and income
generation.
– Key is to manage the risk
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Non Prime Auto Loans
 To borrowers with weak credit history or limited payment
capacity (<640 score considered subprime)
 Alternatives are Buy-Here, Pay-Here auto lots
– Financing by dealer at 30% plus interest rate for high mileage
auction cars that will likely need repair often and keep borrowers
in cycle of debt.
 Equifax National Credit Trends Report shows
– Auto finance lenders have increased lending by 47% in the last
two years (CUs and Banks have decreased by 2%)
– Delinquency rate at auto finance lenders has improved to 1.63%
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Non Prime Auto Loans









Underwriting guidelines
Topics included in
Techniques to mitigate risk
REAL Solutions guide
Pricing guide
Loan portfolio management
Credit union partnership with Enterprise – pays CU marketing
fees on each loan
Using community partnerships to help market program
Program examples from 5 credit unions
Examples of CUs using starter interrupter devices
Insurance products to help minimize the risks
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Non Prime Auto Loans
Freedom First Responsible Rides Program
– Partners help with cars (Enterprise), insurance, financial
education, drug test, follow up, etc.
– 9.99%
9 99% ffor 60 months,
th average credit
dit score 578
– 66 loans for $651,244 with 2 repossessions
North Side Community Federal Credit Union
–
–
–
–
Starts with financial education
Partners with Enterprise but allows other sources
4 5 tto18%,
4.5
18% 35 lloans, scores as llow as 496
496, some with
ith no score
5 delinquent (4<30 days), no charge offs
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Non Prime Auto Loans
Summit CU - Credit Builder Car Loan
– scores <600, Enterprise cars, encourages GAP, extended warranty
– 60 months, 16% with $500 down; delinquencies at .68%
– Credit union purchases its own default insurance at $475
Carolina Cooperative FCU - Basic Transportation Loan
– Partners with Enterprise
– 60 months, 15%, 105 loans made with one loss of $3,000
St. Louis Communityy CU - Freedom Auto Moneyy Loan
– Marketed as an alternative to title loan companies (at 300%)
– Cash loan, purchase loan, or both (at 24-26% APR)
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Short Term, Small Dollar Lending
Target
Gain a share of this growing market while
helping members with a better option.
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2/20/2012
Short Term, Small Dollar Lending
Payday loans – Short term (average 14 days), small dollar (average size is $350)
 Available at a variety of alternative financial service providers and generally
have a fee per hundred borrowed resulting in triple digit interest rates. Balloon
payment due on the due date (typically the borrowers next payday)
payday).
 Many consumers cannot repay the entire debt and are forced to roll the loan
over with new fees. This balloon payment is what causes the cycle of debt.
Who uses payday loans?





Consumers who are banked – 100% have a bank account
May be homeowners (42%)
Are often under the age of 45 (median age is 32)
Are women with children at home (62%)
Are of low to moderate income – 50% have incomes from $25,000 to $50,000
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Short Term, Small Dollar Lending
Why should credit unions care?
 An estimated 15 to 20% of credit union members are using or
have used a payday loan product sometime within the past five
years.
 Members using this product are often caught in a cycle of debt
making it difficult to honor obligations – such as credit union
loans – or to save for the future.
 Members turn to alternative providers because they provide
fast and easy loan approval with few questions asked or
because they do not want their credit union to know they are
having financial difficulties.
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2/20/2012
Short term, Small Dollar Lending
 Online lending
– 36% of total short-term lending transactions occurred online in 2011
– Expected to grow to 68% by 2016 (JPM Securities report)
 Not all users are low-income
– Think Finance reports their online customers have incomes
between $35,000 - $50,000 with some level of college education
www.thinkfinance.com
 Think Finance Goals – to help underbanked with:





Convenience – 24 hour access, fast responses
Transparency – easy to understand, fees simple and predictable
Value – lower cost alternatives through improved underwriting
Education – financial education tools
A road to credit improvement – reporting to bureaus and lowering
rates for good scores
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Short term, Small Dollar Lending
What can credit unions do?
 Consider offering an affordable payday loan alternative that is
sustainable for the credit union. There are hundreds of credit
unions providing affordable solutions to their members.
 REAL Solutions Payday Loan Alternative Toolkit
http://www.realsolutions.coop/solutions/lending/payday-loans
 See Michigan examples and regulations here:
http://www.mcul.org/Short_Term_Small_Amount_Loans_2866.html
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Short Term, Small Dollar Lending
Benefits to offering Payday Loan Alternatives
 Build member loyalty
 Grow membership
 Attract younger members - PDL borrower median age is 32,
with 45% under age 45
 Help members improve their credit score by reporting
positive activity - PDL do not report positive
 Save members money and increase likelihood that they will
g their finances in the future
better manage
 Gain fee and interest income
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Short Term, Small Dollar Lending
Will you be viewed the same as a payday lender?
 Not if your product is a better option!
Will you be able to help people move out of the cycle?
 CU products often have longer payment options than the two weeks
required by payday lenders which helps keep renewals down. CUs
can also help by supplementing program with consolidation loans,
saving incentives and financial counseling.
What about losses?
 Traditional PDL industry average loss is between 4-5% of loan volume
 CU reported losses varied depending on risk mitigation factors
incorporated into structure, ranging from .3% (w/direct deposit
requirement) to 4.6%
4 6% (no membership term requirement)
requirement).
 One example requires a portion of the proceeds to be placed in a
secured savings account to mitigate risk and help move member out
of cycle.
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2/20/2012
Short Term, Small Dollar Lending
Credit Union Models
 Loan amounts: $50 - $1000
 Terms: 14 days – 6 months
 Michigan Examples: 18% plus fees $50-$70 annually;
$10 per hundred
 Length of membership or direct deposit requirement
 Customized model is the norm, turnkey products include
StretchPay http://www.ohiocul.org/StretchPay/CUInfo.htm
htt //
hi
l
/St t hP /CUI f ht
“StretchPay”
“GoodMoney” http://www.goodmoneystore.com/default.asp
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Lower Interest For Timeliness
Target
Build member loyalty and productive use of
credit union products.
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2/20/2012
Lower Interest for Timeliness
40% of consumers have a credit score below 690
 Credit will possibly cost more than twice as much, if they can
get it at all.
g
 Member may have always paid the CU on time in the past.
 LIFT loan enhancement allows credit unions to help members
based on their relationship and payment history with the CU
rather than their credit score.
provides members the opportunity
pp
y to reduce their
 LIFT p
interest rate, pay off their loan faster and reduce the amount
of interest paid.
Filene LIFT
www.filene.org/home/innovation
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LIFT – Filene 2011 Pilot
 Initial loan rate is based on credit score
 Rewarded with lower rate each year if they make their payments on
time - automaticallyy
 Can be added to any qualifying consumer loan using the web tool
 Uses member communication to send congratulations and
encouragement
LIFT for Credit Union:
Reduced collection costs,
increased loyalty, referrals,
direct deposit and auto
payments.
LIFT for Member:
Tangible rewards for positive
payment behaviors, confidence
and hope that they can build up
their credit score.
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2/20/2012
Credit Builder Loans
Target
Help members move from transactors to
borrowers and savers.
“A
A New York Times article this week cited credit union credit
credit-builder
builder loans as a way to help
consumers establish credit or improve their scores.”
– CUNA News Now 2/7/2012
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Credit Builder Loans
 Helps members establish or repair credit
 Creates goodwill in the community
 Approval based on security or capacity to pay, rather than
credit score
– Traditional share secure loans
– Reverse share secure loans
– Unsecured loans
 Combine with financial education or counseling program
 Combine with Save to Win!
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Credit Builder Loans
Credit Builder Loan - United Educational Credit Union
 First loan up to $1,0000 at 18% for 12 months
 Second loan up to $2,000 at 15% for 24 months
 Payments monthly or biweekly tailored to pay periods
 Approval based on capacity to pay
 ITIN members can use this loan
 Discourage early payoff to build credit score
 Financial
Fi
i l education
d
ti iincluded:
l d d
– Credit report review
– Credit education session with lending staff
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Credit Builder Loans
Designed to improve credit score and jumpstart savings habit
 Example: USA One Credit Union Credit Builder Program www.usaonecu.com
 Combination
C bi ti llow-interest
i t
t loan
l
and
d savings
i
program
 Loan from $250 to $600 for 6 -12 months at 4.6% to 4.85%. Funds are
placed in a CD and earn interest.
 Upon final payment, members can withdraw the funds to use or leave
them invested in a CD.
Pay yourself first.
When you make your monthly payments of as little as $42.23,
you’ll also build a habit of putting something aside each
paycheck. “Paying yourself first” is a great habit for building a
brighter future.
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Additional Solutions
Target
Transition underserved consumers into prime
borrowers and loyal members.
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More Lending Solutions
 Lifestyle loans in partnership with local providers
– Medical, dental, funeral home, apartment down payment, etc.
 Mortgage Assistance:
– Troubled debt restructuring - MCUL webinar Feb. 21
http://www.mcul.org
– Reverse HELOC and other examples on the REAL Solutions
Impact Center website
http://www.realsolutions.coop/solutions/lending/mortgages
– Right At Home Answers www.rightathomeanswers.org
– MSHDA Help for the Hardest Hit (H4HH)
http://www.michigan.gov/mshda/0,1607,7-141--235359--,00.html
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Financial Education Component
 Money management tools:
–
–
–
–
In-person financial counseling at credit union
With local partners or Accel phone counseling
Credit check-ups
As part of loan application and closing
 Website tools:
– Financial Resource Center – CUsolutions Group
http://www.cusolutionsgroup.com/Financial-Resource-Center-460.html
– Debt in Focus anonymous debt management tool (filene)
– Balance, other online tools
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Financial Counseling Training
Enhanced Self-Study Program to start in April
 180 p
participants
p
in 2010 & 2011
 Use training and certification to help members
– Some will use for individual budget and credit counseling
– Most will use to enhance sales, lending and collection activity
 Eight modules, Eight tests over a six month period
 Two
T
live
li sessions
i
tto enhance
h
module
d l content,
t t practice
ti and
d ttesting
ti
 MCUF funding for enhancements will keep cost low
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Your Examples and Ideas
What is happening in your credit unions?
What would be a great idea if we could pull it off?
What support, research, background work is needed?
g
“Research shows that credit unions that offer the right
products to low-wealth families grow and prosper.”
-REAL Solutions
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