Innovative CUs Draw Up New Lending Approaches
Successful lenders are proactive and creative—and they don’t think ‘risk’ is a four-letter word.
You can sit back and wait for lending opportunities to knock on your door, or you can throw open that door and create your own opportunities.
Lending innovators have a knack for spotting and acting on opportunities to make loans and boost the bottom line. This requires new products, new relationships—and new ways of looking at lending.SIDEBAR
Input for innovation
Coastal Federal Credit Union in Raleigh, N.C., employed a “cross-functional” approach to develop new credit card products aimed at two distinctly different audiences: young adults heading to college and big-ticket buyers tempted by 0% financing offers.
“We get a lot of input from our business units,” says Willard Ross, senior vice president/chief retail officer for the $2.2 billion asset credit union. “Marketing really hatched these two ideas. Then we talked to lending, front-line staff, and other folks throughout the credit union to come up with our final product.”
Coastal Federal—a select employee group-based credit union that serves more than 1,000 organizations—also worked with the vendor FIS to customize software to accommodate the new products.
Each card has unique features that appeal to potential cardholders:
►The Big Ticket Card lets cardholders make a transaction of $600 or more at any merchant—for one large item or multiple small items, so long as the charges appear on the statement as a single transaction—and pay 0% interest on the balance for six months.
When the six-month period ends, the interest rate reverts to a higher rate, currently set at 18%, which also applies to purchases of less than $600. Cardholders can make multiple qualifying transactions. Launched in July, the card requires applicants to have credit scores of 660 or better, and has attracted 300 cardholders as of Nov. 1.
►The Student [CU] Card helps young adults eventually qualify for a $2,500 credit limit, either on their own or with a co-signer. The card’s spending limit is $500 for the first two years, and it gradually increases to $2,500 if cardholders keep payments current.
Both cards are aimed at preserving important relationships. With the Big Ticket Card, Coastal Federal hopes to persuade members to carry a second credit card with features that counter retailers’ 0% offers, while using another lower-rate Coastal Federal card for routine transactions.
The credit union uses the student card to build relationships with the next generation of members—and their parents—with a product that builds a credit history and prevents cardholders from running up high levels of debt.
“We think we’ve got winners with both of these products,” Ross says.
Coastal Federal also strives to reach targeted markets while limiting the credit union’s risk exposure. A three-year-old program for foreign graduate students at Duke University and the University of North Carolina, for example, offers student loans that are guaranteed by the universities.
And a new product offers 100% loan-to-value home equity loans, made possible when the credit union found an insurer willing to cover the higher risk.
Only a handful of homeowners have used the 100% option thus far. Most opt for the lower-rate, 85% loan-to-value option when they realize they have more equity than expected.
But the product is still valuable, Ross says, because it creates an opening with homeowners.
“That has been the greatest thing. We’re having way more conversations now because we have something that stands out in the marketplace.”
NEXT: Rehab mortgages
Abandoned and foreclosed homes are scattered through the neighborhoods served by $960 million asset Advantis Credit Union in Portland, Ore. Most mortgage products exclude homes in poor condition, but there’s potential for new owners to build equity by renovating these homes.
Enter the Advantis Rehab Mortgage, which helps current and potential members buy and renovate run-down properties that would otherwise be ineligible for funding. Homeowners can borrow 90% of the anticipated “improved value” at the time of purchase, with mortgages capped at $418,000 per property.
Darin Walding, the credit union’s real estate loan manager, says Portland has a tight real estate market for homes in move-in condition because homeowners avoid selling when values are down. That means people seeking value look for “a bad home in a good neighborhood.”
“That’s where this product comes in,” Walding says. “You can look at the market and the foreclosures and get a good deal.”
The learning curve for the program was steep as the credit union figured out how to appraise properties’ potential, administer the loan during the three- to six-month renovation period, and reach potential buyers.
The Rehab Mortgage is modeled after the Federal Housing Administration 203k mortgage—the agency’s primary program for the rehabilitation and repair of single-family properties.
Advantis works with a contractor who reviews the properties and their renovation plans.
Eleven loans have been made so far, but Walding expects applications to double each year now that the community-chartered credit union is marketing the program directly to realtors and the community to reach nonmembers.
This program helps the credit union make inroads with realtors, Walding says. “Realtors want to know what makes a lender different.”SIDEBAR
It’s also “socially responsible lending” that allows the credit union to make concrete improvements to the community where members live and work. There have been no charge-offs or delinquencies since the program began in 2009.
“These homeowners are way more attached to their homes than the typical homeowner,” Walding says. “They went through a project making it just what they wanted, turning a house into a home.”
After pulling back during the recession, 1st United Services Credit Union, Pleasanton, Calif., decided to rebuild its indirect auto lending program based on stronger dealer relationships, says Tosha Y. Eagles-Williams, chief operating officer for the $808 million asset, community chartered credit union.
That approach has taken 1st United Services from $700,000 a month in indirect auto loans at the beginning of 2012 to more than $3.5 million during October 2012. The credit union set a goal of $5 million in monthly indirect loans for 2013 and $10 million per month in 2014.
Eagles-Williams attributes this growth to six steps 1st United Services took to improve its indirect lending program:
“Establishing relationships with the dealership staff was the most critical thing we did,” Eagles-Williams says. “They know they can pick up the phone and talk to the person who made the decision on the loan.”
She notes that offering food to dealers nourishes relationships, as dealers’ employees love to receive treats at the dealership and meals at special sales.
The credit union’s efforts were honored with a 2012 Best Practices Award from CU Direct Corp.
Branches have also played a role in 1st United Services’ lending success. Members apply for loans by entering a “Member Concierge” office equipped with a video camera and computer that links them to loan processors.
“We thought some of our members would be a little leery of this, but the ability to see who they’re talking to makes them really enjoy it,” Eagles-Williams says.
In most cases, members get a loan decision before they end the conversation.
The credit union allows members to sign some documents electronically, which improves efficiencies and allows 1st United Services to review more loans.
In August 2012, for example, the credit union handled 626 loan applications, compared with 195 applications in August 2009.
Lending innovators emphasize the importance of designing products that manage risk while starting new conversations with borrowers.
As Coastal Federal’s Ross notes, it’s easier to start those conversations when innovative products address a genuine need. “That’s what we need to get these products sold right out of the chute.”