Every member has a story
Look beyond the credit score when lending to underserved populations.
Lending to underserved populations is a nuanced proposition. Many underserved loan applicants fall into categories known as B, C, and D paper—lower or even subprime credit tiers. As such, many financial institutions either won’t take on the perceived risk or will charge a pretty penny to do so.
But credit unions that serve these members look beyond the credit score in determining creditworthiness. In fact, these lenders use remarkably similar language in describing how they approve applicants who don’t “check all the boxes.” They say it’s about each person’s story.
- Lending to the underserved requires looking beyond the credit score to determine creditworthiness.
- Community partnerships are invaluable when creating nontraditional lending programs.
- Board focus: With proper due diligence, subprime loans perform virtually as well as traditional loan portfolios.
“We don’t have a computer telling us ‘yes’ or ‘no,’” says Jason Kaufman, vice president of central lending at $1 billion asset Marine Credit Union in La Crosse, Wis. “We listen to each person’s story and find out what brought them here. We use this process with all our members. We don’t lend with a matrix or by checking boxes. Every member has their own story.”
Bob Remillard explains Workers Credit Union’s risk-based approach to lending similarly.
“We’ve been doing this type of lending for years, and you do have to manage it,” says Remillard, vice president of consumer and mortgage originations at the $2.1 billion asset credit union in Littleton, Mass. “I can look at credit scores all day, but you have to ask yourself, ‘What happened?’ Someone might have lost a job. I had a member who was taking care of her parents and fell behind on her loan payments, and now she’s caught up. As often as not, there’s a story there.”
At the same time, subprime lending sometimes demands a level of anonymity, especially when providing alternatives to payday lending (“Faith Fund breaks payday loan cycle”).
‘It’s our mission’
MyPay Today, One Detroit Credit Union’s payday loan alternative, is designed to move members through the lending process seamlessly and as anonymously as possible with an eye on a stronger future relationship with the $55 million asset credit union.
MyPay Today is a $500 personal loan prospective borrowers can apply for in-person or via mobile phone. The credit union runs applicants’ credit scores to check for open bankruptcies but doesn’t consider information beyond that, says Joumana Mcdad, executive vice president and chief strategy and innovation officer.
“We don’t look at debt-to-income ratio as we typically would for a small-dollar loan,” she says. “We don’t care what their credit score is. We’re not even looking at credit scores. And they have two months to pay the loan back.”
Once they make payments, borrowers can also draw on the loan for a full year.
Because the credit union added e-signatures last year, borrowers aren’t required to come into a physical branch.
“We’ve tried to make it as seamless as possible, and it’s worked for us,” Mcdad says.
One Detroit has extended its credit initiatives beyond payday loan alternatives. Located in the inner city, the credit union has made lending to underserved populations a strategic priority.
“It’s our mission,” Mcdad says. “We don’t try to be fancy with our products.
“We’re out in the community and we listen to the people who live there,” she continues. “We partner with nonprofits to understand the needs of the underserved. I can create all these products, but I don’t know the actual need unless I talk to the people who live in the communities we serve.”
One result of that community outreach is a first-time auto loan program developed in partnership with a United Way initiative called the Center for Working Families. The program works with community members who are unbanked and underserved, and helps them with job placement.
“One pain point is a lack of mobility,” Mcdad says. “People can’t get financing to buy cars or they’re going to B lots where the interest rates can run over 20%.”
One Detroit’s auto loan program has an interest-rate cap of 7.99% regardless of the applicant’s credit score. “We don’t require a co-signer,” Mcdad says. “Seventy percent of these loans have credit scores under 580.”
The loan also includes an anti-theft app that shows the car’s location in the event it’s stolen. “That mitigates our risk,” Mcdad says.
At the same time, many community members are already harnessed to bad loans. For that reason, One Detroit developed Refi My Ride, an auto loan refinance program that saves members money.
“Again, we’ll look at the credit score, but the interest rate is not determined by the credit score,” Mcdad says. “If someone comes in with an interest rate of 18%, we’re going to cut that in half.”
She reports that 33% of these loans were made to borrowers with credit scores of 500 or lower. Since its introduction in 2015, the credit union has made 1,400 loans through the program totaling $26 million.
Mcdad estimates the program has saved members $4.7 million in interest.
“That’s $4.7 million going back to the community,” she says. “If you have a little more money in your pocket, not only can you make that loan payment, you might shop and go out to eat a little more. That’s good for the community.”
NEXT: Serving subprime borrowers
Serving subprime borrowers
Workers Credit Union offers an Opportunity Loan to subprime borrowers but collects nontraditional information that may indicate a borrower’s ability and willingness to make regular payments.
One element of credit reporting that often weighs applicants down is education loans. “We’ll see that at one time they were three or four months behind but are current now,” Remillard says.
Partnerships are also critical to Workers’ lending program, particularly relationships with car dealers. Dealers don’t receive the entire share of the loan at closing with the Opportunity Loan program. The credit union retains 5% of that share.
The dealers must understand they’re also taking somewhat more of a chance with these borrowers, because if they don’t repay the loan, the dealers don’t get the 5% on hold, Remillard explains.
“If a borrower has paid on time for one year, we give the funds to the dealer even though the loan is not paid off,” he says.
He explains further that when dealers typically work with subprime lenders, they face more restrictions and fees than when they partner with Workers. Those extra fees are almost always rolled into the loan.
Borrower expectations can also come into play, Remillard says.
“If you have a 615 credit score we can’t lend you $55,000 for a used Porsche. You’d be surprised by some of the requests we get,” Remillard says.
At the same time, the credit union wants to put members in reliable vehicles. “They’ll have to pay for repairs if the vehicle starts breaking down,” he says. “We don’t want a vehicle to be more than eight years old.”
Marine Credit Union has developed a specialty in individual tax identification number (ITIN) lending, approving loan applicants, primarily Hispanic, who do not meet the residency requirements needed for a Social Security number through their individual ITIN.
Because nonresidents without Social Security numbers don’t have established credit histories through the three major credit reporting bureaus, Marine and other financial institutions offering ITIN loans accept alternate forms of credit history such as utility bills and credit references such as rental history.
Marine offers not only consumer and auto loans through its ITIN program but also mortgages.
Robertta Masoud, Marine’s senior mortgage officer, says education is a key part of the ITIN mortgage program.
“These members are so conditioned to save, save, save,” she says. “They have to learn there are other ways to build wealth, not just with mortgages but through CDs and investments.”
At the same time, this financial discipline means the ITIN loan portfolio performs well, Masoud says. “This segment of the population is hardworking and dependable. They’ve just been overlooked. Their entire families are invested in these loans.”
She adds that, as the program has grown, most of her business is based on referrals.
“Once we helped a few families, people were knocking on our door,” Masoud says. “Word of mouth is the best kind of marketing.”
For its efforts in working with the Hispanic community, Marine earned the Juntos Avanzamos (“Together We Advance”) designation Inclusiv provides for credit unions committed to serving and empowering Hispanic consumers.
One nuance of ITIN lending and similar credit programs is the difference it makes in how employees approach their jobs, says Jackie Blanco-Rincon, senior consumer loan officer.
“One of the reasons I came to Marine Credit Union is our ITIN lending program,” she says. “We’re helping people in the community advance their lives because they came here for the American dream.
“Whether it’s their first car or owning their home, we are here to help them.”
This article appeared in the Summer 2022 issue of Credit Union Magazine. Subscribe here.