Most credit union mission statements speak of a desire to better the financial lives of their members. Let’s take a look at a few mission statement excerpts:
- Enhancing our member’s financial health and quality of life.
- …to increase the knowledge and ability of our members to manage and control their financial well-being.
- We seek to be the best choice for all your financial needs.
The mission of credit unions to provide affordable credit goes back to the very beginnings of the movement. This movement rose up out of a need for the average worker to gain access to credit at a fair price. Many credit unions at their inception made small-unsecured loans to their members. Today the payday loan shops that you see in every strip mall across the country are filling that need. Unfortunately, they are not filling that need in the way that the early credit unions did. Many payday loans have an effective APR of up to 400%. These high-cost loans offer the consumer a quick fix to a cash flow problem but can lead them into a debt cycle that is very difficult to exit.
Today, some credit unions make short-term loans under the NCUA Payday Lending Alternative model. Under this model, loans are structured with low upfront fees and relatively low interest rates. Regrettably, these loans account for only about 0.2% of the total payday loans made each year.
End the Cycle
What payday borrowers really need is not an alternative to the payday loan but a solution that ends the cycle. They need a loan to pay off payday debt and put them back in a position of positive cash flow. In order to get back into positive cash flow, the loan terms need to be longer thus making the payments affordable.
Two major factors are discouraging credit unions from making payday type loans. The first factor is the risk associated with these loans and the second is the amount of manual underwriting work required to originate the loan. When you look at these two factors and consider the small dollar amount of these loans, you quickly understand why many CUs have made a business decision to abstain from these types of loans. Borrowers that are stuck in a payday lending cycle have either poor or no traditional credit history. While some credit unions use alternative tradelines like rent or utility payments, the manual review by an underwriter creates a cumbersome and expensive loan origination process.
Reduce Risk and Friction
So how can CUs overcome the challenges of a higher risk profile and a high friction application process? The credit union needs to be able to price these loans appropriately for the level of risk and automate the origination process to reduce costs. To accomplish both of these goals the credit union needs to be able to utilize predictive models to score these applicants and rank order their risk in an effort to build a profitable portfolio. Introducing a reliable score into the process removes the manual underwriting and allows for process automation. Knowing that traditional bureau scores are not a good way to score these applicants, credit unions need to look at credit scoring solutions driven by alternative data.
Solutions like LexisNexis® RiskView™ look at a person’s foundational ability and willingness to repay. Going one step further, these same scores can be used in a prescreen capacity to make sure that resources aren’t being wasted by applicants who won’t qualify.
Efforts to onboard new members with prime credit have a very low ROI due to the number of institutions making offers to these individuals. However, consumers that are currently utilizing payday loans are not getting offers. These members also tend to be very loyal and as they build traditional credit history will qualify for the credit unions core loan offerings.
Payday payoff loans that utilized sound credit underwriting driven by alternative data scores can grow membership in a market where it is increasingly difficult to do so.
For credit unions looking to grow their membership while fulfilling their mission to improve the financial lives of their members, programs like the payday payoff loan that give consumers a second chance may be the ticket.
Cutimes.com. (2018). PAL Program Can’t Replace Payday Lenders: Pew. [online] Available at: http://www.cutimes.com/2018/02/21/pal-program-cant-replace-payday-lenders-pew?eNL=5a8e0e51140ba083048b45fd&utm_source=CUT_Daily&utm_medium=EMC-Email_editorial&utm_campaign=02222018 [Accessed 27 Feb. 2018].