3 Tips To Lend Niche

Credit unions with niche portfolios offer advice to prospective lenders.

 
 

Credit unions exist to serve member needs that run the gamut from basic checking accounts to complex mortgages. Some even need assistance paying for Lasik surgery.

Credit unions that operate niche programs support members whose needs are, by definition, not a big business. But it can be a profitable one, as many niche-lending credit unions can attest.

However, developing such programs is a complex undertaking. Entering a new market or finding the right expertise to make an investment worthwhile can be both time- and cost-intensive.

Here, three credit unions with niche lending programs of varying sizes and reach offer lessons for other credit unions looking to launch a niche program or take one to the next level.

No. 1: Tackle The Marketing And Education Issue

In 2005, the board of directors for Vermont State Employees Credit Union ($654.7M, Montpelier, VT) developed an environmental mission statement that lays out opportunities to promote environmentally sound choices within its operations and business products. Almost concurrently with this statement, VSECU began to offer energy loans.

The loans have evolved over the years, but the goal has remained constant: “to be the preferred statewide financial lender for all energy efficiency, renewable, and alternative energy products in the state of Vermont,” says Chuck Karparis, vice president of lending at the credit union.

Today, VSECU offers a VGreen suite of loans that includes unsecured loans meant for solar projects, auto loans for vehicles that get high gas mileage, and more. Typical borrowers tend to be early adopters who have equity and know the science behind energy efficiency. The loans vary in terms as well as rate, which the credit union will discount to incent members to undertake energy projects. VSECU even considers the energy savings produced by these products in its underwriting criteria.

“A consumer, no matter what life cycle they’re in, can use one of these products,” Karparis says.

VSECU launched the VGreen suite in 2012, and the portfolio now carries more than $10 million with an average loan size of approximately $16,000. In this time, the credit union has written-off just two loans.

The largest barrier the credit union faces is the common member misperception that — although the state of Vermont established a goal to obtain 90% of its energy needs through renewable sources by 2050 — financing for these projects was not available.

“We have plenty of money to lend, and we love these loans,” Karparis says. “We continuously say there’s not a financing issue. It really seems to be a marketing and education issue.”

To combat misconceptions, VSECU developed a three-step approach that has proven successful.

Step one was to develop a suite of products the credit union could show to any vendor, service provider, or contractor without designing a different product for each individual entity. Hence, the VGreen loan suite. Step two was to hire an employee who would manage the suite full time. In October 2013, VSECU hired Laurie Fielder as its VGreen program director. Her hire served to meet the third step — establish contacts and deepen relationships in the efficiency, renewable, and alternative energy fields.

“We’re marketing the program to solar installers and energy contractors as a tool they can use to help their customers and potential customers understand the economics of the project and the return on investment,” Fielder says.

No: 2: Work In — And With — The Community

As an engaged member in its community, MECU of Baltimore ($1.2B, Baltimore, MD) has strong relationships with many non-profits, including Sandtown Habitat for Humanity.

Every year, 30 to 40 MECU employees participate in what’s known as Blitz Week at Sandtown Habitat, where volunteers work together to construct houses for low- to moderate-income buyers who also contribute sweat equity to what becomes their home.

But MECU wanted to do more than just help build and rehab; it wanted to help finance. So in 2004, MECU and Sandtown Habitat for Humanity struck a deal. As a financing option, Sandtown Habitat can buy down MECU’s standard 30-year-fixed mortgage rate to 0%, and the credit union assumes the loan and the risk. But if the individual buying the home is a first-time homebuyer — or the home is in Baltimore City — MECU discounts its rate which Sandtown Habitat then buys down by 25 basis points.

MECU currently holds 140 Habitat loans on its balance sheet. Since 2004, the credit union has lent $11,400,000 and has had limited issues or foreclosures, says Gary Martin, CEO of MECU. When problems do arise, Sandtown Habitat reassumes the loan and puts the property in the hands of another family, helping MECU avoid taking a loss.

Many of these prospective homebuyers have limited credit and lower incomes, a risky proposition for MECU. But as a certified CDFI, the credit union is committed to safely making loans at an affordable price to deserving members.

Habitat helps by preparing homebuyers for the many aspects of homeownership, both by providing financial literacy as well as house maintenance education.

“Habitat does a great job of preparing people for homeownership,” Martin says. “They work with people who want to become homeowners. They educate and give them the skills they need to be successful once they’re in the house.” 

No. 3: Use The Full Portfolio

During the economic downturn, reduced demand for consumer loans caused credit unions to get creative in the search for new loan volume. Legacy Community Federal Credit Union ($404.4M, Birmingham, AL) took a new look at its portfolio to determine what it already had that it wasn’t using.

The credit union zeroed in on its signature loan — a relatively bland product that was ineffective at capturing member attention — and in April 2013 launched the Legacy Lifestyle Loan. The alliterative name reflects a more enticing product, although at one time or another much of its membership had sought financing for one of the 27 expenses the loan covers, says Glenn Bryan, senior vice president at Legacy. 

“This was something they were asking for,” Bryan says. “We simply packaged a familiar product in a more compelling way to meet their needs.”

According to Bryan, of the common expenses, the three most popular are weddings, vacations, and home improvements. But the loan also covers tornado shelter construction, jewelry, and hair restoration procedures, among others.

Legacy Community offers both open- and closed-ended terms, but the loans generally have a 36-month duration. Based on credit profile, interest rates range from 10%-18% with an average APR around 12%. 

In 2014 alone, the credit union booked 930 lifestyle loans for a total of more than $4.6 million with an average loan of nearly $5,000. Delinquency on this portfolio is currently 1.5% and its charge-off rate is 2.5%. With this performance, it’s clear to Bryan that this product is serving member needs.

“Members will let you know what they want,” he says. “Don’t be afraid to reconfigure an existing product to make it more compelling to prospective borrowers.”

 

 

 

March 2, 2015


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