How it happened is up for debate, but on March 1, 2013, across-the-board budget cuts known as sequestration took effect. To heed the heavy toll of the cuts, government agencies began furloughing employees. Starting July 8, approximately 650,000 defense workers have taken one required day of unpaid leave per week, essentially cutting their salary by 20%.
The furloughs are having little effect as a means to reach the mandated budget cuts; unfortunately, that can’t be said of the workers forced to take the unpaid leave. So, credit unions across the country are stepping in to provide support with stopgap financial services that include specialized low-rate loans, differed payments, and refinancing.
Randolph-Brooks Federal Credit Union ($5.5B, Live Oak, TX) has nearly 500,000 members; approximately 30% of which are Air Force or federal workers who could be affected by government furloughs. The executive team at Randolph-Brooks likens the current furlough to the all-hands-on-deck planning sessions that occur after a natural disaster.
“We’re staying in touch with the news and what’s happening,” says Mark Sekula, chief lending officer at Randolph-Brooks. “At the moment something happens, we’re proactively reaching out to members and letting them know we’re here to help with any questions or issues.”
The board at Randolph-Brooks has given senior management permission to take action on products and services tailored to the furlough without waiting for board approval. From post-disaster experiences, the board has learned to trust management to make the calls that will most benefit members.
“When there is a disaster, people don’t want to wait two or three weeks for a board meeting to find out what we can do for them,” Sekula says. “The board has basically given us the authority to offer loans, differed payments, interest rates, and structure for shorter terms to help members going through disasters.”
Now, the same holds true for furloughed workers that need assistance. To mitigate hardship incurred from sequestration, RBFCU is offering the following two programs:
A certificate redemption program that allows members to withdraw funds from CDs without incurring the requisite fee.
Subject to credit approval, a 6.9% unsecured loan with a one-time payment date in December. If members cannot pay off the loan in December, the credit union will refinance the loan at the same rate for an additional 12 months
As of July 31, the credit union had closed 81 sequestration loans ranging in size from $300 to $17,000 and altogether totaling approximately $287,000. But the credit union’s assistance has penetrated more deeply than those numbers suggest.
“We can’t track how many members requested a one or two month extension on their loan, refinanced their auto loan, or increased their credit card limit because they need that advance to get by,” Sekula says.
Prepare For The Worst
Regardless of dire situations, offering products that are inherently risky can undercut the stability of an otherwise strong institution. For that reason, credit unions must tread softly and consider the broader circumstances. According to Sekula, sometimes the best move for a member is to not take out more cash.
“We’ve denied some requests because they’re looking at it as an opportunity to get more money than what they need to get through,” he says, referring to post-disaster loans in general.
Member communication is key in these circumstances. Credit union employees must not only explain the terms of the loan but also distinguish a member’s needs from their wants.
“It’s our responsibility to assist our members but also to be stewards of their deposits and make decisions in the best interest of the member and of the credit union,” Sekula says.
According to Callahan Peer-to-Peer data, as of March 2013, Randolph-Brooks’ delinquency ratio for its $3.5 billion portfolio was 0.29%; that’s significantly lower than the 1% delinquency ratio of its asset-based peer group. Furlough loans aren’t unnecessarily risky, but the credit union can absorb the increased risk the entire $287,000 portfolio represents.
“I don’t think we’re making any money at 6.9% for 12 months on a loan like that,” Sekula says. “But it all gets paid back in the end.”
Aside from monetary return, these niche products build loyal relationships with members who are happy to share their experience with others.
“These folks know they can turn to us, so the next time they need an auto loan or whatever they need, we are confident they will come to us,” says Sonya McDonald, senior vice president of planning and market development. “As a marketing person, you can’t buy that kind of [word-of-mouth] advertising.”
5 Offers That Aid Furloughed Members
Lowered interest rates.
Restructured loan terms.
No penalty early withdrawals on deposit products.