The term “debt consolidation” is taking on new meaning at Kinecta Federal Credit Union ($3.3B, Manhattan Beach, CA). At select locations, the Golden State institution is currently beta testing two alternative debt consolidation loans — the Payday Payoff and the Payday Payoff Plus — through its wholly owned CUSO Nix Neighborhood Lending.
By looking beyond credit cards and car loans, Kinecta is reaching out to underbanked consumers that need help adopting mainstream financial products and services. After all, more than one in four households nationally are either unbanked or underbanked, according to a 2011 FDIC report, and credit unions are in a position to help.
CU QUICK FACTS
KINECTA Federal Credit Union
data as of 3.31.14
HQ: Manhattan Beack, CA
12-MO SHARE GROWTH: 3.47%
12-MO LOAN GROWTH: 12.74%
“We found a huge need for affordable, small-dollar credit products,” says Luis Peralta, chief operations officer at Nix Neighborhood Lending. “We developed the Payday Payoff loan because we want to help these consumers break the cycle of debt.”
According to Peralta, a consumer can pay up to $1,750 in fees on a $900 loan over a six-month term and still not pay off the principle at other payday lenders. In cases like these, Payday Payoff loans can make a difference. The standard Payday Payoff loan allows borrowers to take out $200 to $499 for up to six months at 18% APR. Payday Payoff Plus offers $500 to $1,000 for up to six months at 28% APR. Even given application fees and Nix’s one-time $20 consolidation fee, the Payday Payoff products save the above borrower more than $1,600. Plus, Nix records on-time payments with the credit bureaus, which allows borrowers to build or rebuild credit.
But can a consolidation loan change consumer behavior? According to Kinecta and Nix, yes. In 2013, the duo tested whether a consolidation loan with affordable payments would break the cycle of debt. In 90% of the test cases, it did. And now that Kinecta and Nix have determined the philosophy is sound, they are nailing down the proper underwriting guidelines.
“We partnered with Lexis Nexis and developed a new scoring model that will allow us to predict loan losses,” Peralta says.
Underwriting in these cases means looking at data that isn’t necessarily found on a credit report — such as employment status, utilities, and rent — to determine credit worthiness. Currently, borrowers must provide the following documentation to qualify for a Payday Payoff loan: valid identification, a current utility bill or two documents showing the borrower’s current address, a current bank statement, proof of income, and proof the payday loans to be consolidated are in good standing. The borrower must also submit a personal check as a security deposit.
Although Nix and Kinecta are willing to consider different factors, their underwriting objective does not waiver from that of traditional loans.
“We are ensuring the ability to repay the loan,” Peralta says.
With that in mind, Nix schedules payments to coincide with payday cycles to ensure funds are available on the borrower’s end. And if a borrower does make a late payment, Nix does not ding them with late payment penalties.
Despite consumer demand, however, the institutions must ensure the lending environment is stable. According to Peralta, this means identifying an acceptable loan-loss ratio and establishing an efficient origination and servicing process. As part of the pilot program, Kinecta and Nix are testing the sales and origination process to ensure they are properly educating the consumer as well as providing a fast and easy experience.
For example, when a consumer takes out a Payday Payoff loan, the credit union automatically extends membership. For Payday Payoff Plus loans, borrowers must be Kinecta members for at least 30 days. The loans are an introduction to the credit union and its financial products.
“We work with them to build or rebuild their credit,” Peralta says. “The goal is to facilitate access to mainstream financial services, hopefully with us. This means offering other loans, credit cards, and mortgages with competitive interest rates they don’t have access to right now.”
Before they’ll be ready to roll out the product suite in full — making it available at all locations and offering cash out as well as consolidation — Kinecta and Nix want to close 1,000 consolidation loans. Such a large pool of loans will allow the institutions to examine data and make adjustments as necessary.
“Once we get to that point we’ll be able to do statistical analysis to confirm whether we can scale down the underwriting,” Peralta says. “And also we will be able to find tweaks here and there that will help us to control loan losses even more.”