How Opportunities Credit Union Throws A Lifeline To Underwater Borrowers

This Vermont cooperative is making life-changing auto loans to rescue borrowers who are underwater or burdened with high-interest debt of all kinds.

 
 

Top-Level Takeaways

  • The WOW Auto Loan lets members borrow up to $30,000 to pay off loans or lease residuals and reserve for unexpected repairs.
  • Opportunities also will help members negotiate other debt, and requires financial counseling in some instances.
  • The program has generated more than $3.4 million in loans in two years and only $5,700 in write-offs.

CU QUICK FACTS

Opportunities Credit Union
Data as of 03.31.19

HQ: Winooski, VT
ASSETS: $40.3M
MEMBERS: 6,165
BRANCHES: 2
12-MO SHARE GROWTH: 7.5%
12-MO LOAN GROWTH: 18.5%
ROA: 0.40%

Is America’s auto loan debt getting out of hand? The $73,200 base price of the 2019 Lincoln Navigator kind of says it all.

With prices at the dealership on the rise, America’s outstanding auto loan debt reached $1.14 trillion in Q3 2018, up 63% from 2010, with the average monthly payment for new cars hitting $531.

These pricing pressures are fueling longer loan terms (68.8 months on average for new cars), and a growing number of borrowers are going underwater on their loans or moving to leasing contracts they can ill afford. To provide relief from crushing debt, Opportunities Credit Union ($40.3M, Winooski, VT) began offering its WOW Auto Loan in mid-2017.

Under the program, Opportunities members can borrow up to $30,000 for a 2010 or newer vehicle, with only 70% of the loan secured by the value of the vehicle. Opportunities will pay off the member’s old loan or lease residual, settle collections or other high-cost debt, including credit cards, and place up to $1,000 in a reserve account for unexpected repairs.

Cheryl Fatnassi, CEO, Opportunities Credit Union

The product generated just under $2.2 million in loans in the second half of 2017, $1.2 million in 2018, and is on track to well surpass that amount in 2019. The delinquency rate is less than 1%, and the credit union has only had to write off $5,700 over the life of the program.

“Members have responded very positively, people are extremely relieved when they come in,” says Cheryl Fatnassi, CEO of Opportunities. “Some people have described this as a life-changing product where we’re paying off their debt, their payments are lower, and they have a built-in savings account in escrow in their name. They know if they have some sort of emergency, they can access this account, typically for vehicle repairs, but also for some emergencies that might happen in the family.”

Opportunities financial counselors work with members to analyze their income and expenses and come up with a plan to make payments on old debt of all kinds or roll it into a loan, including sometimes a WOW Auto Loan. Fatnassi says, with the credit union’s help, members can typically settle old debt for 50 cents on the dollar, or even lower on balances near the end of the loan.

“Most of the companies that we work with know our counseling staff, they know we’re looking at people’s budgets and that we’re looking for what’s reasonable,” she says. “And we present that when we offer a settlement. There’s usually some back and forth, but they’re willing to work with us.”

The impetus for the special loan program came from Opportunities’ analysis of consumer loan applications and counseling activities regarding debt and predatory lending rates. This research showed a growing pattern of high debt-to-income ratios, collections and charge-offs, and borrowers being underwater on vehicle loans (owing more than 100% of the vehicle’s current NADA Blue Book value).

A Growing Problem

It’s a common problem, Fatnassi says, driven by high interest rate loans, overpaying for the vehicle, add-ons to the purchase price, end payments on leased vehicles, and insurance losses with balances still owed. 

“As in many rural states like Vermont, public transportation is very limited and having a reliable vehicle is an absolute requirement in order to get to and maintain a good job,” Fatnassi says. “The goal of the WOW Loan is to get them out of all of that debt. If you’re just putting another vehicle on top of their debt, you may be lowering the rate on that one payment, but you’re not addressing the larger problem they’re facing.”

Among the requirements for WOW Auto, in addition to 70% collateralization, members must:

  • Pay bills and loan payments on time.
  • Live at the same address and work at the same job for at least 12 months.
  • Enroll in free financial counseling if they have a late payment history or outstanding collections.
  • Maintain a checking account, enroll in direct payroll deposit, and make electronic payments to pay loans.

Members also are encouraged to use e-banking services, set up automated account alerts, and participate in financial education and counseling.

Cutting Interest Rates In Half

The WOW Auto program supports Opportunities’ mission as a Community Development Financial Institution (CDFI) in providing financial services to economically disadvantaged individuals within underserved communities. Founded in 1989 to serve that market, Opportunities maintains relationships with other credit unions and banks across the state to fill the gap in its underserved market.

The credit union offers interest rates for WOW Auto loans of between 5% and 9%, compared to the high-interest loans that can range from 12% to 20%. 

“We can usually cut their interest rate in half,” Fatnassi says. “It’s not like you’re financing a recreational vehicle or a boat. You’re financing something that they need.” 

Leasing: The New Predatory Scheme

In addition to underwater loans, the credit union is also helping members get out from under auto lease debt. Auto leases typically last 36 months, and borrowers don’t build up equity. An open-ended lease may allow borrowers to purchase the vehicle at the end of the term, but they also may owe thousands of dollars in fees.

Fatnassi calls these leases “the latest predatory area” in finance. Like payday and title loans, leasing contracts can force consumers into an endless cycle of taking out a new lease just to satisfy the old one. Plus, leasing contracts aren’t regulated like traditional loans.

“People who may not think they can finance a new vehicle through a traditional loan are getting steered toward this leasing concept, which seems to have more flexible terms, but they’re getting into leases with more predatory terms,” the Opportunities CEO says. “They sell you on the fact that under the lease, they’re going to do all of the warranty and maintenance on the vehicle, and all you have to do it bring it in. However, there are a lot of terms and conditions on what’s covered and what’s not covered, plus mileage limits and certain large fees. They just wait until the end, and you have this huge bill.”

Focusing On Financial Education

One of the fundamental problems borrowers face is that they lack confidence in financial matters, and when they’re confronted with high-pressure sales tactics, they make bad decisions, Fatnassi says. Recently, she heard the story of a borrower who took his car in for repairs and was quickly convinced by a sales person that repairing the vehicle wasn’t worth it.

“The man said he tried to ask questions, but ‘they made me feel like an idiot,’” she recalls. “After he left, he looked at his paperwork and realized he had an 18% interest rate. We can help someone in that situation but we wish we could help them make better choices to begin with.”

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June 3, 2019


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