’Tis the season to be jolly, but for borrowers dependent on fringe financial providers, year-end mirth frequently turns to New Year regret. So how can credit unions help their most vulnerable members avoid the temptation to overextend their wallets? Education and alternatives are a great place to start.
Johns Hopkins Federal Credit Union ($343.9M, Baltimore, MD) recognizes the financial pressures that accompany the holidays and provides a number of season-specific products and tools for its members, says Lynn Gregory, senior vice president of marketing and member services. Examples include a $1,200 unsecured holiday loan, complete with an interest rate as low as 6.25%, and a Holiday Club account into which savers direct a portion of their established direct deposits, then roll over funds into a share account in October. Both products are popular with certain segments, and members rolled more than $1.5 million out of their Holiday Club accounts this year alone.
Yet not every member has the self-discipline or the credit score to take advantage of these options. Recognizing this unmet need, the credit union began offering an alternative holiday loan product — initially called the 12-12-12 loan — four years ago. With relaxed credit standards, a limit of $1,200 with 12% APR, and a 12-month term, the product presents a safer, more affordable option than many members had access to before.
“The idea was to offer these loans to those who just didn’t qualify for normal credit,” Gregory says. “Borrowers just need to have been a member for one year, have a Beacon score of 560 or above, and have no more than nine non-sufficient funds charges year to date.”
Managing Risk, Maximizing Reward
The product has been popular, and profitable, from the get go, but it has also evolved over time. For example, in 2011, JHFCU rebranded the loan as a Winter Wonder Loan and altered its formula slightly — increasing the loan limit to $1,500 and the interest rate to 12.9%.
In 2013, it limited the loan offer to employees of Hopkins institutions, affiliate organizations, and those who have previously received and paid off a Winter Wonder Loan. Analysis has shown that although the overall delinquency rate for this product is low — currently at 0.69% for loans 30 to 60 days delinquent and 2% for those 60 plus days delinquent — most losses are concentrated among family or friends of SEG employees who opened an account just to get the loan.
“Compared to the volume of members we help and the revenue we make from this, it’s certainly worth the few charge-offs we have,” Gregory says. “The loan appeals to our core membership, and they look forward to it every year.”
Despite the narrowed audience, 2,275 borrowers took out a Winter Wonder Loan from October to November of this year.
Creating Exclusivity, Maintaining Convenience
When JHFCU first introduced the Winter Wonder Loan, it had such powerful word-of-mouth appeal that JHFCU literally faced blockbuster lines at its branches every holiday season. Although this might seem like an ideal problem, it presented a challenge in terms of crowd control, processing time, and service quality.
To accommodate the crowds, the credit union fills the lobby of its headquarters with chairs to keep people comfortable and uses its electronic lobby queue system to ensure it helps individuals in the order they arrived. In 2011, JHFCU hit upon the novel idea to offer early loans via mailed invitations to borrowers who taken out and repaid the loan the previous year.
The credit union groups together qualified members by alphabetical sections. Each section receives two consecutive days in which they can come to a branch and take out the loan. If a member misses those dates, they have to wait for the general promotion a month later. Today, the majority of Winter Wonder Loan activity is now front-loaded into “by invitation only” dates. This structure not only controls branch traffic throughout the holiday season but also allows more prep time for the credit union to disburse the money in record time.
The preapproval process also helps the credit union navigate regulations and ensure it is abiding by its own loan standards.
“These days, you face so many regulations when you try to do preapprovals, so the fact that this is only based on their record with us really works well for everyone,” Gregory says. “We don’t pull the full credit history, but we will upload a beacon score for members coming in so we have that information readily available.”
The credit union prescreens early borrowers at the door, so they need to bring the invitation, an ID, and two paystubs to take out a loan during the invitation dates. Of course, members conducting independent transactions or other business with the credit union are welcome to enter the branches, no invitation required.