Veridian Credit Union’s $2.2 million portfolio in payday alternative loans is a break-even endeavor for the Iowa-based financial institution. Fees and interest payments on these short-term, small-dollar loans aren’t going to fill the coffers at Veridian, even if the credit union is averaging 1,100 of them a month. So why do it?
The answer is simple: Members need it, so Veridian provides it.
Veridian ($2.5B, Waterloo, IA) introduced its payday alternative loan in 2007 when the credit union realized its members were killing their finances by frequenting check cashing shops with high fees and ballooning interest rates — some as high 300%.
The credit union charges a $25 loan origination fee and members can take out $1,000 over a six-month term. Members get a rate of 19% if they choose to sign up for automated payments — in order to qualify for the loan the member must have income directly deposited into the credit union — and 21% if they opt for cash payments. Although this sounds like a more affordable version of the often-criticized payday loan, there is a big difference: Veridian’s payday alternative requires members to deposit $500 of the $1,000 loan into a savings account. The member can’t access that $500 until they pay off the loan.
“We don’t want to be another payday lender,” says Kara Van Wert, manager of consumer and indirect lending at Veridian. “Our loan is geared toward helping members through their situations and helping them learn how to save.”
CU QUICK FACTS
veridian Credit Union
data as of 3.31.14
HQ: Waterloo, IA
12-MO SHARE GROWTH: 1.0%
12-MO LOAN GROWTH: 13.8%
Underwriting For The Underbanked
Because it is an alternative loan, the credit union uses alternative underwriting practices. The credit union does pull a credit report — a standard underwriting procedure — but the credit union is not looking for a minimum credit score. Instead, Veridian uses the report to find opportunities to provide financial products and services that will further help the member on their path to financial stability. Veridian also does not cap a borrower’s debt ratio.
“We had to shift our lending criteria for this type of loan product,” Van Wert says. “In the normal lending world, a minimum credit score and maximum debt ratio are two criteria people are huge sticklers for. With this alternative product, that’s something you have to get away from.”
The credit union is a stickler for habits, though, and the credit union won’t approve its payday product for members with a history of charged-off loans. The first time a member takes out a payday alternative loan, Veridian checks their history through a service called Core Logic, which is a commonly used credit reporting company for payday lenders. Veridian uses the report to ensure members have a clean debt history.
Veridian underwrites 1,100 payday alternatives a month in its 26 branches. Although automating the process might save time, it would also cause the credit union to miss out on an opportunity to identify other ways it can serve members who come in to take out the loan.
“This a group of individuals we want to take extra time with,” Van Wert says. “They are unbanked or underbanked and we want to help them get out of that cycle and improve their credit score.”
Opting to review and underwrite the loans on a case-by-case basis has also allowed the credit union to maintain a 6.04% charge-off rate on a product most lenders categorize as high-risk.
Nontraditional Marketing For A Nontraditional Product
Veridian doesn’t market its payday alternative alone but instead lets word-of-mouth do the work. The product’s popularity has steadily grown since its inception in 2007. According to Van Wert, this is more a function of more people learning about it as opposed to more people needing it. Regardless, Veridian considers the growth of this product a good thing because it means members are avoiding high-fee, high-rate, small-dollar loans.
“Paying upwards of 300% on a loan for a short period of time is one thing we wanted to address with our membership,” she says. “While it’s not the most profitable product for the credit union, it’s important to make sure we have products and services for every area of our membership.”
The success of Veridian’s payday alternative loan earned the credit union a hat tip from the Center for Responsible Lending, a nonprofit dedicated to protecting homeownership and family wealth by fighting predatory lending practices. The Center for Responsible Lending included Veridian’s payday alternative in its 2010 examples of best lending practices.