Credit unions make money in three ways: interest on loans, interest from investments, and non-interest income. According to midyear data from Callahan & Associates’ Peer-to-Peer analytics, average interest on loans for credit unions nationally represented 62.58% of total income. Unfortunately, the credit scores of many would-be borrowers tumbled as a result of the economic downturn, and along with those drops in credit scores went their chances of taking out a loan and contributing to a credit union's interest income. Although many members are working their way back into financial shape, credit scores are notoriously slow to recover, which means a once at-risk member's ability to borrow is still hindered.
Credit unions, sensitive to member needs, have created lending programs geared toward members with lower credit scores. Such loans might carry a higher risk, but credit unions are continuously working to mitigate that in a way that does not disrupt member service.
Located on Fort Lewis McChord, America’s Federal Credit Union ($400.0M, Fort Lewis, WA) understands how tough the transition period can be for families that have lost a job or left the military. That why two-and-a-half years ago the credit union, which primarily serves a military membership, started its Member Assurance program. Based on feedback from the collections department, the program asks members who are struggling with car payments to return the vehicle to the credit union, at which point America’s sells it. The proactive sale protects the damage that would be done to a member’s credit should the credit union have to recover the asset, and it saves the credit union the resource expenditure involved in a repossession.
Unfortunately, the vehicles America’s tries to sell often are worth little in equity. So the credit union takes its auto strategy one step further back in the process by connecting with the member before they get into a loan they can’t afford. To help members with impaired credit get into a car that’s affordable and reliable, America’s offers a loan with a one-and-a-half point bump over its standard auto loan rate. The loan also comes with a requirement that the credit union install a tracking device under the dashboard that allows it to track the car’s movements if the member defaults on the loan.
According to Diane Branson, America’s executive vice president and chief operating officer, choosing the right GPS tracking vendor is important, as credit unions want one that keeps up with tracking technology and offers a product with longevity. Branson declined to name the vendor America’s uses, but said the credit union has had to deal in the past with devices that go bad, in which case the credit union must work to quickly repair them.
America’s purchases three years of airtime on the devices and can renew if necessary. When the member pays off the loan, the credit union stops renewing airtime and the device goes off the grid, meaning it can no longer be used for tracking purposes.
In the meantime, though, members “get a quasi LoJack deal without paying for it because we can track that car if it needs to be tracked,” Branson says.
Unlike America’s other auto loans, the decision-making process behind the GPS loans take longer than the credit union’s standard 10 minutes.
“There’s more hand-holding, fact-checking, and underwriting that goes into making these loans,” Branson says.
The technology takes additional time to install as well. The credit union buys the devices, but it is the auto dealer — the credit union only works with dealers with which it has a good relationship — who installs them after determining expenses and costs with the credit union.
Branson admits its GPS program is not right for every credit union. However, America’s has experienced only a quarter of the risk it anticipated. According to the most recent data provided by America's, its GPS tracking loans had a 1.62% loss ratio and a 1.39% delinquency ration. These figures stand in comparison to Callahan & Associates' most recent Peer-to-Peer data, from June 2013, which show that delinquent loans made up approximately 1.04% of total loans for all credit unions nationally, while the average delinquency ratio for America's loans outside the program as 0.77%.
Although both the rate and the potential for repossession are slightly higher with the loan, members appear to be happy to drive a car they can afford and rebuild their credit.
“[Our members] know what their credit is,” Branson says. “They know what their opportunities are.”
DOCO’s Starter-Interrupt Strategy
According to the 2010 U.S. Census, 31.9% of families and 39.9% of the population of Albany, GA, fall below the poverty line. Accordingly, the credit scores of members of DOCO Credit Union ($202.7M, Albany, GA) are lower than the national average.
To meet the demand for cars in Albany, DOCO carries a large proportion of auto loans on its balance sheet. The credit union carries $72 million in total new and used auto loans, a large difference from is Georgia state peers who carry just $32 million in these areas, according to Callahan & Associates' Peer-to-Peer data. Many of the area’s “Buy Here, Pay Here” car dealerships charge interest rates of up to 28%; by comparison, DOCO’s rates typically range from 12.25% 18%.
The credit union separates potential borrowers into tiers, considering metrics such as loan-to-value ratio and length of employment in addition to credit scores. The lowest credit score a borrower can have and still qualify for a standard loan is 570. Any lower and the member falls into the DOCO’s Fresh Start program, which, among other parameters, requires all vehicles be equipped with a device that can interrupt the electrical flow to the car’s starter.
“It’s their best chance to get a reasonably priced loan on a vehicle without having to go to a ‘Buy Here, Pay Here’ or a finance company,” says loan manager Daryl Salter. “You have people say ‘I’ve had bumps on my credit score; I just need someone to give me a chance.’ If they really feel that way, this is an opportunity to do that.”
The credit union introduced starter-interrupt devices in 2006 when SureTrack, the vendor who makes the devices, suggested DOCO install them as a way to mitigate the risk of lending to lower-tier members. SureTrack installs the device and DOCO controls it. And although every situation is different, Salter says the credit union generally disables a car when a loan payment is more than 15 days late. If a member cannot restart their car, they generally call the credit union first. DOCO usually restarts the car if the member promises to make a payment, and the credit union cannot disable a car while it is in operation.
After it launched the strategy, it found members elevated their DOCO auto loan to their top priority. Of course, members must initially agree to allow the credit union to install the device, and DOCO does make exceptions for long-term members.
“I don’t want to punish the tried-and-true members who, for whatever reason, still have a low credit score but have always taken care of us,” Salter says. “We still want to help those folks.”
On average, the credit union installs five starter-interrupt devices a week and makes one repossession per month. Midyear delinquent loans and net charge-offs at DOCO are higher than peer and national averages, 1.49% and 0.78%, respectively. The starter-interrupt loans, however, are performing better than their lower-risk counterparts. According to Salter, starter-interrupt loans have a 0.5% delinquency on a portfolio of more than $4 million, a figure that has remained steady over the life of the program.
DOCO does experience issues with the program, however. Enterprising members can find ways to take off the device. In those cases, DOCO — who ultimately just cares about repayment — must decide whether it wants to repossess a vehicle from a member who is making timely payments.
“The starter-interrupter is not a magic bullet.” Salter says. “It’s not the perfect solution for everybody, but it is a great tool.”
Member reaction to the program has been surprisingly positive.
“I thought it would be a terrible thing,” Salter says. “I thought there would be folks saying this is crazy. But a majority of folks want to pay. I think that is their nature — they want to pay.”