Wescom Builds Small Loans for Big Lift

Managers at Wescom Central Credit Union in Pasadena, Calif., were poring over feedback from a member survey several months ago when they noticed a comment by a longtime member.

She recently had a major appliance breakdown, and at the time didn’t have the several hundred dollars she needed to repair it.

The member lamented that the credit union didn’t have any way to help her cover that gap of a few hundred dollars for a few months.

“We wondered how many other members were in a similar situation,” Adriana Welch, then vice president of consumer lending at Wescom ($4.1 billion in assets, 194,398 members), said.

Wescom managers researched the issue, and found that many other members might have similar needs. One indicator was 1,300 members had automatic payments being made to payday lenders.

“There’s obviously an opportunity here,” Welch said. “A lot of southern Californians are stuck living paycheck to paycheck and are dependent on those payday lenders.”

The Pew Charitable Trusts cited a recent Gallup survey that showed 40% of Americans say they are running into debt or barely making ends meet. A third of respondents in a 2014 Pew survey said they had no savings, and more recent polling showed that many people do not have sufficient resources on hand to deal with an emergency.

Wescom’s solution was to develop a small-dollar lending program called Quick Assist. It offers zero-interest loans of $200 to $500 to established members – those who have had accounts for at least 90 days. They also have to be current on any loan payments and have no overdrafts with the credit union.

Quick Assist fits within the NCUA’s current regulatory framework of Payday Alternative Loans, and the state-chartered credit union is not lobbying the NCUA for changes.

However, some credit unions and consumer groups have debated changes that might allow the program to help more members by meeting a short-term need without luring them into a predatory cycle of high-cost payday loans.

As it is, PALs have seen a recent surge, according to NCUA data analyzed by CU Times.

Even though the number of federal credit unions offering PALs has been stable (498 as of March, the same as a year earlier), the amount granted per quarter increased sharply in late 2018 and early 2019 even as overall loan originations were falling.

The amount of PALs granted in the three months that ended March 31 was $36.1 million, up 33.1% from 2018’s first quarter. For 2018, grants rose 9.4% to $145.2 million.

One factor in this growth might be that the credit unions offering PALs tended to be somewhat larger and much faster-growing than those that did not offer them.

The average credit union offering PALs had $287 million in assets as of March 31, and their total loans granted grew 16.8% last year, and 11.6% in the first quarter.

Those federal credit unions without PALs had average assets of $223.2 million in March, a 3.2% gain in total originations last year and an 8.5% drop in the first quarter.

The NCUA’s current PAL program allows credit unions to charge up to 28% interest plus application fees up to $20 for loans of $200 to $1,000 for terms up to six months. The average PAL granted during the first quarter was $710, up 9.4% from a year earlier.

The NCUA has proposed some minor changes, including extending the loan range by eliminating the minimum and doubling the maximum to $2,000. It would also double the maximum term to 12 months.

Alex Horowitz, a senior research officer with The Pew Charitable Trusts’ consumer finance project, said the NCUA’s PAL guidelines needlessly restrict credit unions from helping more people. “We have encouraged them to take a more comprehensive approach,” he said.

Whatever credit unions do or don’t, banks are not standing still. The FDIC said it has agreed to pursue joint action on small-dollar lending with the Fed and the Office of the Comptroller of the Currency.

This might clear regulatory uncertainties that have steered banks away from making small installment loans, and allow banks to substantially boost the market for alternatives to payday and similar high-cost loans, Horowitz said. “That would be a very good thing for consumers.”

Americans spend more than $30 billion a year on fees and interest for high-cost, non-depository loans, including payday loans and title loans, he said.

The amount represents nearly 7% of what consumers spent at grocery stores last year, according to the USDA. But while grocery store spending varies little by income, predatory lending is concentrated among the poorest populations, which means the impact is far greater for them on food or other vital needs.

Horowitz said the NCUA standards don’t allow credit unions enough flexibility, revenue and certainty in underwriting guidelines. The uncertainty on guidelines means credit unions and third-party venders can’t run the numbers that would allow them to determine how much it would cost to provide a small-dollar loan.

Do they need to pull credit reports, which are costly, or can they rely on deposit history, which is cheaper and readily available?

For credit unions to sustainably offer a $400 three-month loan, Horowitz figures they need to charge about $60. Under the PAL program they can charge $39. By comparison, payday lenders on average charge about $360 for that type of loan.

For a credit union to sustainably offer $500 for six months, they would need to charge about $120 to $130. Under PAL, they can charge $62.

“We’re generally talking about loans that would cost $20 or $30 more than the PAL program,” Horowitz said. “From the borrowers’ perspective, that extra $21 is not going to dissuade them from using their credit union, but saving $300 compared with a payday lender is a big deal.”

Under Wescom’s program, a member can have only one Quick Assist loan out at a time, and can take out no more than three every six months.

Minimum payment on a six-month loan is $85. The credit union charges a $19 fee, which technically does not count toward APR limits.

Employees were trained to offer the loans to members who might benefit, and the program was launched quietly in May with no announcements. As of early August, 50 loans had been granted to 50 members, and two had been paid off.

“We feel it’s something our members are very appreciative of,” she said. “It’s quick and easy.”

Late this year, Wescom plans to review the program. If it seems promising, the credit union’s marketing department will start advertising the small loans to members through its newsletter, online statements and other direct member communications.

“Once that is out, our response will be a lot greater,” she said. “We wanted to take a crawl, walk, run approach, and see how our members respond.”

Welch, who was promoted in July to SVP of branch operations, isn’t sure whether the program will cover its costs. But the scale of the exposure is safely tiny: The credit union’s net worth ratio was 8.21% as of June 30, and it generated a 0.63% return on investment last year and an annualized 0.92% in the first quarter.

“We see the overall risk as low,” Welch said.

Wescom’s team of project managers, loan analysts and computer programmers developed the credit union’s own automated system based on underwriting criteria drawing from information readily available from members’ history with the credit union.

“We were obviously fortunate to have the resources to make that happen,” Welch said.