Credit Unions See Renter Loan Success

No one needs to be convinced of the utility of a hammer unless they’ve never encountered a nail.

A young person’s earliest financial obstacle is often the chunk of cash they need to get an apartment. Often it’s the first month’s rent, the last month’s rent, a security deposit, a pet fee and a parking fee. And then they need to buy a mattress, box spring, sheets, curtains and all the other sundries of setting up house.

They might think to get a cash advance on their credit card or use a store card. Or maybe just get an advance on their next paycheck. The last thing they might think of is to walk into their credit union and ask for $3,000 to $5,000 cash.

No one would buy a house without thinking of a mortgage, but the idea of offering loans to renters is unusual.

Yet, Seattle Credit Union ($831.5 million in assets, 50,683 members) and Harvard University Employees Credit Union in Cambridge, Mass. ($815.9 million in assets, 51,790 members) have both addressed the cash needs of renters with loans using different approaches.

The Harvard credit union started an interest-free loan program in 2004 as an employee benefit negotiated by the union representing university clerical and service workers. Seattle CU launched a renter loan last year charging risk-based interest.

The credit unions are in expensive housing markets. The Census Bureau’s American Community Survey of 3.5 million housing units per year has estimated that rent and utilities in Cambridge, just outside Boston, was $2,071 per month, double the nation’s $1,023 rent, based on averages from 2014 through 2018. Rent and utilities in Seattle was $1,496 over the same period.

Other surveys showed even higher rents. The RentCafe.com website estimated that while average rent in December was $1,474 for the nation, it was $2,121 for a 694-square-foot apartment in Seattle and $3,182 for an 845-square-foot unit in Cambridge.

Seattle CU President/CEO Richard Romero said the housing market in Seattle is driven by the economy and large employers like Microsoft, Boeing and Amazon. About a third of Seattle’s growth is from current state residents, a third from out-of-staters and a third from foreigners.

“There are quite a few people coming in,” he said.

Romero was one of them. He moved from Los Angeles to Seattle three years ago to take the helm of the credit union, and rented for a year while he learned more about the city.

“I remember having to come up with first and last. Having come from being a homeowner, it was a shock to the system going back to being a renter,” he said.

Seattle CU’s solution to scaling that kind of cash wall is the simplest tool in the chest among lenders: The unsecured personal loan. With the help of a local marketing firm, it was repackaged as The Renter’s Loan.

“This loan gives you a set term with affordable payments spread out over months that fit into your budget,” Romero said.

The idea of the loan is to help young people avoid common mistakes, such as incurring the steep fees of a cash advance from a credit card, the high interest charges on store cards, or even getting trapped in a vicious debt cycle with a predatory payday loan charging interest at annual rates of 100% or more.

The people who need these loans are often highly educated and make salaries that might seem high everywhere but Seattle, where the poverty threshold is household income of $60,000 a year.

Unlike most lenders, Seattle CU doesn’t set a minimum credit score for these unsecured loans.

“We are trained to really dig deep into people’s credit and score beyond an automated credit score,” Romero said.

“We have to sit down and figure out if the income to debt situation really makes sense for this person. Sometimes we have to say it doesn’t make sense; you have to find a more affordable space.”

In emergency situations, the credit union can refer an applicant to a non-profit for affordable housing.

Seattle CU launched The Renter’s Loan last fall. In its first two months, the credit union approved about half of the 80 applications received.

Terms range from 36 to 60 months depending on the amount, and rates in January ranged from 8.99% to 20.99%, depending on the credit risk. The highest rate would be paid by someone with, say, a 500 FICO score, who might otherwise only be able to get money from a payday lender.

The average interest rate is 12.9%, and the average loan amount is about $3,000. The average applicant income is $54,000 a year. On the high end, a borrower might be an Amazon engineer who moved to Seattle not realizing the rent near his office is $4,000 per month.

The Renter’s Loan was developed with the help of Twenty Four 7, a Portland, Ore.-based marketing firm that also guided the credit union in 2018 to change its name from Seattle Metropolitan Credit Union and adopt the slogan: “Seattle’s partner in growth and prosperity.”

The task with the renter loan was to get the attention of the young people who needed the help, and show them the credit union had a solution, Mimi Lettunich, president and executive creative director of Twenty Four 7, said.

“We’re talking to people in language that they understand, and with a situation that is real for them,” Lettunich said. “You’re not talking to people who keep $60,000 in the bank. It’s people who are already floating $10,000 for first, last and pet deposit – or the lowest maybe $6,000. It’s hard to do.”

She added, “There are a lot of young people who don’t understand what their options are. They can really use the expertise we have.”

The new renters might also use some of the swag that comes with the loan, including a roll of packing tape printed with the credit union’s name and The Renter’s Loan logo.

Romero said The Renter’s Loan is not the credit union movement’s “next new ground-breaking product.”

“I don’t expect to get thousands of loans. To me, it’s part of our vision to be Seattle’s partner in growth and prosperity,” he said. “It’s how do we design products to be sure we’re serving all segments of the community.”

And, of course, finding a way to show young people how Seattle CU can help them helps the credit union deepen its relationship with its future members.

“Credit union competition in Seattle is fierce,” he said. “It’s important for us to be able to differentiate ourselves.”

On the other side of the nation, Harvard University Employees Credit Union has been making zero-interest renter loans for 16 years with no in-house underwriting and few losses.

The Harvard Union of Clerical and Technical Workers first negotiated the renter assistance loans of up to $3,500 with the university in 2004. In its 2007 contract negotiations, it established a similar program to cover moving expenses up to $1,200.

Both loans require the borrower to agree to automatic payroll deductions to cover the loan payments, which are spread out over one year through 26 bi-monthly payments.

“The loan is not a ‘blank check’ while you look for an apartment,” the union loan agreement tells borrowers. “You may apply for the loan at the time of signing a rental agreement prior to move-in; or you may use the loan to reimburse yourself within three months’ time after you have taken occupancy.”

The union essentially does the underwriting. Union members who bring the paperwork to the credit union can get the loans.

Gene Foley, president/CEO of the credit union, said he recalled only one charge-off so far, and the amount was less than $1,000.

While the net interest margins on the loans are literally abysmal, the credit union benefits by getting a regular stream of new members.

“People are so appreciative to get help with their housing,” Foley said. “The program has been really successful for us.”

The credit union originates a couple of hundred of these loans each year, and the typical size is about $3,500 to $4,500. The renter loans are only a small portion of its $14.6 million portfolio of personal loans at year’s end.

Most of the rental loan borrowers are people who have moved to Boston to start work for the university from its offices to dining facilities.

“The union will typically send them right into the credit union branch, and they’ll walk out with a check so they can secure housing,” Foley said.