Driving Members to Prime Credit Scores
Some credit unions are using trended data and credit-builder programs to help members buy cars.
All of them require dedication to lending beyond the safety zone of A and A+ paper, and to building analytical muscles. Sometimes small loans for weak credit require a heavy lift to gauge the risk and price for it.
In the Los Angeles area, Financial Partners Credit Union ($1.8 billion in assets, 85,125 members) is trying to build its profile as a lender to subprime borrowers who are willing to rebuild their credit.
Joseph Brancucci, SVP of lending and chief lending officer, said too many credit unions are becoming fixated on selling products. Brancucci said the credit union’s charter isn’t just to sign people up for loans, but to “build a financial relationship that made them successful in their lives.”
To do that, Financial Partners launched a credit-builder program more than a year ago designed for young people with low to moderate incomes who either have no credit history or a bad one. The program involves a checking account designed to prevent overdrafts, a credit-builder loan and, if successful, a loan for a modestly priced car.
So far, Financial Partners has made about 1,000 loans through the program, and it is gathering grants to expand it.
TransUnion is also helping credit unions find ways to say “yes,” without taking undue risks through trended data and alternative data.
TransUnion introduced trended credit data about 10 years ago. About five years ago, TransUnion and others began offering alternative data, such as rent or utility payments, to enhance credit scores.
Conventional credit scores are based on a few simple and largely binary measures at a recent point in time. Did Joe pay his credit card on time? Did he pay his other loans on time? Did he seek more credit?
Higher data storage capacity, faster computer processing times, faster internet and powerful algorithms have allowed credit scoring to incorporate Joe’s story and translate it into reliable predictions of future payment behavior.
Sean Flynn, who oversees TransUnion’s credit union business, said trended data tracks how much a borrower pays on each line of credit. Questions it can answer include, how much is due each month? How much, if any, is paid beyond the minimum? How fast do they tend to pay off debt? The data goes back 30 months.
“When we trend that over time it creates powerful insights,” Flynn said. “With traditional data, a lot of that falls through the floor and doesn’t get used either in modeling or compilation of reports.”
Adoption of trended data was increasing steadily, but the pandemic increased the pace, Flynn said.
“One of biggest use cases of trended data recently for a lot of customers is getting a view of what you don’t typically see. In this case, it might be payment accommodations: Understanding who is in payment accommodations and who is not, and what type of excess liquidity they may or may not have at the moment,” he said.
Often, credit unions are trying to identify people whose traditional score places them in a nonprime category, a credit score of 601 to 660, but, if studied with trended data, are found to behave like prime borrowers.
“For credit unions especially, they’re really trying to find the hidden opportunities to help,” he said.
TransUnion recently studied 40 large credit union auto lenders and found that 9% of borrowers scored nonprime by traditional, point-in-time credit scores would be scored prime or above based on trended data.
“What this means is there might be an opportunity for credit unions that they’re missing out on, particularly with auto loans,” Flynn said.
For borrowers, they might be paying too high an interest rate.
“We want to try to help credit unions find those opportunities to help more people,” he said. “We feel very strongly that trended data can help them do that.”
TransUnion has found credit union loans in the nonprime space perform better than those made by other types of lenders. Flynn said the key is that the loans tend to be for lower amounts, with shorter terms and lower average monthly payments.
Brancucci, the chief lending officer at Financial Partners, has applied decades of experience in credit unions to refine approaches to making auto loans to people who really need cars but can’t get an affordable loan because of their credit history, or lack of one.
Brancucci said banks and many credit unions run auto loan applicants through a checklist, and discard those that don’t fit in their boxes. Brancucci also won’t hesitate to say no, but he said a ‘no’ always needs to have a plan with it.”
And Brancucci has picked up a few plans in his career.
For members with bad credit or no credit, the path to a car loan often requires the borrower to first complete a credit-builder loan. The member can borrow up to $1,200. The proceeds are put in a savings account, while the borrower makes regular payments. At the end of the term, the member has $1,200 for a car down payment and a better credit score.
“Based on the fact that we’ve worked with them, we’ll give them that loan,” he said. “Obviously, carefully; they don’t need a $50,000 Beemer. They need good transportation for work or school or whatever.”
Subprime auto loans are limited to the nonprime tier and are usually less than $15,000. “It’s a good, solid used car. We try to convince them not to buy a car that has 120,000 miles on it, because that’s going to cause them some other issues,” he said, adding, “They now have dependable transportation to get to work. It improves their ability to get a job outside their geographic area of their home, because they’re not dependent on public transportation any longer.”
For members unaccustomed to handling a checking account, Financial Partners began offering Easy Card accounts about a year ago. The account has no book of checks, but instead only a debit card, so members have no way to overdraw their account.
The 1,000 loans Financial Partners has made through its program for below-prime borrowers are a fraction of the more than 20,000 auto loans on its books.
Financial Partners’ total car loans were $206.6 million as of Dec. 31, down 36.7% from a year earlier. However, the $119.7 million drop on the balance sheet was the result of selling about $150 million in auto loans as participations.
Altogether, Financial Partners sold $461.9 million in participations last year.
Financial Partners’ strategy includes maintaining servicing rights on those loans, which provides an income stream that supports its rates and provides flexibility.
“Our off-balance-sheet strategy is as important as our holistic strategy,” he said.
Brancucci is working on getting more loans to people on their way to prime.
Financial Partners is a Community Development Financial Institution (CDFI), and late last year it received a CDFI grant for almost $600,000 to help young people build credit, open a structured checking account and get their first automobile loan.
The grant supports the loan loss allowance, giving the credit union more leeway to lower interest rates. Over three years, the credit union said it expects to make about 10,000 loans in Los Angeles County.
“This credit union had a history before my tenure of folks being turned down if you weren’t an A+ or A. It takes some time to get a reputation of being there to help them, and not just immediately say ‘no,’” Brancucci said.
“The numbers have dramatically changed because we’ve found creative ways to say ‘yes.’ We used to find creative ways to say ‘no.’”
The practices don’t mean the credit union is loading up on unsound loans and has loose underwriting standards. “It just means we find creative ways to structure things that make sense for the member,” he said.
Financial Partners’ auto loans had a 60-day-plus delinquency rate of 0.14% on Dec. 31, compared with 0.50% for all credit union auto loans. The net charge-off rate for the full year of 2020 was 0.19% for auto loans, compared with 0.45% for all credit unions.