How credit unions are tailoring loans to better serve the underbanked

Scott McFarland, chief executive of Honor Credit Union, a $1.6 billion-asset institution in Berrien Springs, Michigan, explained how the process of improving credit health of members began with exploring points of friction.

"[In] building relationships at Honor, we realized that some of the barriers stopping members are very basic. … Just walking into an office can be very intimidating, filling an application out online can be very intimidating and another barrier may be credit bureaus," McFarland said. 

"We call them members, [but] are we treating them like members? Do we actually value them as a member? Or do you just plug them and chuck them into numbers that Equifax and TransUnion and Experian have?"

Starting with the application process, McFarland began building individualized credit profiles for each applicant using information they provide, combined with credit card payment and spending data generated over time.

Using this strategy, along with an income estimator tool from the credit union's core processor and the review of a member's soft credit score (without impacting the applicant's credit), the credit union can supply members with a pre-approved "fast cash" loan offer of $2,000 to $3,000.

McFarland stressed that consumers who transact with finance companies or check-cashing businesses aren't afforded the chance to develop their credit, while the profiles and loan program "gives them a chance to build their credit, make payments and still get access with an approved offer," he said. Since the launch of the initiative 18 months ago, the credit union has recorded less than 1% in delinquencies and has seen 40% of participants improve their credit scores.

"As credit unions, we all are the descendants of people that opened their lunch box and locker a long time ago and decided to start something because there was a need in economics, and I hope that we never lose that," McFarland said.

Jeanne Kucey, CEO of JetStream Federal Credit Union, a $244 million-asset institution in Miami Lakes, Florida, explained that the credit union had already made solid progress in reaching the communities of newly arrived immigrants when she joined in 2009, but was still facing the challenge of underwriting more auto loans.

"[When I came to JetStream, they had] No Credit Check loans, Second Chance checking, credit builder loans, secured credit cards, and employees knew how to interact with the underserved communities of recently-arrived immigrants, as several staffers were once in that situation themselves. … The problem was the members would always ask how to get a car loan, as the public transportation in Miami is not great so if you don't have a car, it really limits your employment opportunities," Kucey said.

Kucey first ensured that each lender was accredited as a community development certified financial counselor — providing them with training modules that ranged in topics from how to effectively save for a first car and college to drafting a budget and managing credit. Doing so allowed the credit union to aid both employees and members in getting a better handle on their finances.

Kucey expanded the credit union's "subprime" lending portfolio by launching a branded insurance agency — JetStream Insurance Group — that could assist members who were only offered expensive high-deductible plans by various dealerships. 

Through various levels of automation such as a Pay By Phone feature and outsourcing the distribution of collection letters and phone calls, the credit union was able to reduce friction points and uphold a certain level of service without the extra costs of hiring new talent.

"I would just say that there are very simple solutions, and I would encourage you if you're going to embark on a program like this to have these things in place before you start the program," Kucey said.

Martin Eakes, chief executive of Self-Help Federal Credit Union, a $2.1 billion-asset institution in Durham, North Carolina, said underserved communities of single Black mothers and other people of modest means were the first groups financed by the credit union and played a key part in its growth.

"When we started making home loans to single African American mothers, my banker friends told me there's no way you can make loans to the people we don't make loans to and you're gonna lose your shirt. … I told them that you'll know more about banking than I'll ever know in my whole lifetime, but I know more about single mothers than you'll ever know in your lifetime because the community where I grew up was 95% Black, and I ate at the dinner table of mothers every other day as a kid," said Eakes, who is also CEO of Self Help Credit Union, a $1.9 billion-asset institution also in Durham.

Eakes explained that through lending programs built around the use of an Individual Taxpayer Identification Number, which people without Social Security numbers can use to pay taxes, he broadened the reach of both credit unions and began underwriting automobile, unsecured, business and home loans to immigrant families.

"In the 1980s and 90s when we first started … the mythology back then was that if you've got a blemish on your credit report, it means you're a bad person, you have bad character," Eakes said. "All it means is that you didn't have very much cash to start with [and], well, that's what we're in business to do."

Between both of his credit unions and the neighboring Latino Community Credit Union, a $883 million-asset institution, there has been roughly $3 billion in underwritten immigrant loans since beginning the practice, with Eakes emphasizing the need for due diligence in ensuring that all information gathered is legitimate.

"My thing is that if we're going to ask individuals to help build houses for everyone else, they should be entitled to borrow and buy a modest house of their own," Eakes said.