FERNDALE, Mich.-CU ONE here has introduced a Debt Buster loan program, which it says is a mix of old-school underwriting and progressive packaging.
Debt Buster loans allow members to refinance mortgages and consolidate debt for short-term payoffs as a way to eliminate debt quickly in order to better time it to major life events, such as retirement or sending kids to college.
"There's a new sentiment now in our world that people are debt-averse," said Steve Grech, EVP at the $739-million, 103,000-member credit union. "Some of the things that people have gone through in the last three to four years opened their eyes, and debt kind of has a double meaning now. It certainly facilitates some of the things that allow us to afford some of life's nicer things, but with it also comes a sense of insecurity."
PMI is not required for Debt Buster loans, but CU ONE requires that members have a minimum credit score of 730, no late payments on first mortgages or home equity loans during the previous 24 months, no bankruptcies or foreclosures, and a debt-to-income ratio no higher than 35%.
"These are people that have shown a propensity to keep things current, but are trapped," said Grech. "Is it going to capture everybody? No. But we as an FI are sticking out our underwriting neck, so to speak. And knowing that, it's not all things to all people."
Terms are available for 10, 15 or 20 years, and pricing is based on the applicant's loan-to-value, the term and whether or not they are applying for cash out. Base rates on a 10-year term start at 2.875%, plus a premium that rises by every 5% increment of LTV.
"The theory, from an underwriting point of view, is that by allowing for a shorter term, you're appeasing that debt-averse segment of our society," said Grech. "Also, the payback is so quick that from a lender's standpoint you're really only sticking your neck out for about 12 to 18 months."
Strong Volume
CU ONE is advertising Debt Buster loans through in-branch signage and radio ads. When the radio ads began in August, the credit union brought in more than $27 million in first-mortgage applications during that month alone. In comparison, during the first six months of 2011, the credit union averaged $9 million per month in first-mortgage applications. "If we take the second six months of 2011, plus January 2012, our average applications have been $19 million," said Grech. "We attribute that to Debt Buster."
So far the CU has closed just shy of $2-million in Debt Buster loans, with another $3-million in the pipeline. Grech noted that the strict underwriting criteria have meant that not everyone qualified for the program, but some of those loans have ended up as HARP or other loan programs. "Just the fact that we offered it created more business in total," he said.
The average Debt Buster loan has been close to $200,000 (more than double the amount the CU expected, said Grech), with a rate averaging between 4.5% and 5%. Most of the loans are 10- or 15-year terms, and the credit union is porfolioing all of them.
"Seventy percent of our 2011 originations were either 10- or 15-year terms," noted Grech. "If that doesn't speak to people wanting to get out of debt and get their homes paid off and have that financial security, then I don't know what does."
