TOLEDO, Ohio -- Toledo Metro Federal Credit Union turned to Walmart for some loan marketing inspiration.
More than one-third of the community CU's $32 million loan portfolio was subprime paper and many members paid as much as 17.99% interest on their loans, according to Dan Zimolzak, TMFCU's president and CEO.
"In terms of volume, almost 40% of all loans written were to subprime borrowers and comprised 27% of the total loan portfolio," Zimolzak said. "The subprime portfolio generated more than 45% total loan income after net charge-offs, creating an ROA that exceeded peer ratios by 400% or more, making it one of Ohio's top-performing credit unions in that category."
Despite the profitability, Zimolzak knew that such rates were unsustainable for low-income members of the $45 million institution. He also knew that the number of subprime loans decrease as credit scores improve and members are able to move into higher credit tiers, causing the CU's board and staff to seek a new way to work with low-income borrowers and the credit union.
Zimolzak credited Michael Plath, TMFCU's vice president of lending, with the idea of adapting a Walmart-inspired, price-rollback marketing scheme to address the challenge. Low-income borrowers currently paying the top interest rate could earn an interest-rate rollback to lower levels through regular payments of all their bills, including credit union loans, and by exhibiting overall good credit practices.
"Technically all members qualify for the program, but it's the ones with subprime loans who benefit the most," Zimolzak said.
Interest rates on unsecured lines of credit and signature loans for borrowers with credit scores higher than 740 are 6.99%, TMFCU's lowest rate. Those same loans for borrowers with credit scores less than 600 come with interest rates of 17.99%. New and used auto loans for the two categories carry rates of 2.24% and 15.99%, respectively.
Members who improve their credit ratings can actually see a decrease in their interest rates on existing loans, Zimolzak said. As part of the program, the credit union checks borrower credit scores posted on Transunion every six months following the dispersal of the loan. As a member's credit score improves, Plath and his staff make file maintenance changes that result in a corresponding reduction in interest rates.
The CU also offers financial counseling during to help members achieve their financial goals, Zimolzak said.
One member with a credit score of 551, for example, paid an initial 17.99% interest on a seven-year $22,325 loan he took out in Nov. 2014, with biweekly payments through payroll deduction of $217.36. By May 2015, his credit score had increased to 600, causing his rate to drop to 12.99% and biweekly payments that declined to $189.08.
By November 2015, the member's credit score had increased to 632, causing TMFCU to reduce his rate to 9.99%, lowering biweekly payments to $175.10.
News of the program spread among members and loan traffic has increased exponentially. TMFCU's ROA continued improving, and the credit union has now become Ohio's top performer in this category. Best of all, Zimolzak said, the members have benefitted.
"At 80% [loan-to-share ratio] we are pretty well loaned out," he added. "Now we're looking at an aggressive rate campaign to bring money in and keep the rollback program alive."
