PHILADELPHIA -
Market factors ranging from stiff competition to declining housing markets have chipped away at credit cards and home equities, leaving credit unions on the lookout for new (or in this case old) opportunities. That has led to a renewed focus on the signature loan, although some CUs report they never moved away from the product (see related story, page 13).
"When I first took this position 10 years ago, signature loans made up about 20% of our portfolio," said Claire Ippoliti, VP-lending at Philadelphia FCU and a member of the CUNA Lending Council Executive Committee. "Today, we really don't promote it, and signature loans make up a little over 6% of the portfolio. I don't think it's something we've done intentionally, we just sort of got to a point where we advertise it maybe once a year. But we really should push it more."
Of course one reason the signature loan may have fallen out of favor is it's unsecured and carries more risk than a collateralized loan. "It's our highest delinquency and highest loss, but we can adjust the rate to price it correctly," Ippoliti noted.
And when a credit union thinks about risk, it also thinks about safety and soundness, as a matter of course.
"Unless credit unions get more liberal and stop using credit as the basis for qualifying for a loan, you're not going to see signature loans make a big come-back," suggested Ed Turk, senior vice president of lending at the $377-million IQ Credit Union in Vancouver, Wash., and a member of the CUNA Lending Council. "Regulators are going to look at that and question the safety and soundness."
But as credit unions continue to seek out ways to better serve the underserved at the same time changes in the housing market have taken some of the shine off of home equity loans, some credit unions believe the time has come to reinvigorate the signature loan.
The $553-million Philadelphia Federal was granted a low-income designation in 2004 and has been looking at ways to increase service to its new field of membership. One of the first things it did was reevaluate its minimum loan amounts.
"Originally it was at $1,000, but we brought it down to $500, and now we're looking at $100," Ippoliti related. "We looked at our mortgage lending to see how we could expand approvals. When we assessed our denials, we found that the down payment was typically the barrier, so we're using Fannie Mae's My Community Mortgage product. We're also toying with payday lending, but we haven't found something we're ready to bring to market at this point. But this is why I think we need to promote the signature loan."
Ippoliti, who has joined the newly developed CU Development Corps, is looking forward to learning from historically low-income credit unions how to reach out to this market.
"I've always worked at a mainstream credit union. I want to see how these low-income credit unions develop their lending programs," she said. "Maybe we need to have a signature loan for just six months. To serve this market, we may need to make the signature loan a loss leader. I don't think we can ignore it any more."
But is the signature loan a viable option to compete with payday lenders and check cashers?
"I don't think so," Turk said. "I think the market will come up with a solution, and I hope credit unions come up with it. I don't know what it's going to be, but it will probably be a hybrid of existing products."
Or maybe the answer is to give the signature loan a makeover. "About 10 years ago we did away with the traditional signature loan," said Aaron Bresko, director of credit and portfolio management at $7.5-billion BECU in Tukwila, Wash. "We went to an unsecured line of credit that allows us to shut down the line if there's a problem, and then it becomes unsecured installment credit."
BECU did, however, retain its "special consideration loan"-essentially a signature loan capped at $3,000 for those who don't qualify for the line of credit but who have experienced a life-changing event, such as a death in the family or major illness.
The idea behind moving people to a line of credit was to eliminate the time and costs involved in repeatedly making the same loan. "This way it's reusable," Bresko offered. "The key is you don't just do the loan, put it on the books and you're done. A line of credit requires continuous monitoring and adjusting the rate accordingly."
The unsecured line of credit comprises about 4% of BECU's total loan portfolio, or about $250 million, with credit cards comprising another 6% of the portfolio.
"Our overall delinquency is at about 40 basis points," he added.
The convenience of a reusable loan, such as a line of credit, should have an appeal to consumers who might otherwise be rolling over a payday loan over and over again, with hefty fees each time.
But if convenience is king, then the real key may mean an expansion of indirect lending, Turk advised.
"More people are making lending decisions at the point of service. Fewer people come into the branch for a loan," he observed. "I think this gets back to the flat membership growth issue. We're going to have to be right at the point of sale."
Even as Turk essentially dismissed a potential resurgence of the signature loan, he had to add, "Signature loans were good for us. It is one of the higher-earning loans even after you account for the higher losses. We're going to have to think about that."
Indeed, several CU lending experts told Credit Union Journal that while they hadn't thought about their signature loan program in quite some time, after being asked about it for this article, they said they might just have to give a little more time and energy to the signature loan.
"I think what happens at a lot of credit unions is that we get into these set patterns, a sort of run, where we always promote this type of loan at this time of year," Ippoliti said. "Maybe it's time for us to reassess when we market our programs."
