United Credit Union in Chicago recently launched a loan program to help the area's huge underbanked population — especially those who frequent
The $302 million-asset credit union expected a good response but was overwhelmed with the interest the program garnered.
"We had to pause it because we were inundated with requests," said United Credit Union CEO Mario Aguirre in an interview. "It was well beyond what we expected."
United launched the "Second Chance" loans on May 1 and made 100 loans worth $250,000 in the first week.
"So we had to pause it temporarily, just to make sure that we have the capacity to take in these loans," Aguirre said.
He said part of the attraction of the program is the high number of underbanked households in the Chicago area. According to a
Part of the goal of the loan program is to help United's credit-challenged members to build credit and get out of the payday loan cycle, Aguirre said.
The Second Chance loans allow members to borrow up to $2,500 for up to 24 months. Aguirre said the interest rates vary but will usually fall in the "high teens," which would be on par with a typical credit card but far below the rates in the 30% range that payday lenders often charge.
There is no collateral required and no minimum credit score to qualify. Borrowers are accepted based on their ability to pay the loan, he said.
Tim Scholten, founder and president of the credit union and community bank consultancy Visible Progress, said that depending on their underwriting criteria, the loans may be more for Community Reinvestment Act credit than to solve many real member needs.
He added that it's a curious time for a financial institution to be taking on risk with the fears of a recession and rising interest rates.
"It is a tightrope between quality and getting paid to take on much greater default risk," Scholten said. "Given rates have been rising and the economy slowing, I don't see too many organizations increasing their appetite for increased risk at this point."
Credit unions are not typically subject to CRA requirements, but the Illinois Department of Financial and Professional Regulation in January issued a
"We know and understand the risks that we face," Aguirre said. "In general, financial institutions are in the business of taking risks."
Other credit unions have rolled out similar alternatives to payday loans during the past few years. But Aguirre said this one is different because it features fewer restrictions.
For example, the $96 million-asset Afena Federal Credit Union in Marion, Indiana, created
Its CEO, Karen Madry,
But people who only joined Afena within six months of requesting the loan can only borrow up to $600.
United was founded in 1930 to serve school teachers during the Great Depression and now holds a community charter to serve all residents of Cook County, Illinois.
The credit union earned $963,000 in the first quarter of 2023, compared with about $146,000 a year earlier, according to call report data from the National Credit Union Administration. Aguirre said that big increase was primarily due to the Employee Retention Credit tax refund.
Total loans for United increased 20% over the year to about $147 million.
Aguirre said all the
