More consumers are looking to access loans during the pandemic, but some lack the credit histories needed to obtain them. Credit unions can step up, however, by relying on more than traditional-scoring metrics when making lending decisions, says Eric Levine, CEO of Alternatives Federal Credit Union. In the latest Credit Union Tracker, Levine discusses how CUs can tap into alternative data sources to offer financial lifelines to members in need.
Credit unions (CUs) have played a major role in supporting consumers who have been financially hit the hardest by the pandemic.
Sixty-five San Francisco Bay Area-based CUs reported processing business loans to the tune of $723 million through the Paycheck Protection Program (PPP) from mid-March to early July. They also extended 20,789 mortgage payments and 539,724 consumer loans, including car and credit card loans. CUs nationwide have helped in similar ways, extending relief programs to local communities to help keep consumers and businesses afloat.
One such example is Ithaca, New York-based Alternatives Federal Credit Union, which teamed up with local government entities and other agencies in its county to pool forgivable loans of up to $4,000 apiece for Ithaca’s small businesses. The CU agreed to serve as the administrator of the program, called the Small Business Resiliency Fund, which deployed nearly $650,000 to 162 small businesses in Ithaca, according to Alternatives CEO Eric Levine.
“We certainly didn’t expect to be involved in anything like that before the pandemic,” he said in an interview with PYMNTS.
The 11,000-member CU with $140 million in assets is one of many CUs quickly pivoting to innovate relief efforts and provide credit solutions enabling faster access to funds for businesses and individuals in dire need during the pandemic.
Thinking Outside The Lending Box
The effectiveness of the Small Business Resiliency Fund inspired Alternatives to develop its own response to the pandemic, and it created the Community Assistance Loan Fund (CALF) to help fill the gaps caused by the reduced or lost income of any member, nonmember or business. The intended $1.4 million program has thus far extended loans collectively worth more than $425,000 to 70 businesses, Levine said.
“The fund was created in cooperation with some local funders because it’s a very risky loan product where we don’t have an interest income to offset the risk, and we’re lending money to people who may be unemployed or who have suffered a loss in income,” Levine explained.
Businesses, nonprofits and other organizations can apply for CALF loans of up to $8,000 to cover losses associated with COVID-19. Any existing member or new applicant facing financial hardships due to the pandemic is similarly eligible for a personal loan of up to $3,000 with zero percent interest and no payments required for three months, he said.
Alternatives judges its ability to underwrite CALF loans based on an individual’s pre-pandemic income. The CU considers any downturn in income to be “temporary,” Levine said, and it does not qualify the member based on that loss, instead taking the optimistic view that the individual will be able to go back to work.
The amount of money CUs must reserve for lending is overseen by the National Credit Union Administration (NCUA), with the understanding that a certain percentage will not be repaid.
“We want to reserve that amount for ordinary lending, but [in] offering zero percent loans for people affected by the pandemic who have lost their job or have had their hours cut or have had to close their business, there’s no interest income to offset anybody who doesn’t repay, so the risk is much higher than normal,” he said. “We want to reserve maybe eight or 10 times what we would normally reserve as a loan loss for that.”
Innovating Credit Products
CUs are quickly adjusting their credit product offerings to suit the evolving needs of their members as the global health crisis continues, especially as individuals try to determine how to save more money. A priority of many members six months into the pandemic is to clean up their credit to put themselves in a better position to borrow in case of future job loss.
“That has [also] led to people wanting to refinance mortgages and consolidate consumer loans,” Levine said.
CU members may be in desperate need of loans during the pandemic but may lack the exemplary credit scores needed to obtain them. Levine claimed that Alternatives does not approve loans based on credit scores but prices the interest rate based on credit score — while helping borrowers improve their scores.
“One innovative product that is relevant during the pandemic is the Fresh Rides loan, a secured car loan for individuals who may be reentering the workforce after a hiatus or for those who may have just started a job and can’t get a loan without a six-month work history,” Levine said. “If we believe they can afford the loan and have the intention to repay it, we’re going to give them that loan so they can get their car and they’ll be able to go to work.”
Alternatives will accept letters from employers confirming members’ new employment instead of requiring a traditional six months of work history for the Fresh Rides program. CUs that offer a range of credit options and support their communities’ immediate financial needs during this time stand to build not just interest in emerging credit solutions but also lasting relationships and loyalty.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
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