By Ray Birch
DOTHAN, Ala.—What began as a simple means to address a call center problem has become one credit union’s most popular loan product.
Five Star CU created the Express Loan about four years ago to take the burden off the CU’s call center which was getting inundated with requests for small-dollar loans, many of which were not being approved.
Most of Five Star’s loan are handled via phone, but CEO Bob Steensma related how the four loan officers handling the calls could not keep pace with all the small-dollar requests coming in during 2013.
Steensma explained that the credit union serves a significant population of low- to moderate-income members who often need short-term, payday-type loans for things like rent or a new washer.
“Back in 2013 we noticed that we had a problem,” said Steensma. “Our call center was getting overrun with small-dollar loan requests. But also in the queue were $20,000-$30,000 car loans. So we needed a way to expedite these small-dollar loans and get them out of the way so we could make the larger loans.”
Many Loan Requests Turned Down
But getting these short-term loans approved and closed was not the only issue, explained Steensma. Many of the payday-type loans being requested were being turned down over the phone.
“Our call center team was swamped and most of the requests for small-dollar loans came from people who are credit challenged,” so that led to a lot of turndowns, which does not help our membership,” said Steensma.
The credit union created the Express Loan that is based on a member’s relationship with the credit union instead of a FICO, charges a flat 18% APR interest, and comes in amounts ranging from $500 to $2,500.
“We put some criteria together based on length of membership and deposit history with Five Star, and said how can we approve these loans and serve these people quickly and effectively,” said Steensma. “We did not want to make this loan credit based—what we found from the past is that most of these loans were approved based more on relationships than credit.”
Bob Steensma, Five Star
Repayent Terms
Repayment terms are based on the amount borrowed: 24 months for $2,500, 18 months for $1,500 to $2,000, and one year for $1,000 and less.
“We simply had to find a way to expedite these loans to not only clear out the backlog in our call center, but to also help our members,” said Steensma. “So, we created a quick cash loan they had to come into the branch to get and in two minutes walk out with cash in hand.”
The move turned out to be beneficial for both borrower and lender. Members received a better alternative to a payday loan and started breaking the cycle of payday debt, and the credit union developed its most popular loan product.
Lance Wagner, director of sales and consumer lending, said in the loan program’s first year, Five Star approved 2,500 loans. That total grew to 3,000 in 2015, 5,795 in 2016 and last year the total topped 6,000.
“The loan brings in $1 million in top-line revenue annually, but we do have charge-offs, about 20 to 30 a month,” said Steensma, who said the 18% APR makes the Express Loan a high-yielding product despite 3.44% delinquencies. “The typical amount members receive is from $750 to $1,000.”
While Five Star considers the loan a payday alternative, it would not be not impacted by the CFPB’s proposed rules on payday lending (which the agency has recently indicated it will be scaling back), explained Steensma.
“Our product is not covered under the proposed rules,” he explained. “This is a true amortizing loan.”
Meeting Needs Of Members
Steensma said that Five Star needed to design its own payday alternative to meet the needs of its members, as NCUA’s Payday Alternative Loan does not. Steensma said Five Star sees the NCUA PAL as too restrictive for members and too short term, with a lot of regulations around it.
The CEO added that the Express Loan has many more members now engaged with the credit union, moving away from just a single-service relationship.
“Most of the time these borrowers just used us to cash a check,” Steensma said. “When you tell someone ‘no’ for a loan, although you don’t mean anything personally by the decision, members often take it personally. You say ‘no’ to someone in business and they often don’t come back.”
Mike Bridges, VP of marketing and communications, said the Express Loan is helping members who have been turned down for many things in their lives.
“Many of these borrowers think people don’t care about them. We are building relationships with this product,” Bridges said. “We get people who come to us for $500 for a cracked windshield they don’t have insurance to cover. We had a lot of people come to us over the holidays for Christmas money. These people have been pushed aside a lot in their lives, and we are here to stop that and help them.”