MADISON, Wis.–Details are now being shared on how a pilot program from the Filene Research Institute generated more than $100 million in auto loans over an 18-month period.
The Non-Prime Auto Loans (NPAL) program,created by the National Credit Union Foundation and given to Filene to test, seeks to address the needs of the underserved and credit challenged. The goal is to provide reliable transportation to get people to work, to school, to the supermarket—so they can lead normal lives.
During the pilot, $101 million was loaned across 10 credit unions with an average interest rate of 11.47%.
“Considering the average borrower credit score was 581, the rates the credit unions charged, which they set on their own, are lower than what most consumers would have received elsewhere,” Andrew Downin, managing director, innovation at Filene, told CUToday.info.
Downin emphasized that most underserved consumers pay high interest rates on car loans they often get at “buy-here-pay-here” lots, and that the cars they buy often turn out to be undependable.
Limited Options
“Up until recently there has not been a tremendous number of options for this group of consumers at credit unions,” added Downin. “For a number of reasons, credit unions have not been willing or able to underwrite loans for consumers with credit scores well under prime.”
The backbone of the program is having credit unions look at other data sources, outside the traditional credit score, to make loan decisions.
“It’s character-based lending,” said Downin. “Some of those data points could be the member’s history with the credit union; that means putting more emphasis on the members’ past relationship than on the credit score.”
As with many new alternative scoring methods developed by credit bureaus, NPAL can take into consideration rent payments, utility payments and other reoccurring bills. Downin said an emphasis was placed by some credit unions on auto loan payment history, as well.
“If the consumer has shown a good history of paying on auto loans, at any financial institution, that was considered,” said Downin. “Steady employment and residency were factors that were considered as well.”
Score Sets Rate
Downin said most credit unions in the pilot considered the credit score, but used it primarily to set the rate.
Two credit unions in the program, SchoolsFirst FCU in Santa Anna, Calif., and University FCU in Austin, Texas, each made more than 2,000 loans with NPAL.
And while the program was designed to help responsible consumers who are struggling financially, the credit union has to make money on NPAL, reminded Downin.
“From the credit union perspective, the program was successful,” said Downin. “Ninety-two percent of the borrowers said they would take the loan again. Ninety percent said they would recommend the program and credit union to others. And 84% said this product made them more loyal to the credit union. Any product that contributes to member loyalty returns benefits far beyond the product itself.”
Downin said NPAL has shown lower delinquency rates than traditional “C” paper loans. He explained that one of the reasons is that there is a sense these consumers have “hit bottom” and are ready to admit they need help. Financial data from the pilot showed that loan losses from NPAL averaged 2.04% of the non-prime auto loan volume, aggregated across all participating credit unions.
Strong Collections
Credit unions using NPAL also had strong policies and procedures around making sure members pay on time, as well as robust collections methods. The CUs, too, placed concentration limits on NPAL loans to limit risk exposure.
The average NPAL loans was $13,000, a good sign, agreed Downin, that the cars these borrowers were buying were going to be dependable.
“Ultimately, this is about getting consumers who are having financial difficulty into reliable transportation so they can improve their lives,” said Downin. “We are pleased with the results so far. Our ultimate goal, now that the program is out of the pilot phase, is to have more credit unions contact the National Credit Union Foundation to offer NPAL to their membership.”