By Ray Birch
WHITTIER, Calif.–When one credit union introduced a new credit product to help consumers challenged by the pandemic-driven economic downturn, it learned a lesson itself in the process.
The $2-billion Credit Union of Southern California is reporting it has gained some insights into what’s happening with its members’ balance sheets during the pandemic–including some surprises––a period that continues to raise questions about the effects on consumers’ credit across the country.
As CUToday.info has reported, a greater share of Millennials report they have added to their credit card debt since March compared with older generations. About 56% of Millennials say their credit card debt has grown since the start of the pandemic, compared with 53% of Generation Xers and 46% of Baby Boomers, according to a survey from CreditCards.com.
In addition, approximately 55% of Millennials blamed the crisis for their snowballing balances, while fewer than half of Gen Xers and Baby Boomers pointed to the pandemic as the cause of their growing debt.
Fitch Ratings reported the pandemic has resulted in sharp declines in overall U.S. credit card debt.
‘Fortunate’ Members
Michelle Hunter, chief communication and experience officer at CU SoCal, told CUToday.info the credit union has not broken out by demographic group the effects of the pandemic on members, but emphasized the CU’s overall numbers are good.
“Looking back over the last year, I would say our members have been fortunate,” said Hunter. “The majority of our members are still in a good place financially. But that is not to say a certain portion of our membership who work in a specific field hit hard by the pandemic have not been affected disproportionately.”
What has perhaps been the biggest indicator for CU SoCal that the downturn has not driven too many members deeply into debt is loan losses have been well below expectations. As CUToday.info previously reported in a series of articles, loan losses have been well below expectations at many credit unions that had set aside healthy provisions in anticipation of red numbers.
“We approved loan payment forbearances for members that covered more than $100 million in loans at the peak. That’s sort of indicative of what could occur,” Hunter said. “But we know that many other credit unions have much higher numbers.”
Not ‘Out of the Woods Yet’
Cory McDaniel, SVP of lending, said the credit union saw forbearance demand rise early during the health crisis, and then the issues with payments leveled off, leading to much fewer loan losses and fewer forbearances than expected.
Michelle Hunter
“We saw the peak, and then we've been successful at working with members to help them recover,” said McDaniel. “We were anticipating things would get fairly bad, and I would agree that it was not as bad as we expected.”
However, McDaniel is not certain that what now looks like extra funds sitting in the ALLL account will flow back to the bottom line this year.
“It’s too early to tell, as the country and our credit union, is not out of the woods yet,” he said. “There are still many forecasts that say 2021 will be a challenging year for financial institutions. We’ll see how things play out.”
At the onset of the health crisis the credit union watched as many of its members hunkered down in a state that has been aggressive in locking down the economy.
“They took the stimulus and they saved it, and they put off plans they had in place for the year in terms of travel or new purchases…you name it,” McDaniel said. “On the other hand, you had a boom on the real estate side where members were taking advantage of low interest rates trying to save money through refinancing. I think it was very one way for a lot of members, and a completely different way for a lot of other members, just depending on the sector of the business they were in and where they were financially.”
The community charted credit union serves a wide mix of member types. Prepared to assist members in many ways during the COVID-19 crisis, in January CU SoCal added a new product to help consumers whose credit has been damaged or those with no credit or a thin file.
New Loan Product
The credit union’s new Credit Builder Loan is designed to help those with less-than-optimal credit. Unlike a standard loan, the $1,000 Credit Builder Loan does not initially disburse funds; instead, it does so only after members successfully make all 12 monthly payments. After that, the $1,000 is available for the member to spend or keep as a savings account. The credit union then reports that payment history to the nation’s credit bureaus, with the objective being to either boost scores that have fallen or to create a score for those without any history.
During January, the credit union funded 26 of the loans. McDaniel said once CU SoCal begins heavily advertising the loans, the monthly numbers should move even higher.
“That’s a good number for our first month,” said McDaniel. “Unfortunately, with this pandemic, some members are going to struggle. We wanted something for our members who have had difficulty over the course of last year, and this product is a good fit.”