Converting Nonprime Auto Borrowers to Stronger PFI Members, One at a Time
By Sarah Snell Cooke, Principal, Cooke Consulting Solutions
Santa Cruz Community Credit Union faces a bit of a predicament daily: on one end of the county is “hippies and Bay Area retirees,” according to President/CEO Beth Carr, and the other end is 80%-90% Latino and a sore lack of economic justice. Working to migrate the lower-income people in the community up the credit score scale, however, lifts the community overall.
Most of the low-income members of the community do have poor credit scores, Carr said, but the credit union works through that with its credit building programs, such as share-secured credit cards and lending to those with low or no credit score. SCCCU also builds relationships with local dealerships to help reach more of the low-income community, striking deals for full recourse if the dealer-recommended auto loan goes bad in which the dealer believes in the borrower so much that they guarantee to pay off the credit union loan or take back the car. And if a dealer does something unsavory, they are persona non grata.
As members improve their credit they receive rewards, for example, after paying 12 months on an auto loan and increasing their credit score, members can either lower their payments or pay the car off early.
Individual counseling is a big piece of the SCCCU program’s success. “We see a lot of people come and are afraid of loans, so they just go to the dealership. It’s typically they’re first loan…I believe this is opening doors and showing people what a different financial institution looks like.”
To mitigate risk, the credit union runs a lot of reports, Carr said, including checking credit migration quarterly. “In a three-month period, you will know if it’s going to Hell in a handbasket,” she quipped. The $122 million credit union’s delinquencies are higher than peer at 2.67% versus 0.84%, but so is its ROA, which stands at 1.29% versus peers’ 0.52%. The credit unions’ net worth took a hit early this year because it paid back a secondary capital loan from Treasury, but it’s already rebuilding and Carr expects to hit 8% by yearend.
“You constantly have to look at the risk because risk changes. You constantly have to look for patterns—and in some areas the anomalies,” Carr advised, noting an increase at one time among the B paper that led to strengthening of the underwriting. “You have to do the analysis, and then ask, ‘What’s it telling me?’…The reporting makes it not a fun thing to be doing, but it’s doing really good things for good people.”
Ironically, during the economic crisis, A and B paper is where credit unions really took the hit, Carr asserted, yet the NCUA was requiring credit unions to stop nonprime lending. In fact, an analysis of the loan delinquencies by credit band performed by Thompson Consulting & Training on SCCCU showed that D and E delinquencies were vastly lower than C paper. Amazingly, R paper (the lowest rating) delinquencies were lower B paper delinquencies! “It’s profitable, but also makes me feel good we’re helping people build credit,” Carr concluded.
SCCCU has also been the recipient of numerous grants through the Community Development Financial Institutions Fund and others, including an $800,000 grant for committing to work to finance small businesses in its low-income areas. Carr was very distraught the current administration was threatening to take access to those types of grants away, especially as the credit union is working to deepen its tracking capabilities for greater primary financial institution-status conversion.
“I’ve spend 30 years in credit unions, several over that time, but this credit union is unique,” Carr remarked. “This credit union’s heart is in the right place and now managing risk well.”