By Gregg Stockdale, Principal, GS CU Consulting

Crazy? Not really! In an effort to break members away from payday lenders, my old shop, 1st Valley CU, started offering an alternative unsecured loan: $250 to $1,000 on a one-at-a-time basis with a short maturity and a low rate compared to payday lenders. These loans were based upon a relationship of a minimum term at the credit union, some kind of regular deposit, and no credit report was taken.

The loan losses were infinitesimal: In 2016, the program's third year, only $175 was charged off of a total of $190,753 in these loans. More importantly, our members were paying much less in overdraft fees. Their financial position was improved, and they had more money in their pockets.

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We noticed those members were not moving up to more traditional loans, so how do we move them to the next step? Voila! The Next Step program was conceived. Now 1st Valley offers payday loan alternative members who have a positive history with us an unsecured line of credit up to $2,000 with a lower rate than the payday alternative. Minimum advance levels were put in place, so they don’t come back every payday, and no credit report is taken. Gasp! Really? Really, and no losses to speak of ($2,749 charged off in 2016 of $717,264 in loans).

Credit unions used to lend this way, until the NCUA became obsessed with credit reports. Now they are requiring credit unions to run semi-annual reports on members. So, I ask you, isn’t that discriminatory if you take ANY action based upon that report? 

Does your credit union approve 100% of the A+ loan requests? Does it categorically deny all loans under 600? I’m hoping not!

Let’s examine this. Risk-based pricing, as presented by Rex Johnson and used by most credit unions, requires that only the rate will be set by the credit score, not the approval or denial. Does your credit union approve 100% of the A+ loan requests? Does it categorically deny all loans under 600? I’m hoping not! The credit score is not a call to action, otherwise it would be discriminatory! What the NCUA is requiring, especially if action is the result, is discriminatory. Please repossess my car just because my score dropped from 820 to 640, even though my payments are all on time … WooHoo! Free car and a wad of cash for me and my lawyer to boot! (BTW – You do disclose up front that a deterioration in credit will result in a lowering of credit card limits, right?)

You want a good indicator of an imperiled loan? Look at the deposit relationship. If direct deposit or payroll deductions stop, you’ve been warned!

Here’s a key point: Each of these members are given the opportunity of having a fully underwritten loan, with a credit report. They don’t want the credit report run! They are afraid we’ll see what’s there. Guess what? We don’t care! You are behind at Sears and your cell phone is in collections? So what? 

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Either pay off those accounts, run a credit report and obtain a lower rate, or leave them and pay the higher rate. The same is true on other loans we do run a report on.  If the delinquent or charge-off amount doesn’t impair the applicant’s ability to repay, the choice is theirs.

Member’s choice: Lower rate if you take the steps to clean up your credit report, or higher rate as-is. Non-discriminatory, and therefore, none of the regulator’s business!