A Sound Incentive For Credit Score Success

Compounding loan rate reductions help members damaged by economic circumstances.

Directions Credit Union($561.5M, Toledo, OH) is the progeny of three credit unions from across the state of Ohio whose assets ranged from $124M to $200M that combinedvia separate mergers over a three-year period in the mid 2000s.

Now with $561 million in assets, more than 67,000 members, and 18 branches spreadacross a 200-mile footprint, Directions is forging ahead in ways its predecessors may never have dreamed possible.

The credit union has reached 0.97 loan accounts per member, according to Callahan & Associates’ Peer-to-Peer Software, compared to a peer average of 0.5.At third quarter 2012, the credit union posted a 6.7% annual loan growth with double-digit growth in newauto, 13.4%, and other unsecured, 20.7%.

Callahan & Associates | www.creditunions.com

Generated by Callahan & Associates’ Peer-to-Peer Software.

The recession forced many financial institutions to pull back from riskier segments of the market, but Directions’ redoubled its commitment to all segments of its membership. Two of the nine counties Directions serves draw most of their economic steam from some form of manufacturing. During the recession, these communities experienced inflated unemploymentin a state whose unemployment already exceeded the national average.

Almost every automotive facility within our footprint closed down for at least some amount of time and we lost a few of them permanently, says CEO Barry Shaner.

Many of Directions well-performing borrowers faltered and missed loan payments as a result of either directincome loss or from a trickledown effect that affected employees of local businesses that catered to manufacturers.

Even after a member’s situation stabilized, they still faced lasting scars on their credit reports, which limited the financing options the credit union and other lenders in the area could offer.

With the risk-based pricing program we use, there are limitations to what we can do with the interest rate, Shaner says. We didn’t feel we could make exceptions to rate without violating the integrity of that program.

However, the credit union also believed it was unfair to punish members who been historically responsible and would be responsible in the future yet were damaged by conditions out of their control.

We had members who’d made good faith efforts to make their payments and, in most cases, had caught up either with or without help from us, Shaner says. Butif they wanted to borrow anything in the future, they were going to have a pretty unfavorable rate.

To address such troubles, Directions launched a Back on Track loan program in January 2012 that is designed to help long-term, reliable members repair their credit and save money. To qualify for the loan, existing members must have a TransUnion creditscore of 670 and a positive payment history.

We wanted to make sure we were treating these members differently than those who chronically paid late, even prior to any economic issues, says Ron Patton, seniorvice president of lending.

The credit union bases the initial Back on Track interest rate on the member’s current credit score. When members make on-time payments, though, the credit union drops the rate1% annually for the first year, 2% for the second, and 3% for the third. It offers up to a 6% total reduction, which makes payments more affordable. The credit union gives members a 14-day grace period for payments. If a member does miss a payment, they can still qualify for a 1% reduction the following year if they pay all subsequent payments on time.

When members reach an annual benchmark, the credit union asks them to sign a subsequent action form so it can re-amortized the loan with a new rate and the remaining term. And to give members a better shot at making Back on Track work for them, Directions added requirements such as auto pay and financial education that it does not require with its standard loans. By keeping the process simple and streamlined, members see an obtainable goal rather than red tape.

Members get the chance to lower their monthly payments, save more money, and improve their credit score, which may allow them more opportunities to borrow with Directions Credit Union in the future, Patton says.

And because Back on Track loans adhere to the same underwriting guidelines as a standard loan product, there’s minimal additional staff training or education.

In the first eight months the credit union offered Back on Track, it granted roughly 253 loans and funded approximately $1.5 million. In total, Back on Track loans compriseroughly 5% of total consumer loans generated at Directions so far this year.

Some members use the product for unsecured loan consolation. However, a full 88% of Back on Track members secure the loan, mostly by vehicles, which helps minimize risk to the institution.

Callahan & Associates | www.creditunions.com

Generated by Callahan & Associates’ Peer-to-Peer Software.

To date, the institution has no reportable delinquency for these loans; only four loans are past due by 30 days or less.

When we first put the program together it was aimed at rewarding existing members, so we haven’t gone to the marketplace and tried to attract new members,Shaner says.

However, in the future the credit union may try to use this product as a resource to help adjust the behavior of perpetually tardy borrowers as well.

Back on Track is a reminder that cooperatives can be innovative and adaptive in their product offerings without throwing caution to the wind.

With any new product or service, you should always start by going back to your members, Shaner says. Ask what’s causing you pain and how can we help with the issue?’ That’s when we’ve seen the most success.

Want to learn more? Click on the articles in the Subscriber Package below for a deeper dive into Credit Score ER.

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