The loan that helps members build credit – in reverse
Thanks to a diligent loan officer, The Partnership Federal Credit Union realized its suite of credit-building products were not meeting the needs of every member.
The $153 million-asset credit union, based in Arlington, Va., said a frequent challenge encountered with traditional secured loans is the members who most need them typically do not have the funds to make the required deposit for the loan.
Through conversations with the credit union’s Debt Solutions department, Shadiamond Harvey, a loan officer, identified the issue. Even though its existing program was generating some success – 50 percent of members who used a credit-building product experienced an average credit score increase of more than 40 points – Harvey decided more was needed. She proposed a no-money down secured loan, which ultimately became known as the CU’s Reverse Secured Loan product.
That product and the response from membership garnered The Partnership a 2018 Best Practices Award from Credit Union Journal in the lending category.
The Reverse Secured Loan was developed to help members rebuild credit, with a fixed one-year term and loan limits ranging from $600 to $6,000. The loan amount is established based on the goal and monthly payment comfort of the member. For example, if a member is only comfortable paying $50 per month, then the loan amount will be set as approximately $600. Alternatively, if a member is interested in purchasing a new vehicle and can handle a monthly payment of $300 per month, the credit union would establish a loan amount of approximately $3,500.
Unlike traditional secured loans, this program was designed so any potential borrower may qualify. There is no debt-to-income calculation, no minimum credit score, no application fee and no prohibitive deposit. Rather than the borrower receiving the loan proceeds at funding, the Reversed Secured Loan funds are disbursed to a 12-month certificate of deposit, securing the loan. Once the Reverse Secured Loan has been paid in full, the borrower gains access to the certificate previously used to guarantee the loan.
Because this product is specifically designed to improve a member’s credit score, The Partnership FCU said it “baked in” a few “unique” features. For example, it developed a pricing calculator that sets the loan rate to ensure that, with regular on-time monthly payments, at the end of the one-year term, the total interest paid on the loan is equal to the total interest earned on the certificate.
“Essentially, this creates a no-cost credit-building solution as long as the member follows through with the program,” explained VP of Operations David Martinez. “If the member closes the loan and certificate early, all interest earned on the certificate is forfeited, ultimately leaving the member with a net cost from the loan interest.”
If the loan reaches 29 days past due, the credit union will use the funds in the certificate to pay and close the loan, with any residual certificate balance transferred to the member’s savings account. Martinez said this helps ensure the product does not report 30 or more days past due, which would damage the borrower’s credit score.
At the end of the 12-month term, the borrower has successfully paid off an installment loan and has the funds in the certificate available either as the start of a savings account or a down payment.
“This is a no-money-down solution to build savings and credit, courtesy of The Partnership FCU,” Martinez said.
The Reverse Secured Loan has only been offered for a short time, but Martinez said it has been very popular. It first was offered to members who have been denied for a loan as part of a “soft rollout” spearheaded by Harvey. So far, members have “overwhelmingly” been interested in loan amounts from $600 to $1,000. These folks typically have been “B” paper to “E” paper.
“We have heard back from 55 percent of the members we offered the Reverse Secured Loan to, and 90 percent of those we have heard back from requested to move forward with it,” Martinez said.