Steer Clear How Credit Unions Help Car Buyers Avoid Predatory

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Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 1
Table of Contents

Preface ................................................................................................ i
Acknowledgments ......................................................................ii
Executive Summary .................................................................. 1
Method ............................................................................................... 3
Market Analysis ............................................................................ 4
Lessons Learned ......................................................................... 7
Other Observations .................................................................22
Concluding Comments ........................................................24
Next Steps ....................................................................................25
References ...................................................................................26
About the Author ......................................................................27
Appendices
Survey: Invitation Letter ................................................. 28
Survey: Results and Verbatim Comments............. 29

This research was funded by the Annie E. Casey Foundation. We thank
them for their support but acknowledge that the ﬁndings and conclusions
presented in this report are those of the authors alone, and do not
necessarily reﬂect the opinions of the Casey Foundation.

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Preface

Founded in 1948, the primary mission of the As the philanthropic and social responsibility
Annie E. Casey Foundation is to foster public leader of America’s credit union movement, NCUF
policies, human-service reforms, and community raises funds, makes grants, manages programs,
supports that more eﬀectively meet the needs of and provides education empowering consumers
today’s vulnerable children and families. In pursuit to achieve ﬁnancial independence through not-
of this goal, the Foundation makes grants that help for-proﬁt credit unions. Donations to NCUF
states, cities, and neighborhoods fashion more enable credit unions to help their members reach
innovative, cost-eﬀective responses to these needs. life-changing goals. Through NCUF grants and
One of the Annie E. Casey Foundation’s programs, credit unions create greater access to
investment areas is expanding social and economic aﬀordable ﬁnancial services, provide widespread
security for families in poor communities. In 2006 ﬁnancial education, and empower more consumers
the Casey Foundation expanded the focus of its to save, build assets, and own homes.
work on payday lending and check-cashing to fund To further credit unions’ eﬀorts to serve
research on auto lending. The Casey Foundation consumers with low wealth and modest means,
funded a report by Remar Sutton of the Consumer NCUF in 2007 began the national expansion of
Task Force for Automotive Issues. Car Financing REAL Solutions® as its signature program. Upon
for Low and Moderate Income Consumers assessed reviewing the Annie E. Casey Foundation research
this key component of the auto ﬁnance market. on auto lending, NCUF proposed the current
In addition, the Casey Foundation funded a project, which examines a full range of credit union
documentary and discussion guide entitled Pursuit innovation in non-prime auto lending.
of the Dream: Cars & Jobs in America, to explain the This project is jointly funded by the Annie E.
importance of aﬀordable, reliable transportation Casey Foundation and NCUF. The Aspen Institute
for building the economic success of low-income helped facilitate the work under this grant.
families and their communities. This project brought to light both commonly held
Around the same time, a separate report assumptions and unclaimed innovations.
demonstrated how one credit union successfully I would like to express my appreciation to the
serves borrowers with low credit scores. University Annie E. Casey Foundation and the National
Federal Credit Union’s Analysis of Sub-Prime Credit Union Foundation for providing the funding
Lending Program presented a case study of a credit for this report. Special thanks are due to Steve
union in Austin, Texas, using a pure risk-based Delﬁn, Executive Director of NCUF, for his early
lending technique. recognition of the critical importance of this
These initiatives led to two meetings at The issue, and to Irene Skricki, the Annie E. Casey
Aspen Institute during the ﬁrst half of 2007 to Foundation’s Program Manager for Assets and
bring together parties interested in collaborating Savings, for her ongoing insights and support.
on ways to provide aﬀordable car ﬁnancing to
more low- and moderate-income borrowers. One William Myers,
of the participants was the National Credit Union Field Coach, REAL Solutions®
Foundation (NCUF). Senior Fellow, The Aspen Institute

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders i
Acknowledgments

This project would not have been possible without the credit union industry executives, service providers,
and friends of credit unions listed below, as well as the 251 credit unions that provided survey responses.
Your inventiveness, enthusiasm for service, and willingness to participate in this project is sincerely appreciated.

Shelly Berryman, Director of Member Advocacy Carolyn Hayden, Managing Partner
Schools First Federal Credit Union MGH Consulting, LLC
Santa Ana, CA Springdale, MD
Larry Blanchard, Senior Vice President—Special Projects Vicki Joyal, Field Coach—REAL Solutions®
CUNA Mutual Group Madison, WI
Madison, WI
Lois Kitsch, National Program Manager—REAL Solutions®
Tom Boos, President/CEO National Credit Union Foundation
Billings Federal Credit Union Washington, DC
Billings, MT
John Lass, Senior Vice President—Strategy & Product
Steve Bosack, Deputy Director Development
National Credit Union Foundation CUNA Mutual Group
Washington, DC Madison, WI
Paul Budvidas, Regional President Kirsten Moy, Director—Economic Opportunities Program
Walkaway USA The Aspen Institute
Irving, TX Washington, DC
Bob Falk, President/COO Jeffrey Purvis, National Impact Center & Database Manager
Purdue Employees Federal Credit Union National Credit Union Foundation
West Lafayette, IN Washington, DC
John Flynn, President/CEO Betty Saiz, Vice President—Indirect Lending
Open Lending Inc./Lenders Protection, LLC U.S. New Mexico Federal Credit Union
Austin, TX Albuquerque, NM
Brooke Gilchrist, National Marketing Manager Linda Stephens, Vice President—Consumer Lending
Enterprise Car Sales Wright-Patt Credit Union
St. Louis, MO Fairborn, OH
Barbara Goodwin, President/CEO Corey Stone, CEO
Fitchburg ME Federal Credit Union PRBC (Payment Reporting Builds Credit)
Fitchburg, MA Annapolis, MD
John Goodwin, Senior Vice President—Commercial Products Pete VanGraafeiland, Manager—Loan Retailing and Servicing
CUNA Mutual Group Coastal Federal CU
Madison, WI Raleigh, NC
Yulanda Grant, Executive Administrator Jim Wagy, Senior Vice President/Chief Operating Ofﬁcer
National Credit Union Foundation Tropical Financial CU
Washington, DC Miramar, FL
Douglas Grout, Senior Vice President—Credit Union Operations Margy Waller, Executive Director
SELCO Community Credit Union The Mobility Agenda
Eugene, OR Washington, DC
Bill Hampel, Chief Economist
Credit Union National Association
Washington, DC

ii Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Executive Summary

Despite rapidly rising gas costs, the vast unions are now struggling to make loans.
majority of Americans (88%) continue driving Used-vehicle loan growth rates have dropped
to work. A Brookings Institution Policy Brief1 considerably in the past three years after a
lamented that “fewer than 5% of workers decade of growth rates in the 10% to 20% range.
took public transportation to work.” In many The mortgage market has slowed, but there are
situations (e.g., single-parent households), plenty of needy consumers wanting to buy a car.
public transportation is not available or is As other lenders tighten their standards or exit
not practical for taking children to daycare or the non-prime market altogether, a signiﬁcant
school and arriving to work at a designated opportunity exists for credit unions to meet
time, at a location far from home. Cars can the needs of consumers whose options have
provide convenience, ﬂexibility, safety and the narrowed and may be pulled to predatory
opportunity for lower-income people to work lenders. Those credit unions with strong capital
for employers that are not located near public positions and stable balance sheets are in a solid
transportation. position to take advantage of the opportunities
Thus, an important strategy for strengthening that this market oﬀers, even during the current
economic mobility and our economy is to ensure economic slowdown.
that workers with low wages and/or low credit Credit unions’ programs and techniques for
scores are able purchase reliable, aﬀordable cars. making vehicle loans may not be working as
Non-prime auto lending represents a well as they should. Techniques such as “See
substantial nearby opportunity for not-for-proﬁt Us First” have proven to be only modestly
credit unions to expand their markets, build net successful for securing loans before members
income, and attract new loyal members by giving head to showrooms and become exposed to
them a substantially better deal. ﬁnance and insurance (F&I) salesmen. Indirect
This research report identiﬁes the lending lending has created loan volume, but at the price
techniques by which credit unions are making of having dealers represent the credit union as
large and sustainable inroads into the non-prime the member’s primary contact. Credit unions
auto market. The ﬁndings are presented as seven uniformly report that indirect lending leads to
lessons. single-service members. Auto loan recapture
programs have shown some success, but again
Market Opportunity at the price of ceding the initial relationship to
The market for non-prime used auto loans dealers and other lenders.
is large and has not historically been served
by most credit unions. This is unfortunate as Time for Change?
some borrowers are subject to excessive charges Perhaps it’s time for credit unions to change
and credit unions are missing a large and it up—to enter new markets and employ new
economically viable service opportunity. models in order to increase and strengthen their
Consider this: Over 40 million used vehicles vehicle loan portfolios.
are sold each year in the U.S.—2½ times the Some credit unions across the country are
number of new vehicles sold. Eight million successfully implementing non-prime used
(20%) of these cars are sold to low- and auto loan programs. Some are revising their
moderate-income borrowers.2 Many of these programs after a less-than-successful launch,
borrowers end up buying their cars through while others are just entering this market.
predatory lenders such “buy-here-pay-here” and Sadly, given that credit unions account for only
“auto title” outlets. 5% of non-prime used auto loans, it becomes
While vehicle lending has traditionally served obvious that the majority of credit unions are not
as credit unions’ “bread and butter,” credit serving this market.
1
Why not? Potential reasons why credit unions
Margy Waller, The Mobility Agenda, “Brookings are not serving borrowers with low credit scores
”
Institution Policy Brief. 2000. include uncertainty and unfamiliarity, downside
2
Remar Sutton, Consumer Task Force for Automotive loss potential, lack of data about this market,
Issues, “Car Financing for Low and Moderate Income board apathy or reluctance, and regulatory
”
Consumers. April 2007. concerns.

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 1
Why Serve this Market? Seven Lessons can eﬀectively steer members
away from modern loan sharks.
So why should credit unions lend The information derived from
to more low- and moderate-income credit unions and from suppliers
borrowers? Two principal reasons: that have developed products/ LESSON 4: Employ a “hard
1) It’s good business. Survey responses services to meet the needs of this close” to cement bonds
that form the basis of this report market can be summarized in the with members.
demonstrate examples of used auto following seven lessons learned:
Verify information, educate the
lending programs that have proven
borrower, and reinforce the value
successful — both in terms of providing LESSON 1: Non-prime of membership when closing
aﬀordable car ownership for non-prime
used auto lending is a every loan. This process of
borrowers and sustainable business
strategies for credit unions. ﬁnancially viable line of documentation, education, and
business. loyalty building provides a solid
2) It’s credit unions’ mission. Federal
defense against the increased
credit unions and many state credit Given the pervasiveness of delinquency that comes with
unions are chartered with a statutory lenders charging excessively moving down the credit score
mission to serve “people of modest high rates in this marketplace, scale.
means.” And even where state credit credit unions are able to price
unions do not have this mission non-prime loans for risk and
expressly written in their charter, it is eﬀort and provide members a LESSON 5: Insure borrowers
implicitly written in their history. All better deal. Price + a lender that against events out of the
credit unions in the U.S. are member- has the borrower’s best interest realm of their control.
owned, not-for-proﬁt cooperatives in mind = a better deal. Credit From credit disability and credit
established as part of a movement to unions’ non-prime used auto life to guaranteed asset protection,
provide consumers with more aﬀordable loan rates, while necessarily mechanical breakdown insurance
alternatives to the for-proﬁt banking higher than credit unions’ prime and debt cancellation, a successful
industry and to put predatory loan rates, are signiﬁcantly lower than low-score auto loan program
sharks out of business. Whether this what borrowers could receive will include protections for the
mission is written or unwritten, all credit from other lenders. borrower as well as the credit
unions to some extent are expected by union.
lawmakers, regulators, consumer groups,
foundations, the media, and the public
LESSON 2: Reduce the
to help people who are not being served underwriting gap by LESSON 6: Export risks by
by banks and who are vulnerable to transferring traditional using available loan loss
predatory lenders. character lending insurance products and
techniques into an guarantees.
Learn from Innovators automated decision- Default and collateral
Now the question is: Can credit unions making process. protection insurances exist to
viably lend to more low- and moderate- minimize the credit union’s risk
Old fashioned, high-touch
income borrowers in a safe and sound with non-prime borrowers.
character underwriting is
manner?
eﬀective for non-traditional
This project focused on ﬁnding the
answer from innovators. And it became
borrowers, but the process needs LESSON 7: Keep in touch
to be more fully automated and with borrowers by allocating
clear that with suﬃcient information and
eﬃcient in order to eﬀectively
properly designed programs, the answer resources to monitor and
compete in this marketplace.
is a resounding “Yes!” collect the loan at the ﬁrst
Our surveys and interviews revealed sign of trouble.
many examples where credit unions have LESSON 3: Get in front
developed innovative loan products and of dealers by assisting It’s critical for credit unions to
modify their existing collections
features to meet the needs of non-prime members in ﬁnding cars.
used auto loan applicants—without processes to include “proactive
Whether through an collection.” This is an aggressive
sacriﬁcing ﬁnancial safety and soundness.
agreement with a select few but not abusive practice.
All of the credit unions and suppliers
dealers, an online car buying Credit unions are able to
proﬁled in this report encourage more
service, or by sponsoring used successfully enter (or re-enter)
credit unions to engage in non-prime
car sales, this is a good way to the non-prime auto lending
used auto lending. Our sources invite
maintain direct contact with market by incorporating the
other credit unions to consider replicating
borrowers and to ensure that lessons above into loan programs
or adapting their products to serve non-
members get good deals on designed speciﬁcally to meet the
prime borrowers across America.
reliable used cars. Credit unions needs of emerging markets.
2 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Method

How Credit Unions Help Car credit unions that were doing What Do We Mean?
Buyers Avoid Predatory Loans “innovative work with low credit
For purposes of this report, the
identiﬁes credit union lending score auto borrowers.” So the
deﬁnition of:
techniques that can successfully population of interest for this
u “Low credit score” is a FICO
expand auto lending to non- project is limited to credit unions
score (Fair Isaac Corporation’s
prime borrowers. The research that are implementing innovative
credit score) below 600.
contained within this report was approaches to D and E paper auto
u “D-paper” refers to loan
derived using qualitative methods loans. Each e-mail included a
applicants with FICO scores
and a self-selected sample. It is link to the online survey.
between 550 and 599.
not statistically representative The survey instrument
u “E-paper” refers to loan
of all credit unions – but it does consisted of six multiple-
applicants with FICO scores
showcase innovative product response questions, each with a
below 550, with thin credit ﬁles
features and practices that not- set of pre-determined response
or no credit records at all.
for-proﬁt credit unions are using categories, plus an “other” ﬁeld to
u “Low-to-moderate income”
to assist members who might capture responses that didn’t ﬁt
and “low wage” refers to
not otherwise qualify for vehicle neatly into one of the categories.
households with annual incomes
loans. The six questions covered
of less than $40,000.
underwriting, car sourcing, risk
u “Emerging markets” is used
Targeted Auto Loan Survey mitigation, insurance, marketing,
in this report to refer to growing
In mid-December 2007, and partnerships. In addition,
markets that have not been fully
an invitation to take part in a ﬁnal question asked whether
served by insured depositories:
the National Credit Union the respondent’s low credit
immigrants, youth, the unbanked,
Foundation’s (NCUF’s) Auto score auto lending program
and low-income.
Loan Survey was e-mailed to the was successful, and to describe
u “Non-prime” is used to
entire group of nearly 400 credit lessons learned.
redeﬁne and emphasize the
unions that have participated By March 10, 2008, a total of
business opportunities that
in NCUF’s REAL Solutions® 251 responses had been received
exist beneath “prime” and
program to provide products and from credit unions of all asset
above “sub-prime.” Non-prime
services to low-wealth and low- sizes, ﬁelds of membership, and
has historically been lumped
to-moderate-income households. geographic service areas.
together with sub-prime—and
An identical invitation was thus depicted as a potentially
e-mailed to the entire group In-Depth Interviews dangerous market for regulated
of Credit Union Development In-depth telephone interviews lenders to enter. Non-prime
Educators (CUDEs), nearly 800 were then conducted with a today is not exclusive to “low-
graduates of NCUF’s immersion dozen credit unions representing to-moderate income” or “low-
training in cooperative principles the various innovation areas wage” borrowers. Non-prime
and credit union values. identiﬁed in survey responses. can also include middle-income
In addition, on January 18, These interviews gathered borrowers with other credit
2008, Credit Union Times additional information about issues. Given the current credit
published a full-page article their non-prime vehicle crunch and the importance
about the project as well as the loan programs. Many of the of obtaining credit to ensure
survey URL. interviewed credit unions are transportation to work sites, all
Finally, on February 10, 2008, an proﬁled in this report. non-prime consumers could also
invitation to complete the survey Finally, in-person interviews be considered “people of modest
was e-mailed to 12,000 credit were conducted with vendors means.”
union executives representing all that were frequently identiﬁed
8,400 U.S. credit unions. by survey respondents
In each instance, the invitation and interviewees to gather
from William Myers, who was information about their product/
also serving as a REAL Solutions® service oﬀerings related to non-
Field Coach, speciﬁed that prime vehicle loans.
the survey was designed for

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 3
Market Analysis

Similar to the lack of aﬀordable recent years, as more jobs have prime mortgage loan debacle
child care, lack of transportation moved to the suburbs, access to a has caused the overall mortgage
is a common problem facing low- car creates greater access to jobs. market to slow. Many homes
wage workers trying to get—and Reliable, ﬂexible transportation decreased in value and as a result,
keep—a job. Improving job allows consumers to earn more, the home equity market has
opportunities for all Americans to get better jobs, and to have diminished as well.
is crucial to strengthening our more choices in terms of housing, Real estate markets are likely
communities. Unfortunately, schools, and activities. In fact, to remain soft or to become
not owning a car is increasingly a access to a car is positively unstable in the coming years.
barrier to economic mobility. correlated with an increase in If credit unions shift now, well
According to Margy Waller, work hours and higher earnings. ” collateralized used auto lending
executive director of The Mobility Thus, an important strategy for could grow steadily.
Agenda: strengthening economic mobility The used auto loan market will
“Transportation is the second- and our economy is to ensure be “hot,” according to CUNA
largest consumer expenditure that workers with non-prime Economist Steve Rick in a May
after housing. Most American credit can purchase reliable, 2008 Credit Union Magazine
workers (88%) drive to work. aﬀordable cars. article3. And “even in a down
Public transportation—when So, what is the ﬁt between economy, people still have to buy
available—takes double the time not-for-proﬁt credit unions, cars,” reasons Barry Rose, Vice
of driving, and can be unreliable car-buying, and non-prime auto President of Insurance and Sales
and unpredictable. In 2000, lending? for Citadel Federal Credit Union’s
less than 5% of employees used indirect lending credit union
public transportation to get to Used vs. New service organization, Member
work, mainly in three large cities. First of all, a huge opportunity Financed Autos, LLC.
Transportation is key to ﬁnding exists for credit unions to
and keeping employment. In increase their market share Loans vs. Investments
and portfolio of used car loans. More important in the long
FIGURE 1 Consider that over 40 million term—and in any economic
used vehicles are sold each year climate—will be ﬁnding ways
Distribution of Credit Union Loans in the U.S.—more than twice the to permanently rebuild credit
(as of March 2008) number of new vehicles sold. At unions’ loan-to-share ratio.
year-end 2007, used auto loans Credit unions’ very name clearly
represented 12% of credit union indicates their purpose as
Home Eqity
Second Mortgage 6.9% Other
assets: $92 billion. cooperative lenders rather than
10.5% Figure 1 depicts the distribution as simple savings or investment
4.6% of credit union loans as of March clubs. Yet perhaps in part
First Mortgage 2008. Note that the credit union because credit unions have not
Adjustable New Auto loan portfolio dollar distribution tapped their potential to serve the
11.7% 15.7% of used auto (17%) versus new non-prime auto lending market,
auto (16%) loans is nearly credit unions’ loan-to-savings
identical. ratio has hovered between 70%
With an average loan amount and 80% for decades. This
of roughly $11,000, it takes means most credit unions could
considerably more used auto loans reallocate signiﬁcant funds from
First Mortgage Used Auto to match the dollar volume of investments into productive
Fixed 16.8% new auto loans. But the potential lending programs.
23.6% market of used auto loans is also
Unsecured
10% more than twice as large. Credit Union Auto Loans Skidding
Eight million used cars (20%)
Source: CUNA Economics & Statistics’ Monthly Real Estate vs. Vehicles are sold to low- and moderate-
Credit Union Estimates After many years of solid real income borrowers. Credit unions
estate loan business, the sub- captured 15% of the total U.S.

4 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
auto ﬁnance market in 2007. interest rates and accept loans of pricing, underwriting, and risk
But credit unions’ market share shorter duration. ” management.
for non-prime loans is a mere An Automotive Fleet article6
5%. Sub-prime lenders (60%) reports: Concerned Consumers
and banks (30%) dominate the “Banks are reluctant to lend, Yet today there are fewer
market.4 even as their cost of funds options available for non-
For the past three years, credit declines, because they are short prime borrowers—those whose
unions’ used auto loan growth on liquidity, are more risk averse, livelihoods could depend on a
rates have averaged less than 1.7%. demand a higher risk premium, lender who is willing to give them
(See Figure 2.) Credit unions and need to increase proﬁts to a chance. Economic uncertainty,
would certainly beneﬁt from a rebuild balance sheets. Also, high food and energy prices, and
jump start in used vehicle loans. more lenders are putting caps
on how low a FICO score they’re 4
Remar Sutton, Consumer Task Force
Potential to Accelerate willing to fund, often above the for Automotive Issues, “Car Financing
If credit unions would choose to threshold of subprime borrowers. ” for Low and Moderate Income
Yet another Automotive News7 Consumers. April 2007. 5 Donna
”
approve loans for members with Harris, “Lenders shun subprime
FICO scores below 600, their article reports that lenders
are adjusting their sub-prime ”
market, Automotive News. February
potential used auto market would 18, 2008.
immediately expand by 15%. strategies by making fewer
5
Furthermore, if credit unions underwriting exceptions, working Donna Harris, “Lenders shun
to acquire more prime borrowers ”
subprime market, Automotive News.
could ﬁnd a way to underwrite February 18, 2008.
borrowers without FICO scores, to balance the risk of non-prime
their non-prime market potential borrowers, and tightening loan- 6
Mike Antich, “Subprime Crisis
would grow by an additional 40%. to-value ratios. ”
Metastasizes to Fleet Resale Market,
Credit unions can ﬁll the Automotive Fleet. April 21, 2008.
Narrowing Options void in the non-prime market 7
Rosland Briggs Gammon, “Lenders
in ways that are ﬁnancially ”
adjust subprime strategies to ease risk,
Unfortunately, the options viable—with appropriate Automotive News. November 12, 2007.
available to consumers with non-
prime credit have narrowed—
both with respect to the number FIGURE 2
of lenders willing to approve
these loans, as well as the loan Distribution of Credit Union Loans
terms. Fallout from the sub- (as of March 2008)
prime mortgage crisis is causing
some lenders to tighten standards 25
and step back from making non-
prime loans.
In January 2008, more than 4% 20
of sub-prime auto loans were
60 or more days delinquent, 15
according to Fitch Ratings.
This is an increase of 43% from
January 2007 and the highest 10
in 19 years. A recent article in
Automotive News5 reports: 5
“The credit crunch is forcing
many would-be consumers to buy
cheaper models, or purchase a 0
’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07
used vehicle instead. If customers
with shaky credit can get loans
at all, often they must make a Source: CUNA Economics & Statistics’ Credit Union Report, Year-end 2007
bigger down payment, pay higher

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 5
FIGURE 3
Consumer Concern About
Ability to Obtain Credit
Credit has already Not sure Extremely Concerned
been affected 7% 10%
4.2% u those from Southern states; the dealer’s entire vehicle cost.
Somewhat u consumers who categorize Then the dealer adds ﬁnancing on
Concerned themselves as a race/ethnicity top. For example:
23.4% other than white. u The dealer purchases a used
GDNAuto President Michael car with 100,000 miles for $1,000.
Sheridan said the survey u The buyer is asked to put
“highlights the continuing need $1,000 down and ﬁnance $5,000.
to oﬀer lending to a number u If the buyer misses even one
of cash-strapped segments.” A payment by one day, the car is
majority of credit unions are in a repossessed.
Not concerned at all position to do so in ways that will Buy-here-pay-here dealers
55.4% beneﬁt new members as well as follow a standard operating
their credit unions. model to turn over each car ﬁve
Source: Synovate/GDNAuto Survey of Consumers, times per year.
October 2007 Predatory Competition
Many of those who compete Opportunities for Credit Unions
less access to credit have caused with credit unions in the non- A review of the non-prime
some consumers to worry about prime auto market are doing used-car loan market reveals:
their creditworthiness. borrowers no favors. The u Consumers with non-prime
An October 2007 survey8 predatory nature of “buy-here- credit scores need (and want)
commissioned by GDNAuto pay-here” and “auto title” lending to own cars in order to improve
revealed that one in three has been documented in the their economic situations;
consumers are concerned that Aspen Institute’s 2007 report, u Credit unions need and
fallout from the sub-prime Car Financing for Low and should want to make more car
mortgage crisis will aﬀect their Moderate Income Consumers. loans, especially in this slow-
ability to obtain credit for The auto title loan process growth economic environment.
“something like a car loan.” Even involves the borrower driving u There is considerable room
more disturbing: 4% of survey the vehicle to the title broker for credit unions to improve their
respondents reported that their for the purpose of pawning the market share of the vehicle loan
ability to obtain credit “has title but retaining the car. Often, market and to jumpstart used
already been aﬀected.” These the borrower must present vehicle loan growth.
survey results are illustrated in the vehicle’s key to the lender u As other lenders tighten their
Figure 3. to facilitate repossession, if standards or exit the non-prime
As would be expected, some necessary. Some states require market altogether, a signiﬁcant
groups of consumers are more the borrower to sign a power of opportunity exists for credit
likely to be worried than others. attorney form so the lender has unions to meet the needs of
Those most worried about their the right to transfer the vehicle consumers whose options have
ability to obtain credit for a car title to the lender if the borrower narrowed and may now be
loan include the very groups of defaults on the loan. In other limited to predatory lenders.
people likely to possess low or no states, the borrower sells the u Those credit unions with
credit scores: vehicle to the title lender in a strong capital positions and
u consumers 18 to 34 years of sale/leaseback arrangement. stable balance sheets are in a solid
age; Buy-here-pay-here independent position to take advantage of the
u those who are not married; used auto lots use so-called opportunities that this market
u those with children; “opportunity pricing.” In reality, oﬀers, even during the current
u consumers with annual this means they base the price economic slowdown.
household incomes of $25,000 to of the car on what the buyer This report will go beyond
$50,000; can aﬀord. Each buyer is ﬁrst temporary factors and present
8
GDNAuto is an online marketplace
asked how much he or she can ongoing strategic reasons why
that enables dealers and lenders to raise from friends and family credit unions should serve the
package car loans so they can be sold for a down payment. The down non-prime market to ensure
as asset-backed securities. payment amount usually covers long-term viability.

6 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Lessons Learned

The surveys and interviews In 2007, James Nastars, Senior resolution of failing loans.
conducted through this project Vice President of Lending The UFCU analysis revealed
reveal many examples where at University Federal Credit that just under half of sub-prime
credit unions have developed Union (UFCU) in Austin, Texas, applications are approved or
innovative loan products and presented a research paper 9 “conditioned” for the borrower.
features to meet the needs on his credit union’s two-year However, only about half of
of non-prime used auto loan experience with a pure risk- approvals are actually funded.
applicants without sacriﬁcing based lending auto program that Those that go unfunded do
ﬁnancial safety and soundness. features: so because the borrower can’t
The information derived from u loans priced according to meet or is dissatisﬁed with the
credit unions and from suppliers credit risk for those with credit loan terms, or he/she obtains
that have developed products/ scores as low as 420; ﬁnancing at the dealership.
services to meet the needs of u encouraging members to Applications that were not
this market are summarized come to the credit union to get a approved initially were typically
according to seven lessons that loan approved before they go to denied for at least one of four
contribute to a successful non- an auto dealer; primary reasons:
prime auto lending program. u loans underwritten to u excessive debt in relation to
mitigate the lender’s credit and income;
collateral risk; u lack of down payment,
LESSON 1: Non-prime used u a full understanding by the resulting in excessive loan-to-
auto lending is a ﬁnancially borrower of the loan terms and collateral value ratios;
viable line of business. his/her obligations under the loan u previous negative car credit;
agreement; u lack of a previous relationship
Credit unions frequently u a collections process that with UFCU.
approach emerging markets includes quick identiﬁcation and These reasons reinforce UFCU’s
with charity on their minds. sound underwriting criteria.
This approach is limiting and 9 Due to the higher rates
counterproductive. There James Nastars, “Analysis of Sub-
Prime Lending Program, University
” determined by risk-based lending
are most certainly ﬁnancial Federal Credit Union (as depicted in Figure 4A), UFCU
opportunities in non-prime auto
lending. After all, sub-prime
FIGURE 4A
ﬁnancial service providers charge
unseemly rates and accumulate Spread Analysis for UFCU’s Sub-Prime Auto
over-the-top proﬁts. When
credit unions adopt a charity
Loan Program
perspective, they have only a
fractional percentage of their A+ paper E paper
assets to engage. When credit Loan Interest Rate* 6.00% 17.00%
unions build a viable business
model, they have their full asset Cost of Funds 2.25% 2.25%
base to lend. Originating Costs 0.72% 1.32%
Risk-Based Lending Servicing Cost 0.32% 0.72%
One existing credit union Loan Losses 0.03% 4.79%
practice that can be used for
reaching consumers with Net Spread 2.68% 7.92%**
lower credit scores is risk-
*Assumes a 60-month term
based lending—where the loan
Note: This example uses the interest-rate environment in place as of
rate charged depends on the
12/31/06. At the time UFCU was charging 17% on E-paper loans, sub-
borrower’s credit rating in order
prime lenders were charging 25% or more. Borrowers were still receiving
to match the anticipated risk with
a much better deal at the credit union.
an appropriate interest rate.

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 7
netted more income on loans to future loan losses. 3% to 4% level. [It is] more than
low-score borrowers (“E-paper”) With suﬃcient experience, adequate to make this part of our
than to high-score borrowers credit unions will be able to portfolio productive. ”
(“A+ paper). According to adjust rate premiums to reﬂect u “We have been able to save
Nastars: their loan loss rates. the members money when they
“…the spread increases in the initially had the loan ﬁnanced
lower credit tiers in order to Risk-Based Lending elsewhere and we can reﬁnance
provide a reserve against future Success Factors that auto loan with the credit
losses. In economic downturns, it When asked about the success union. We normally can beat
is likely that sub-prime loans will of their non-prime auto lending ”
their rate by several basis points.
go bad at faster rates than prime programs, some credit union u “We ﬁnd that many times the
loans, as these borrowers do not executives took the opportunity A paper quality borrower is slow
usually have a secondary source to point out that these loans to pay more than the D or E paper
of repayment. Higher margins are can be priced to cover risk borrower, which is surprising.
needed to fund reserves against and still oﬀer a better deal for Members are so thrilled that
such events. ” members. Others indicated that the credit union gave them an
** It should also be noted that delinquencies and charge-oﬀs are opportunity to borrow—they work
this analysis took place during acceptable and manageable. Here hard at keeping their payments
a period of strong economic are their comments: current. ”
growth. These E-paper loans u “Our portfolio yield is more u “We have been able to provide
were made before the sub- than 120 basis points above our members ﬁnancing with rates that
prime mortgage crisis and peers, and more than makes up are considerably lower than they
the unprecedented rise in gas for our (above-)average charge- would receive from other ﬁnance
prices. As Nasters predicted, net oﬀs. It is a business strategy that companies. ”
spreads on E-paper loans during both fulﬁlls our social mission and u “We have had record years of
economic downturns are typically has a positive ﬁnancial impact to auto loan growth in this market
much lower than the spread that the credit union.” and have learned some things
UFCU netted in 2006. u “We ﬁnd that low-income along the way to improve it. ”
Figure 4B illustrates what would members have a great sense of u “We have seen some losses
happen if loan losses were to pride when they commit to these higher than peer on our portfolio,
double on UFCU’s E-paper loans: loans. Our delinquency rate is but generally the interest rate
Net spreads would nearly even out less than 1%. ” earnings oﬀset the losses.”
with “A+” loans. This explains the u “It has been successful with u “…we’ve been able to serve
need to charge relatively higher delinquency and charge-oﬀs better these lower score applicants at
interest rates on E-paper loans in than industry [standards]. ” reasonable rates as compared to
order to build reserves to cover u “Loss ratios continue at the their other alternatives, all while
keeping delinquencies/charge-oﬀs
in check. ”
FIGURE 4B
Given the pervasiveness
If E-paper Loan Losses Double of predatory lenders in this
marketplace, credit unions
A+ paper E paper are able to price these non-
prime loans for risk and eﬀort
Loan Interest Rate* 6.00% 17.00% and provide members a better
Cost of Funds 2.25% 2.25% deal. Even during the strongest
Originating Costs 0.72% 1.32% economies and lowest interest
rate environments, car-buyers
Servicing Cost 0.32% 0.72% captured by predatory lenders
Loan Losses 0.03% 9.58% will typically pay at least 7
percentage points more than the
Net Spread 2.68% 3.13%** federal credit unions’ statutory
interest rate cap of 18%.

8 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Credit unions, as member- underwriting criteria (other than the ‘whole picture’ when making a
owned cooperatives, have a vested credit score) are: credit decision.”
interest in helping members u “…over the years, we have
become better credit risks. u a good relationship and built a reputation—both through
history with the credit union, the membership and our indirect
Price + Lender with the u a good payment history on dealers—that we will not
borrower’s best interest in mind auto loans, discount any application solely
= Better Deal u stable employment and due to their credit score. We will
The comments of one NCUF residence, always consider ‘character’ and
Auto Loan Survey respondent u and payroll or other circumstances before making an
concisely summarized the automatic payment. underwriting decision. ”
assertion that non-prime auto (See Figure 5.) u “We underwrite based on
lending does not have to be judgment, then price the loan
considered charity work: Character Lending Success Factors based on the risk it presents. ”
“Don’t focus on just losses. Price The link between character u “The key is to evaluate each
for the risk taken, and the overall lending and successful non-prime individual on their own merit. ”
proﬁtability will be there even if auto loan programs is illustrated u “We look at each applicant’s
losses are high.” by the following comments qualiﬁcations, no matter what
from NCUF Auto Loan Survey their credit score, and try to
ﬁnd a way to make the loan
LESSON 2: Reduce the respondents:
and educate the member when
u “We do not make loans based
underwriting gap by appropriate. The credit score is
on credit score alone. We look at
transferring traditional
character lending FIGURE 5
techniques into an
automated decision-making Underwriting Criteria for Non-Prime Auto Borrowers
process.
Prior to 1995 and the advent Good payment history with the CU
of credit scoring, credit Good payment history on auto loans
unions used a form of loyalty
relationship lending they called
Strong employment
“character” lending. Credit Payroll or other automatic payment
unions historically maintained Credit scores below 620
better than industry charge-oﬀ
levels through a homogenous Lower credit scores require a higher down payment
ﬁeld of membership: knowing Higher equity ratio required
members, knowing employers Low unsecured debt
and workplace policies, and
using co-signers. Credit unions Offer share secured loan instead
do recognize the value of their Advance money down in CU savings account
own data and relationships with Length of membership requirement
members. Old fashioned, high-
touch character underwriting No credit score required
is eﬀective for non-traditional Lend on ITIN
borrowers.
Internally generated credit score
Character lending allows credit
unions to build an underwriting Other
basis that goes beyond the 0% 20 40 60 80 100%
credit score. At credit unions
that responded to NCUF’s Auto Source: National Credit Union Foundation (NCUF) Auto Loan Survey, March 2008
Loan Survey, the most important

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 9
a tool used primarily for pricing, survey respondents apply these When Income Drives Credit
not decision-making. ” techniques to low credit score Scores
This lending process is similar borrowers.
Corey Stone, CEO of Payment
to situation-speciﬁc ﬁnancial There is no doubt that credit
Reporting Builds Credit (PRBC),
education, where the loan oﬃcer scoring is a quick, useful and
presents two situations that
serves as a consumer advisor consistent tool to assess the risk
suggest income could drive credit
to the member. The member is of loan applicants. Introduced
scores—even for consumers with
educated on credit scores, debt in 1995, credit scoring quickly
identical repayment performance
ratios, auto buying and how became prevalent among
on loans:
to maintain a strong, positive lenders due to many attractive
1. The percentage of available
relationship with the credit features: It’s fast, uniform, and
revolving credit line utilization
union. Using this approach, inexpensive; simpliﬁes pricing;
is an important factor in credit
credit unions try to thoroughly encourages competition, and is
scores. A lower utilization makes
understand why the credit score not subjective or discriminatory.
for higher scores because it
was low, pay attention to positive However, there is evidence that
means you can tap lines to make
or negative movement in the credit scores can be aﬀected in
payments in the short term.
score, and evaluate what plans the part by the borrowers’ income,
Income is an important factor
member makes to improve their not just their likelihood of
that lenders use in extending
situation. This hand-holding also repayment.
and augmenting credit lines,
acts as a risk mitigation measure.
so a consumer with higher
This approach can be extended
income is more likely to have
from going over the credit report
with borrowers, to building a
budget, to car-buying workshops, Alternative Credit Bureau Proﬁle
to assisting the members in
reviewing the paperwork from a Payment Reporting Builds Credit (PRBC) www.prbc.com
dealer.
Bad marks on the credit report Thin-ﬁle consumers—those Fair Isaac recently announced
are treated seriously. Tax liens with little or no credit history— a collaboration with PRBC
and medical debt must be in make up an estimated 35 to collect, verify, and score
repayment. Some credit unions million to 50 million adults in rental and bill payment data
track the borrower’s credit score the U.S. This represents about with consumers’ approval.
twice a year. Weak records 20% of the adult population. The collaboration combines
trigger the need for higher loan- Youth, immigrants and PRBC’s veriﬁed data with
to-value ratios or a co-maker. emerging markets typically fall FICO® Expansion® Score
There are drawbacks to into this “thin-ﬁle” category. data and analytics. The
character lending: long Payment Reporting Builds companies promise to deliver
processing time, and a need for Credit (PRBC) is a service a more complete and accurate
specially trained and experienced designed to enable lenders to assessment of applicant
loan oﬃcers. This is another better evaluate these thin-ﬁle risk—one that meets Fannie
reason why loan rates need to be applicants who have little or no Mae, Freddie Mac, and HUD
higher to cover costs of lending to recent credit history. PRBC requirements. Their goals are
non-prime borrowers. acts as an “alternative credit to address several problems
Since character lending is bureau” that tracks rent and for lenders, and help qualify
based on close relationships other payments such as utilities, creditworthy customers among
(as with “friends, neighbors, phone, cable, and wireless that the large no-hit/thin-ﬁle group.
and co-workers”), it has not are not considered by the main The combination of a FICO
been practical to expand to credit bureaus. This alternative Expansion Score with PRBC
new markets. While over allows potential borrowers with bill payment data could help
80% of credit union survey little or no credit history to build uncover signs of risk that would
respondents use expanded loans a credit ﬁle. otherwise go unnoticed.
processing, less than half of the

10 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Underbanked, Not Unbankable

Thin File/No File-50M
(Traditionally non-scorable) Subrime-47.7M
(Scorable and Non-Scorable)

higher available lines and lower
utilization rates. (This is true
on a percentage basis, if not in Thin File/No File— TF/NN— Subprime
absolute dollars). prime + near prime: subprime: (Traditionally
37.5M 12.5M scorable)
2. The number of trade lines 35.2M
is an important factor in credit
scores—the more the better, up
to a point. In general, higher
income people are more likely
to receive unsolicited oﬀers of
credit. In turn, higher income
people can support more active A recent paper from the Center scores oﬀer the potential to
trade lines. For example, a for Financial Services Innovation reliably measure the credit
person who has enough income suggests that alternative credit risk represented by far more
to support a car loan plus three
active credit card accounts will Alternative Lending Solution Proﬁle
probably have a higher score than
someone who can only support Forum Credit Union / Capital Lending Strategies, LLC
a car loan and one active credit
card account even though they Assets: $1.06 Billion origination system featuring
have the same overall utilization Members: 103,789 scalability, conﬁdentiality, on-
rates. Location: Indianapolis, IN line decisioning, and 24/7/365
Contact: Steve Mundell user-friendly accessibility,
Automating Character Traits Website: www.forumcu.com backed by a leading insurance
provider.
The trick for credit unions in
Forum Credit Union has Capital Lending Strategies
non-prime auto lending will be to
developed a non-prime auto (CLS) claims to be “one of the
automate the use of its traditional
lending partnership with Capital few companies in the country”
underwriting process—character
Lending Strategies, LLC, of that can provide Collateral
traits included—to supplement
Irving, Texas. Value Indemnity coverage on
credit scores, or to evaluate and
The credit union is leveraging a loan-by-loan basis.” CLS
subscribe to bureaus that gather
Capital Lending Strategies’ says this beneﬁts both lenders
a wider spectrum of consumer
Alternative Lending Solution and borrowers. Lenders have
data.
(ALS). This product intends to an opportunity to protect their
Several credit bureaus and
increase an institution’s return assets while providing auto
scoring agencies are trying to
on assets (ROA) by creating loans to borrowers that fall
oﬀer scores to assess credit risk
incremental direct and indirect outside of their existing prime
among people with “thin ﬁles.”
auto lending opportunities. lending guidelines. Borrowers
Among the products available:
ALS combines the platform of with less than prime credit
u eBureau from Experian;
its Internet-based, automated ratings can ﬁnance their auto
u FICO Expansion Score from
loan decisioning system with purchases through ﬁnancial
Fair Isaac;
the beneﬁts of a carrier rated institutions.
u L2C from TransUnion;
“A” (excellent) by the A.M. Best CLS concludes that lenders
u Market Max from Equifax;
rating agency. like Forum Credit Union could
u RiskWise from LexisNexis.
The carrier’s Collateral Value “readily capture 30% to 60%
This is good news. All of these
Insurance product claims of their current turn-down
products are intended to devour
to substantially protect the business,” while reducing
as wide a range of data as possible
lender against ﬁnancial losses required loan loss reserves and
to make up for missing bureau
resulting from repossession. increasing ROA.
data. This includes receipts from
The result, according to Capital ALS is available with virtually
rent, layaway payments, utilities,
Lending Strategies, is an no “upfront” costs.
and online bill payment data.

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 11
purchasing, so that members
Second Look Loan Program Proﬁle can negotiate intelligently and
Capital Lending Strategies, LLC conﬁdently.
www.clstrategies.com Credit unions will sell repos
and returns of leasing from their
As reviewed in Forum Credit is funded by the credit union. parking lots. As depicted in
Union’s Forum Solutions CLS purchases CUNA Mutual Figure 6, several credit unions
Blueprint: Subprime Auto Group’s Lenders Protection have relationships with local
Lending, Capital Lending (proﬁled in this report under dealers to provide promotions
Strategies (CLS) provides Lesson 6). and referrals in exchange for
software that takes a second The dealer prepares a a ﬁxed mark-up for members.
look at loans that are declined package (proof of income, More ambitiously, a few sponsor
by the credit union as prime mileage of car) and sends it credit union owned dealerships.
loans. The average FICO to CLS to conﬁrm terms. The Car buying services
approved by this method is into credit union services the loan. through Credit Union Service
the 600s, but loan decisions Of the loans initially rejected Organizations (CUSOs) are a
are made for FICO scores of as by the credit union, CLS is able fast growing option. Here, credit
low as 500. to approve about 50%. About unions eliminate the middleman
FICO analysis is done by 25% of those approvals are by establishing a credit union
Mercer RFI. Additional data accepted and closed by the owned CUSO to work together
reviewed includes proof of dealer and the borrower. to identify quality used cars with
income and proof of residency. Competing loan-decisioning pre-arranged pricing. Existing
There are eight credit tiers in systems include FIData, Appro, programs include, but are not
the matrix built by CLS, with SWBC, CRI and Agon. limited to:
categories including debt-to- Car dealers are also building u Credit Union Direct Lending
income and loan-to-value. systems to bring this type (CUDL) (www.cudl.com)
The process ﬂows from of ﬁnance back under their u CU Fleet (marketed under the
the dealer, who sends an control. (See www.dealertrack. Central State Mortgage (CSMC)
application to the credit union. com.) umbrella of CUSOs) (www.
The credit union gets the Typically, credit unions expect cuﬂeet.com)
application. If declined, the acquisition fees of $700 to u United Buying Service (www.
full ﬁle automatically passes to $1,200 from dealers. As the ubs4cars.com)
CLS staff at the credit union. risk increases, the net yield is Motor Vehicle Certiﬁcation
If CLS approves the loan, it higher. Program (www.mvcp.com/intro.
php)
individuals than can be assessed ﬁnding cars. This can begin as an u Cars for Members (www.
with traditional data. extension of ﬁnancial counseling. carsale.com)
Credit unions have used non- According to one NCUF Auto u Auto Resource Center (www.
traditional credit criteria in the Loan Survey respondent, “We do cucompanies.net/pages/auto_
past, and continue to do so. But, review purchase agreements and about_us.asp)
these systems are not compatible will help negotiate sales price, u Autoland (www.autoland.
with the time frames required to especially with dealers that have com)
be competitive, especially with excessive markups which impact Another NCUF Auto Loan
indirect lending. loan-to-value.” Survey respondent wrote,
Passive approaches include “We recently partnered with
oﬀering a Carquotes website Enterprise and introduced a
LESSON 3: Get in front (www.carquotes.com or www. program called SmartBuys. The
of dealers by assisting pricehub.com). Credit unions program is speciﬁcally targeted
members in ﬁnding cars. may assist members with online to low- and middle-income
One way to recapture or price assessment of the cars they members to assist them with
maintain direct contact with are trading and the cars they are locating a reliable and economical
members is to assist them in car.”

12 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Indirect Lending FIGURE 6 loans account for
80% of net auto loan
Indirect lending
generates an almost Types of Assistence Offered growth.
to Help Members Find a Car Indirect lending
religious passion
does not get in front
among credit unions
of dealers – but it does
on both sides of the Agreement with local dealer put credit unions in a
issue. Some believe
position to get in front
that credit unions have Online car buying of borrowers they
to do indirect lending
otherwise would not
to make enough loans
to survive. Others
Car sale through rental agency have an opportunity
to reach with auto
believe that letting
someone come CU owns a used car lot loans. Indirect
lending dealerships
between the credit
union and the member CU owns a dealership in eﬀect become
mini-branches, which
is contrary to credit
unions’ mission. 0% 10 20 30 40 50 60% increases the credit
union sales force.
One point is
Source: National Credit Union Foundation (NCUF) However, when new
undeniable: Indirect
Auto Loan Survey, March 2008 members go to dealers
lending accounts
ﬁrst, the credit union
for 40% of credit
is a nearly invisible
unions’ auto lending.
wholesale lender.
According to CUNA credit unions participate in
Converting indirect borrowers to
Mutual Group, about 63% of indirect lending programs. These
full service members is not easy.

Credit Union Finance Company Proﬁle
SELCO Community Credit Union
Assets: $784 Million Lending Outlet has attracted 34% of SELCO’s regular
Members: 77,324 a new type of member for membership.
Location: Eugene, OR SELCO. About one-third of u 39% have a share and loan
Contact: Douglas Grout the loans derived from this only.
Website: www.selco.org company are in the D and E u 43% have a checking
category. Interestingly, the account.
In June 2006, SELCO business has also attracted u 71% are homeowners.
Community Credit Union about $1.5 million in platinum u Average deposit balance:
established a separate ﬁnance paper—borrowers with good $853
company called The Lending credit but who may not have u Average loan balance:
Outlet to expand the credit a trusting relationship with $12,625 (10.95% weighted
union’s target market and steer mainstream ﬁnancial institutions. average rate)
borrowers away from predatory u 2007 loan production: $7.5
lenders and predatory loans. The Lending Outlet million in loans; 627 new
Although The Lending Outlet (ﬁnance company of SELCO members; $54,110 in loan
looks like a ﬁnance company Community Credit Union) losses
location and has a different u 728 members u Average number of accounts
feel from the credit union, the u 48% of members generated per member: 2.77
business offers the same rates from The Lending Outlet have u Average annual net income
as the credit union. household incomes below per member: $170
The look and feel of The $40,000. This compares to

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 13
CUSO Proﬁle
Credit Union Direct Lending (CUDL) www.cudl.com
Credit Union Direct Lending simplifying the buying process vehicle is lost or stolen, CUDL
(CUDL) was established to and getting members the best GAP ensures that both the
provide point-of-purchase price when they buy a vehicle. member’s investment and the
lending for the credit union The AutoSMART program credit union’s investment are
community. CUDL has grown also allows for co-branding protected.
to become the nation’s largest opportunities. CUDL Financial Services
point-of-sale and indirect Other CUDL services include is a sub-prime program to
lending network owned by back ofﬁce indirect lending, auto dealerships, accessible
credit unions. Today, the web-based ASP solutions, through the CUDL platform.
CUDL network of credit unions and insurance for lost or stolen Members and non-members
and dealers serves nearly 18 vehicles. who do not qualify for credit
million credit union members CUDL GAP™ offers a union ﬁnancing may qualify for
nationwide. guaranteed auto protection CUDL Financial Services. This
CUDL’s most popular product, which can be made program promotes competitive
product is the AutoSMART available to credit union ﬁnancing with the same speed
program, a web-based interface members at the auto dealership and convenience of the CUDL
designed to increase credit or directly at their credit system.
union member satisfaction by union. When a member’s

Rental Car Sales Program Proﬁle
Schools First Federal Credit Union/
Enterprise Car Sales
Assets: $7.5 Billion credit union has dedicated one days, Enterprise guarantees car
Members: 376,789 team member to “keeping the buyers’ continued satisfaction
Location: Santa Ana, CA hype,” stocking brochures, and by including a 12-month /
Contact: Shelly Berryman communicating the story. 12,000-mile limited power
Website: www.schoolsﬁrstfcu. The SmartBuys program train warranty and one year of
org allows the credit union to keep roadside assistance.
three vehicles on the property—
SmartBuys priced $1,000 to $1,500 below TRIP—Timely Repayment
Partnerships are another way Kelley Blue Book value. (For Incentive Program
for credit unions to expand their example, a recent selection of Another innovation for
offerings to members. Case in cars included a 2007 Chevy non-prime borrowers is a
point: the “SmartBuys” program Cobalt at $9,999, a 2007 program called TRIP (Timely
that Schools First Federal Chrysler Sebring at $13,999, Repayment Incentive Program).
Credit Union has developed and a 2007 Dodge Grand TRIP allows all non-prime
in partnership with Enterprise Caravan at $15,499.) borrowers to improve the rate
Car Sales. In a six-month pilot The program is speciﬁcally on their loan by .5% after 12
at one branch, the SmartBuys targeted at low- and middle- on-time payments. This is
program provided 12 members income members to assist an opportunity for borrowers
with access to “low cost, them with locating reliable and to automatically adjust their
reliable vehicles.” economical cars. Enterprise loan to the best rate that was
Based on its success, works to ensure the quality of available at the time their loan
Schools First Federal Credit each car by ﬁrst conducting was originated (assuming a
Union (formerly Orange County a 109-point inspection by an maximum risk up-charge of 50
Teachers FCU) is planning ASE-certiﬁed technician. Each basis points at origination). The
to roll out the program in two vehicle comes with a seven- earned interest rate reduction
additional branches this year. day repurchase agreement allows a greater percentage of
In this partnership, Enterprise so that it can be returned for each payment to go toward the
will provide brochures and any reason—no questions principal.
marketing materials, while the asked. After the ﬁrst seven

14 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Credit Union Partner Proﬁle Regional Differences
There is an astounding
Enterprise Car Sales www.cuautodeals.com/ variation in regional auto
www.enterprisecarsales.com markets, based on the amount
Enterprise Car Sales has for members to view. of market share credit unions
partnered with credit unions Enterprise offers haggle-free control. Where credit unions
for decades, providing used pricing and sells 120 makes are bit players, credit unions pay
vehicles and guaranteeing and models of vehicles priced dealers for referrals. In areas
that credit unions will get the below Kelley Blue Book value. where credit unions dominate the
ﬁnancing. Today, Enterprise Vehicles from Enterprise are market, dealers pay credit unions
works with more than 1,000 typically one to three years a loan loss reserve. (One credit
credit unions across the U.S. old. Each vehicle undergoes union calls this their “acquisition
to develop a successful plan a 109-point inspection before fee: $495 from dealers to reserve
to help drive credit union auto being listed as one of nearly for loan losses”).
loan volume. 8,000 cars available for sale It’s as if in some areas a
Partnerships with Enterprise online and in 178 car sale customer pays for goods at Wal-
are developed on a case-by- branches throughout the Mart and, and in another area,
case basis. They usually focus country. Each vehicle comes Wal-Mart pays the customer
on marketing strategies that with a limited power train to take the goods. Similarly, in
range from providing basic warranty, roadside assistance, some regions, an 80% loan-to-
marketing brochures to larger and a seven-day repurchase value (LTV) ratio is standard,
promotional events where agreement. while in others, credit unions are
Enterprise places cars on-site not getting loans unless they go
to 125% LTV.
Is indirect lending worth the
Many credit unions accept fraud exposure. However, credit price? Credit unions have found
indirect borrowers as single unions usually do not have a success on both sides of this line
service members. commercial loan relationship in the sand.
Remar Sutton, with the passion with the dealer.
of a converted car dealer, opined
that credit unions will never Saver’s Loan Program Proﬁle
be able to capture the ethical
side of this ﬁnancing market in Fitchburg ME Federal Credit Union
partnership with dealers. CUNA
Mutual Group ﬁgures show that Assets: $25 Million 10% of the loan payment into
credit union members are 37% Members: 3,174 a dividend-bearing account,
more likely to repay than those Location: Fitchburg, MA which is secured until the loan
who become members via the Contact: Barbara Goodwin is paid. The loan is pledged
indirect route. Website: www. into the savings account and
Indirect lending necessitates ﬁtchburgmefcu.com the savings earns dividends at
quick decisions and funding—10 a low rate (e.g., 0.5%).
minute turnaround. It thereby Fitchburg ME Federal Credit Loans are for a 10-year
increases reliance on fully Union has developed a savings maximum term with a 90%
automated lending. program for low credit score loan-to-value ratio. Usually a
The longstanding bank model borrowers or borrowers who ﬁve-year loan will be paid back
for indirect lending was to can’t get a co-signer. This in four or 4-1/2 years.
underwrite the dealership includes young people without Fitchburg ME FCU also
through a ﬂoor plan commercial credit. participates in the Enterprise
loan. The commercial banking In most cases, the vehicle Car Sales program proﬁled
relationship with the dealer purchased is a used car. under Lesson 3 in this report.
provided some recourse and The savings program allocates
discipline to lessen indirect

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 15
LESSON 4: Employ a “hard collected, including a picture of ﬁnancially and for the future….
close” to cement bonds the vehicle. We commit that if they pay
This documentation and us, they can depend on future
with members.
education process provides auto loans as long as we can see
About half of responding credit
a solid defense against the positive ﬁnancial management
unions found a “hard close” to be
increased delinquency that comes eﬀorts. They see us as a partner in
an eﬀective way to improve loan
with moving down the credit their ﬁnancial success. ”
repayment performance. Since
score scale. u “Close the loan hard at time
dealers come between members
of closing. Also we tell member[s]
and the credit union during the
sales process, a hard close allows
“Hard Close” Success Factors that building credit with us will
Several NCUF Auto Loan help them for future needs.”
the credit union to cement bonds
with members and get them Survey respondents mentioned
started on the right foot. the signiﬁcance of hard-closing
To employ a hard close: When the loan as a key to the success of LESSON 5: Insure borrowers
members are ready to sign for a their program: against events out of the
loan, take some extra time to: u “A strong loan closing is very realm of their control.
u Thank them for their important. ” Ninety percent of credit union
business; u “A need to gain a ﬁrm respondents to the NCUF Auto
u Verify information in their commitment from the borrower Loan Survey oﬀer member-paid
loan application; at closing (i.e., the hard close) [is a insurance coverage(s).
u Review and conﬁrm that the lesson we learned]. ” Credit disability and credit
members understand loan terms u “We always educate our life are the protections most
and consequences such as the members about credit scores and commonly oﬀered, followed
monthly payment amount, date budgeting. Lesson: Closing the by guaranteed asset protection
due, insurance requirement, late loan properly is a must. ” (GAP) loan deﬁciency or residual
fee and penalties; u “The pre-close counseling value insurance, and mechanical
u Reinforce the value of includes awareness of what breakdown insurance (MBI) or
membership by explaining that the ﬁnancing means to them extended warranties. In addition,
the credit some credit unions oﬀer
union is willing debt cancellation products
to assist if/ FIGURE 7 to cover events such as
when there are divorce, injury, and/or loss
problems so Insurance Coverages for Non-Prime of job. (See Figure 7.)
the members Auto Lending These coverages
should stay in particularly beneﬁt lower-
contact with the Credit disability protection income borrowers who are
credit union; less likely to be covered
u Cross-sell Credit life protection by other private insurance
appropriate Guaranteed asset protection policies.
products such
as direct deposit Mechanical breakdown Insurance Success
and automatic
Debt cancellation
Factors
payment. Some credit union
Credit union Assure insurance executives suggested that
representatives one key to the success of
witness the Walkaway
their non-prime auto loan
signature, 0% 20 40 60 80 100% programs is borrower
and detailed insurance:
information Source: National Credit Union Foundation (NCUF) Auto Loan
about the Survey, March 2008
collateral is

16 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
FIGURE 8
Primary Causes of Default Among Loan Financing
Programs with a Loan Component

Lost job
Cannot pay for repairs
Cannot make ends meet
u “Get them to take mechanical
breakdown insurance because Car failure
they cannot aﬀord the repairs
later.
”
Relocation
u “GAP insurance is a deﬁnite
[to have] these days. ”
Accident
u “We push for … acceptance
Injury or illness
of disability, GAP and life
insurance.… ” 0% 10 20 30 40 50 60 70 80%
u “We also implemented [the]
same loan payment with or Source: National Credit Union Foundation (NCUF) Auto Loan Survey, March 2008
without insurance. We simply
extend the term of the loan
to cover the cost of insurance
Concept in Motion
protection. So far, members don’t
mind the extra payments as long Walkaway Protection www.walkawayprotection.com
as the payment ﬁts their monthly
cash ﬂow/budgets. ” U.S. credit unions now have u loss of driver’s license due to
According to a recent survey access to programs that medical impairment;
of low-income car ownership allow drivers to walk away u self-employed personal
programs, the most prevalent from their lease or loan when bankruptcy;
causes for non-prime borrower certain circumstances occur. u international employment
defaults are losing a job, budget One such package is offered transfer.
constraints, and car failure. (See by Walkaway, a Canadian An elite Walkaway program
Figure 8.) company that now serves U.S. provides more protection by
All of the write-oﬀs identiﬁed credit unions. covering:
in Figure 8 (except for the third A standard Walkaway u temporary lay-off from a full-
related to budget constraints) are program covers: time, non-seasonal job;
losses that could be insured with u involuntary unemployment; u mental health disability;
the aforementioned products. u physical disability; u accidental death.
Credit unions wishing to engage
in this higher-risk proﬁle market Credit Union Insurance Proﬁle
can build a combined package
of insurances that make the net Tropical Financial Credit Union
income of these non-prime auto Assets: $721 Million disabled.
loans more predictable. These Members: 66,136 Each insurance policy adds
coverages primarily protect Location: Miramar, FL approximately $20 to $30 to
the member, and secondarily Contact: Jim Wagy the monthly payment of the
the credit union. Nonetheless, Website: www.tropicalfcu.org loan.
CUNA Mutual Group has found The optional insurance has
that the more insurance products To protect against losses, been widely used by TFCU’s
on the loan, the better the loan Tropical Financial Credit Union members since 1991. About
performs. (TFCU) offers two forms of 80% of TFCU’s auto loans
There is an opportunity for insurance—credit life and credit include either credit life or
credit unions to provide a disability—for the majority of credit disability.
package of ﬁnance and insurance the loans in its $220 million The credit union has
that oﬀers each borrower a car portfolio. Underwritten by found that credit-challenged
with the assurance that payments Minnesota Life, the insurance borrowers generally like the
are only required when the car pays in full with no fees or product, because they don’t
works and the member has a job. additional costs if the borrower usually have much insurance.
passes away or becomes

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 17
Preferred Dealer Proﬁle
Coastal Federal Credit Union / CUDL
Assets: $1.8 Billion approximately 500 dealers in its to build a connection with or loyalty
Members: 170,000 operating area alone. Realizing that to the credit union. To mitigate
Location: Raleigh, NC 500 dealers may be overwhelming losses, CFCU insured itself with
Contact: Peter VanGraafeiland for members, and that the majority Lenders Protection from CUNA
Website: www.coastalfcu.org of CFCU’s loans come from a small Mutual Group. (See the Lenders
pool of dealers, the credit union Protection Proﬁle.)
At Coastal Federal Credit Union developed a “preferred dealer” Lenders Protection charges a
(CFCU), four out of ﬁve auto loans relationship with approximately 30 technology fee for the service (in
come through indirect channels. dealers in the area. the range of 2% to 3% of the total
So developing solid partnerships The preferred dealer arrangement amount ﬁnanced). However, CFCU
and offsetting risks from borrowers allows the dealership to upload a believes the fee is well worth the
who may never visit a credit union ﬂyer of deals and offers directly offset in risk. CFCU originally used
ofﬁce are high priorities. onto CFCU’s website, building a Lenders Protection for loans with
In 2003, CFCU became the closer relationship between the a credit score of 640 and below.
ﬁrst credit union in North Carolina credit union, members, and the But starting in February 2008,
to use the Credit Union Direct dealership. the credit union decided to have
Lending (CUDL) programs proﬁled Protection against loss is Lenders Protection cover its entire
under Lesson 3 in this report. especially critical for indirect loans, portfolio.
CFCU estimates that there are as indirect borrowers are less likely

Lenders Protection Proﬁle
Lenders Protection www.cunamutual.com
Lenders Protection is a web-based loan ofﬁcer the appropriate deal submitting a claim.)
technology from CUNA Mutual structure, including the suggested Lenders Protection also pays up
Group that delivers instant decisions contract interest rate and loan term. to 60 days interest to give the credit
and loan alternatives to members. This contract interest rate enables union time to repossess and sell the
Lenders Protection offers the credit union to recover the cost vehicle.
72-month loan terms and 125% of the program and build a reserve The intent is for credit unions to
loan-to-value, plus rebate-able to cover uninsured risks. manage and pool the risks of default
add-ons. Coverage applies both The lender pays CUNA Mutual on direct and indirect loans.
to current model year vehicles and Group an upfront fee, which is The insurance costs a credit
models up to seven years old. recovered as the loan is repaid. union between 2% and 22% of the
To ensure that each borrower Should the borrower pay off early, a loan value, depending on the risk
receives a competitive interest rate, partial premium refund is available. evaluation.
the cost of insurance is calculated In cases of default, Lenders About 60% of premiums are paid
based on the risk each individual Protection pays the difference out to cover losses. The average
borrower presents—not on a blanket between the loan balance and the loss on a non-prime auto loan is
rate across all eligible loans. greater of: $7,000.
Loan decisions with Lenders (a) 80% of the wholesale trade Competitors in this market
Protection are made through value of the vehicle at the time of include Ameriquest, Capital One,
an Internet-based insurance default, or and Triad at Ford Motor Company
decision system. If the applicant (b) the amount for which the credit (which approves FICO scores from
meets the insurance criteria, the union has sold the repossessed car. 525-580).
system communicates back to the (Repossession is a prerequisite for

18 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
LESSON 6: Export risks by insurances exist to reduce the
using available loan loss credit union’s risk.
A completely diﬀerent approach
insurance products and
is envisioned by the corporate
guarantees. credit union network with
Diﬀerent sets of coverages Charlie Mac and its CARPooL
protect the credit union directly. program. Such loan sale and
Default and collateral protection

Non-Proﬁt Proﬁle
Opportunity Cars www.opportunitycars.com
Opportunity Cars is a network insured depository account. Opportunity Cars organizations
of more than 150 non-proﬁt u If Opportunity Cars offers offer an array of additional
organizations dedicated to tiers of service, a credit union services to help ensure their
increasing private automobile could begin by ﬁnancing the top clients’ success. At the start
ownership for low-wage tiers and move down as it gains of the relationship, they either
working families to support their experience and conﬁdence. directly deliver or make referrals
ability to ﬁnd and retain quality Opportunity Cars organizations to partner organizations that
employment, and to improve help approximately 10,000 deliver support services
their overall well being. low-income families with their including ﬁnancial counseling,
Several credit unions have transportation needs each year assistance with insurance, and
partnered with Opportunity Cars by using one or more of the car maintenance workshops.
organizations to export risks following approaches: Pre-qualifying could include
and receive certain guarantees. u Providing a car; requiring employment or a
Potential partnership u Providing a low cost loan; commitment for employment,
conﬁgurations are outlined here: u Matching consumers’ savings possession of a valid driver’s
u Opportunity Cars can offer for car purchases or down license, or review of the driving
a partial guarantee to a credit payments. record. If a car buyer is receiving
union in the event of a deﬁciency When programs are providing a car loan, the program may help
after repossession. cars directly to families, some ensure the borrower receives
u Opportunity Cars could of the cars are provided at no an affordable and reliable car
set a guaranteed earnings rate or low cost. Others are sold by arranging for the car to be
for a mutual fund type pool using a tiered pricing model inspected, determining the fair
of loans, based on its write- and supported by technical market value, checking the car
off experience. (This means assistance. About half of history, or providing assistance
Opportunity Cars would “proﬁt” Opportunity Cars programs have with online auto shopping.
if defaults were lower.) ﬁnancial institution partners. After the sale, Opportunity
u A credit union could provide Each program is different. Cars organizations may provide
ﬂoor plan inventory ﬁnance as Many rely on donated cars, but other services including ongoing
working capital (i.e., the credit some programs purchase cars repair and maintenance training,
union underwrites Opportunity from dealers, at auctions, or a warranty or service agreement,
Cars). through government ﬂeets. and in some cases, an escrow
u A credit union could ﬁnance Organizational funding comes for repairs in the ﬁnancing.
ﬁxed assets of Opportunity Cars. from different sources including The average Opportunity Cars
u A credit union could set a Job Access and Reverse loan is $3,200 for a 24-month
binding agreement to ﬁnance Commute, Temporary Assistance term with an 8% interest
a second car upon timely for Needy Families, Community rate. The down payment is
repayment of the Opportunity Service Block Grants, the Ofﬁce accomplished through a $2,400
Cars loan. of Refugee Resettlement, private grant. The delinquency rate is
u A savings component could foundations, and revenues 7%.
be added to the loan to build an generated through car sales.

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 19
participation programs enable Across the board, credit early collections, and
credit unions to sell auto loans to unions recognize the beneﬁts of creating/maintaining open
a credit union-focused secondary modifying the collection process communications with non-prime
market investor, while retaining when originating non-prime borrowers:
the servicing. auto loans. Loans based on u “[We utilize] continuous
Another approach is the lower credit scores will receive monitoring of lower tier
National Federation of attention more quickly when delinquency performance and
Community Development Credit collecting (e.g., on days 1 to 15) open communication with our
Union’s PRIDE program, which and repossessing (e.g., on days 30 collections group to ensure that
will absorb 25% of the losses to 60). (See Figure 9.) credit granting guidelines are
when participating credit unions reﬂective of loss experiences. ”
engage in aggressive outreach The practice of “proactive u “[Our program] has been
lending. collection” is aggressive, but it’s successful because we monitor it
not abusive. on a regular basis. ”
LESSON 7: Keep in u “We also feel that collection

touch with borrowers by
Collections Success Factors calls need to be done immediately
The following comments from (within seven days from
allocating resources to delinquent account) instead of
credit union executives help
monitor and collect loans waiting to call them after 30 days
to illustrate the importance
at the ﬁrst sign of trouble. of continual monitoring, past due. ”
u “We always try to work WITH
FIGURE 9 the member at all levels, and by
keeping in touch, we have been
Risk Mitigation Techniques for Non-Prime Auto Lending able to keep our delinquencies
down. But the most important
thing is to keep at it before it
Limit loan to Blue Book value becomes too big to work anything
out.”
Set max. loan duration based on age of car u “Good tracking and
monitoring is the key to a
Verify the information provided
successful program. ”
Schedule payment when member gets paid u “You have to get in touch
with [delinquent non-prime
Require min. time at job/in ﬁeld/at residence borrowers], sometimes at one day
past due. ”
Five-day collection call u “We work with members for
Set portfolio loan limits payments when issues create late
payment. Repossessions beneﬁt
Make sure they carry member-elect insurances no one. Collections department
personnel speak to them. We
Proactive collateral recovery system tell them about the credit union
Regularly analyze members' credit scores diﬀerence and that we are taking
a chance on them that other
Repossess the vehicle at 30 days late ﬁnancial institutions would not
take. ”
Forced savings for repairs u “Our institution oﬀers a
0% 10 20 30 40 50 60 70 80% delinquent borrower a $25 pre-
paid card for visiting the collector
in person. The focus is on healing
Source: National Credit Union Foundation (NCUF) Auto Loan Survey, March 2008 the breach and restoring member
loyalty and good will. ”

20 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Effective Collections
u Billings Federal Credit Union
- Look for ways to say “Yes”
- 25% of portfolio is C&D borrowers (<620)

u Two Simple Collection Steps:
- #1 Call delinquent accounts on Day 1;
- #2 When accounts become delinquent, take action quickly!

Direct Lender Proﬁle
Billings Federal Credit Union
Assets: $64 Million come up with a down payment.
Members: 8,034 As a result, Billings FCU’s
Location: Billings, MT riskiest loans have, on average,
Contact: Tom Boos an 80% loan-to-value ratio.
Website: www.billingsfcu.org Limiting the loan-to-value
ratio helps mitigate losses.
Lending Overview But losses do occur, and
u $23 million portfolio they can cause discomfort for
u 2,471 auto loans on the credit union boards. An early
books strategy for engaging the board
u Focuses on direct loans is to clearly communicate the
(88% of the portfolio) reward for taking on additional
risk. Although Billings FCU’s
With 15% of car loans in the charge-offs are higher than the
“D” category, Billings Federal norm (0.6% in 2007), the net
Credit Union has ﬁgured out yield – 110 basis points above
how to serve riskier borrowers peer group average – more
through relationship building. than makes up for these higher
By focusing on the direct charge-offs.
lending channel, relationship If a loan defaults, dedicated
building and loyalty to the and focused collections and
credit union’s mission begins follow-up tactics are necessary.
in the initial interview process. Billings FCU pays much more
The message for high-risk attention to borrowers with low
borrowers at Billings FCU is credit scores. This improves
that “we’re willing to help and their ability to keep the loans
work with you, but this requires current. For “C” and “D” paper,
a commitment.” the credit union’s collection
Part of this commitment is department will call on day one
ﬁnancial. When pressed, the of the delinquency, whereas it
credit union has found that will let “A” and “B” borrowers
most people will be able to slide for 15 days.

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 21
Other Observations

Marketing Practices for looks like a ﬁnance company opportunity to meet the member
Non-Prime Used Auto Loans location, with a name diﬀerent with a counter-oﬀer; a counter-
from the credit union. This oﬀer can be developed for every
Many of the successful ideas concept has also been successful situation. No matter what the
revealed in the NCUF Auto Loan in reaching non-members with ﬁnancial situation of the member,
Survey are simple revisions in payday lending and check- there is a ﬁnancial step in the
the way products are presented cashing services. positive direction right in front
to members. The ideas reviewed 7. First Time Auto Loans of them. Opportunities Credit
in this section are generally are loans to 16-year olds with Union in Burlington, Vermont,
product features and marketing a parent/guardian co-signer … uses a tag line, “We don’t say no,
approaches, rather than full or in another case, for military we say ‘when.’” That statement
lending products and processes. members only. expresses their intent to turn loan
Credit unions should consider 8. Second Car Loan is a clever denials into opportunities for
utilizing the following marketing follow up. Recent reports from both the credit union and non-
approaches when designing and the payday lending industry prime members.
promoting a non-prime auto loan indicate that customers only stay
program:
1. Lower Interest Rates, and
with them for two years because a Accepting Market
life event (e.g., new job, marriage, Segmentation, Not
interest rates tied to additional relocation) moves them to a
factors besides credit scores, are Discrimination
diﬀerent set of services. Credit
constant credit union themes. unions, by engaging in the non- Unfortunately, some credit
2. “See Us First” is a popular prime market, can assure that the unions hesitate to promote
attempt to get to members next set of services is at a credit non-prime vehicle loans to the
before the ﬁnance and insurance union by putting in place “step-up distinct market segments that
salesman does (at dealers without products” to ensure a continuous those loans are designed to serve.
credit union partnerships). Sadly, service pathway for migrating For example, as one respondent
even when members leave the members. explained, “When [we] market,
credit union with a car purchase 9. Saver’s Loan puts 10% of we market to all our members.”
check in hand, half of approved each payment into a dividend- Verbatim comments from credit
borrowers are recaptured by a bearing account, which is secured union survey respondents reveal
dealer. until the loan is paid. This can that signiﬁcant confusion exists
3. Auto Recapture guarantees be marketed as a repair reserve between market segmentation
that the credit union will or a down payment for the next and discrimination. Some credit
reﬁnance loans from other car. Hybrid, linked, and bundled unions believe that adherence to
institutions to a lower interest products build the cross-sell into democratic principles means that
rate, often without a credit the product. they must treat all members the
analysis, as long as members have 10. Marketing to Non-prime same—with no special deals, and
paid “as agreed” for some period Borrowers is handled through no targeted approaches.
of time. Some credit unions pay store branches, through dealer To suggest a non-controversial
members a $50 premium for referrals, by staﬃng a desk at counter-example, a credit union
reﬁnancing. the dealership, and of course, by wouldn’t want to promote
4. Timely Payment Reward word of mouth referrals from mortgage loans to middle school
automatically lowers the interest other members. students. When you want to hit
rate when a member pays on- 11. Premium Promotions have a target, you have to aim. When
time for 12 to 24 months. been successful. A free gas card you want to reach a person, you
5. Basic Transportation and a free mechanical inspection have to talk to them in ways
Program is a bundle of services are two examples. they ﬁnd compelling. This
(used car, small loan, insurance 12. Say “No” Better. The discriminatory mindset must
premium ﬁnanced) for car adverse action process itself does change and evolve before a credit
owners with modest means. not do justice to the not-for- union will be able to successfully
6. Re-branding is an ambitious proﬁt cooperative credit union serve untapped and underserved
approach to build a branch that mission. Each loan denial is an consumers.

22 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
That said, it will take time for research and market testing with of NCUF Auto Loan Survey
some to change their institutional innovative companies seeking to respondents work with
culture. One survey respondent successfully serve underserved BALANCE, Accell, or a consumer
lamented, “As a traditional markets. Weiser notes, “If we credit counseling agency.
‘A-paper’ shop, we’ve found it had to put everything we have
diﬃcult to change the mindset learned into a nutshell, we would Potential Partnerships
of the loan decision-makers.” say that the most important Less than a third of survey
Attention has to be invested in overarching respondents report more
justifying the focus on emerging success substantial and far-reaching
markets and on training staﬀ and factor is to partnerships. The most obvious
the board on how to respond. create value opportunity for partnerships
Along with any opportunity for the is with non-
comes risk. In order to minimize community proﬁt auto
the risk, successful credit at the same programs. The
unions adapt their products time as vendor proﬁle
and practices to the market. In you create of Opportunity
addition, successful credit unions value for Cars under
use targeted marketing tactics to business.” Lesson 6 in this
reach this segment of members In order report suggests
and potential members with to create that mutual value, some avenues
information about new loan Weiser found that more than to explore…
programs designed especially for two-thirds of the companies perhaps just to
them. that had successfully tapped learn how this
Even as credit unions use underserved markets had market works.
risk-based pricing, non-prime “formed a partnership with an Interestingly, there was no
borrowers have access to organization that brought new mention in the surveys of peer-
relatively better deals than prime knowledge, skills, resources, to-peer (P2P) lenders (e.g., Zopa
borrowers could receive at credit or connections to their eﬀort. and Prosper) which present a
unions when compared to their Frequently, these organizations largely unanswered challenge
alternatives. Case in point: were drawn to working with the to credit unions. Perhaps there
u During the interest rate companies because they were is room in the marketplace for
environment of late 2006 / early seeking to create community a “mutual fund” model for P2P
2007, non-prime borrowers had beneﬁts rather than trying to lending where credit unions
access to 17% auto loan rates make a proﬁt themselves.” would oﬀer the underwriting
at credit unions. Other auto During the course of this technology and a sophisticated
lenders were charging non-prime project, it became apparent that web application interface. The
borrowers 25% or more. not-for-proﬁt credit unions that interface could provide potential
u At the same time, prime developed non-prime auto loan investors with underwriting
borrowers had access to 6% auto programs tend to rely on business information. Investors could
loan rates at credit unions. Yet partnerships for integral program then build their personal loan
auto dealers and other lenders components. Those businesses policies (e.g., two years of
were enticing prime borrowers utilized most frequently have been employment, credit score above
with ﬁnancing as low as 0% proﬁled throughout this report. 600, etc.). Credit unions could
(under certain conditions). The most popular partnerships originate and service the loans.
regarding non-prime auto This would be an appropriate
Partnerships with Product/ loans are for providing ﬁnancial activity for a CUSO.
Service Suppliers counseling. More than 85% Overall, credit unions have a
John Weiser, author of 10
plethora of partnerships to explore
John Weiser, Michele Kahane,
Untapped—Creating Value and consider, including those
Steve Rochlin and Jessica Landis,
in Underserved Markets10, Untapped—Creating Value in designed to share expenses, share
conducted seven years of Underserved Markets, 2006. knowledge, and build referrals.

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 23
Concluding Comments

Part of the excitement of But make program changes credit union services to markets
working with emerging markets through policy, not through drift. previously served by sub-prime
is that no one has all the solutions Once you have a policy in place, lenders:
for success. follow it or revise it. u “We have reduced our denial
NCUF Auto Loan Survey rate by 50% in the last six
Experiment! respondents overwhelmingly months. ”
Much of the current work is agree that once you stretch the u “Members are grateful to have
experimental. boundaries, you “don’t lend a low-interest loan. ”
“We built it, but they didn’t outside of policy.” u “It is a business strategy that
come” is an all-too-common One credit union several both fulﬁlls our social mission and
excuse for credit unions that years ago started oﬀering has a positive ﬁnancial impact to
have tried to enter new markets. auto loans with an escrow for the credit union. ”
Experience shows that account savings. Members’ response was u “We ﬁnd that low-income
acquisition is the hardest part of extremely positive. However, the members have a great sense of
the process of expansion. implementation had a small ﬂaw: pride when they commit to these
the escrows could be breached loans.”
Use Failure as a Path to Success for unusual car expenses or u “People with low credit scores
down payments with approval who do get a loan here tend to
Among credit unions that have by the CEO. The credit union come back to us ﬁrst when they
tried and eventually succeeded, a found that escrow withdrawal are car shopping again. ”
familiar theme is, “It turned out management was taking a u “We realize that when we help
diﬀerently than I imagined – but signiﬁcant amount of time, these type[s] of members, they will
it was worth it!” decided that the program was not be loyal forever.”
Make sure to think of each a full out-of-the-box success, and
product as an experiment that dropped the program rather than
provides data about what works investing in modiﬁcations and
and what doesn’t. This way, no improvements.
products end as failures—just
opportunities that open in Set Limits
hitherto unexpected directions.
Starting out, credit unions
Revise, Don’t Reverse should consider setting portfolio
limits, perhaps based on capital
Nobody gets a new market right and staying within agreed
on the ﬁrst try. You must allow parameters until the institution
time to track outcomes and to has gained experience.
revise policies and procedures. Set aside a loan loss reserve
for the program based on your
Strategize... board’s perception of the value
of the experiment and the risk
u Strategize at the board level capacity of the credit union.
u Philosophical change from Set a sunset date on the product
“the old days” with a speciﬁc date to present
u Deﬁne your appetite for risk new data and revised proposals to
u Get buy-in from front line staff the board.
u Goals:
- Live your mission Reap Rewards!
- Serve more members Besides reaching new members
- Increase loan/share ratio and achieving ﬁnancial success,
- Increase net yield on portfolio many credit unions rejoice in the
- Develop loyalty positive member comments and
experiences when they deliver

24 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Next Steps

The word “opportunity” came
up many times in the surveys
and interviews for this report.
What can be done to move credit
unions to expand non-prime used
auto lending to build net income
and to serve members by giving
them a substantially better deal?

1) Get the Word Out! spot for photo
Share this report with credit
unions. The National Credit
Union Foundation and state
credit union leagues, through
the REAL Solutions® program,
can market this report directly
to credit unions and to the trade
press, speak on this issue at
conferences, and feature these
ideas on their websites. A short
brochure and PowerPoint would platform that would match credit credit union members have, and
be useful. union products to non-proﬁt build a project to design products
client needs. to meet these needs. Products
A bolder approach would be to that appear to be on the close
build a Steer Clear nationwide 5) Document Results horizon for emerging markets
branded product that gives credit Collect data to document and include prepaid cards, mortgage
union identity to non-prime used analyze credit unions’ non-prime triage products, and micro-
auto lending. used auto lending. Organize a enterprise.
pilot project to study in detail the Opportunities to increase
2) Build a Toolkit results and proﬁle one or more market share and vehicle loan
credit unions. volumes, while fulﬁlling credit
Operationalize the research. unions’ mission to improve the
Build a “How to” toolkit. Make it
easier and quicker to implement 6) Design New Non-Prime ﬁnancial situation of people of
non-prime used auto lending. Products modest means, should drive
credit unions to help car buyers
This toolkit would delve down Research other products that “steer clear” of predatory loans.
deeper into each of the seven could be added to the non-prime
lessons. portfolio of credit unions. For
example, the REAL Solutions®
3) Fill in Gaps process includes original insights
Encourage vendors, including into ﬁnancial markets (e.g. the
CUSOs, to ﬁll in the product value of emerging markets),
gaps: insurance, loan guarantees, research on opportunities in
automated underwriting, those markets, identiﬁcation of
secondary market, etc. credit unions already engaged
in best practices, and (working
4) Replicate and Collaborate through the leagues) sharing
product approaches and case
Identify suitable partners and studies with credit unions
build a replicable model for interested in implementing new
partnerships with non-proﬁt products.
car programs. Collaborate on a Determine what other needs

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 25
References

Annie E. Casey Foundation. Pursuit of the Dream: Cars & Jobs in America. Documentary DVD. February
2008. http://www.aecf.org/MajorInitiatives/FamilyEconomicSuccess/PursuitoftheDream.aspx

Nastars, James A. 2007. Analysis of University Federal Credit Union’s Sub-Prime Lending Program.

National Economic Development and Law Center (NEDLC), and the Annie E. Casey Foundation. June
2007. Low-Income Car Ownership Programs—2006 Survey.

Opportunity Cars Resources. http://www.opportunitycars.com/Articles/index.htm.

Schneider, Rachel and Arjan Shutte. 2007. The Predictive Value of Alternative Credit Scores. November
26. Center for Financial Services Innovation.
http://cfsinnovation.com/research-paper-detail.php?article_id=330262

Sutton, Remar. April 2007. Car Financing for Low and Moderate Income Consumers. The Consumer Task
Force for Automotive Issues, and The Aspen Institute.

The Mobility Agenda—Car Ownership and Financing. http://www.mobilityagenda.org/carﬁnancing

Waller, Margy. 2005. “Auto-Mobility: Subsidizing America’s Commute?” Washington Monthly. October

26 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
About the Author

William Myers is Senior Fellow of the Aspen Institute,
focusing on the Economic Opportunities Program. He
also serves as a Field Coach for REAL Solutions®,
the signature program of the National Credit Union
Foundation.
Mr. Myers founded Alternatives Federal Credit Union
and was its CEO through mid-2007. From its inception,
Alternatives successfully focused on serving emerging
markets through innovative products and partnerships.
Noted innovations include a volunteer income tax
preparation site, ﬁve youth credit union branches, small
business training and lending, volunteer-staffed ﬁnancial
planning, and Individual Development Accounts.
Mr. Myers continues his work researching, consulting,
and speaking on innovative product design and
partnerships. His most recent projects include payday
lending models, pre-paid cards for emerging markets,
a scale and sustainability study, and a pilot using back-
ofﬁce consolidation as a merger alternative.
Mr. Myers is a graduate of Cornell University. He
has twice co-facilitated Credit Union Development
Education, the training program funded by the National
Credit Union Foundation to teach cooperative principles
and credit union values in the modern marketplace.
He has served on the boards of the National
Federation of Community Development Credit Unions
and the Opportunity Finance Network. He has also
served three initiatives of the Credit Union National
Association: the Federal Credit Union SubCommittee,
the Renaissance Commission, and Project
Differentiation. And he is currently the List Manager of
the Community Development Banking listserv.

William Myers

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 27
Appendices

Survey Invitation Letter
As part of a pilot program involving the National Credit Union Foundation’s
(NCUF’s) REAL Solutions® program, The Annie E. Casey Foundation, and
The Aspen Institute, we are surveying credit unions for their innovative work
with low credit score auto borrowers. Working together, we believe we
can substantially increase auto lending to low-wealth and modest income
working families and grow credit unions.

We appreciate your assistance in helping us recognize the innovative work
you are already doing by taking less than 10 minutes to complete this survey
at http://tinyurl.com/2x3heh

Thanks for your continued support of the National Credit Union
Foundation and REAL Solutions® .

William Myers,
Field Coach, REAL Solutions®
Senior Fellow, The Aspen Institute
wmyers@realsolutions.ncuf.coop
(607) 227-0934

28 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Results and Verbatim Comments

Credit Union non-Prime Auto Lending Study
Responses through 3/10/2008

Name and Contact information.
Response Response
Answer Options Percent Count
Your Name: 99.6% 246
Your Title: 98.8% 244
Your Credit Union: 98.8% 244
Your EMail Address: 99.2% 245
Your Phone Number 98.0% 242
answered question 247
skipped question 4

The verbatim comments that appear on the following pages have been reproduced without editing.
This is meant to ensure that all survey respondents’ thoughts are conveyed to you exactly as they were
communicated to us.

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 29
What underwriting criteria have allowed
your Credit Union to safely extend its
lending to low credit score borrowers?
Response Response
Answer Options Percent Count
Good payment history with the CU 82.7% 206
Good payment history on auto loans 64.7% 161
Strong employment 62.7% 156
Payroll or other automatic payment 59.4% 148
Credit Scores below 620 49.0% 122
Lower credit scores require a higher down payment 41.4% 103
Higher equity ratio required 38.2% 95
Low unsecured debt 36.5% 91
Offer share secured loan instead of auto loan 26.1% 65
Advance money down in CU savings account 12.0% 30
Length of membership requirement 12.0% 30
No credit score required 11.6% 29
Lend on ITIN 6.0% 15
Internally generated credit score 4.0% 10
Other (please specify) 26.9% 67
answered question 249
skipped question 2

- A partnership with a non-proﬁt orgagnization - Checking relaltionship.
called BonnieCLAC which provides assis-
tance in locating cars, counseling to borrowers - Common sense
and a partial guarantee to the credit union in - co-signer
the event of a deﬁciency after reposession
- CO-SIGNERS
- All of our Loans are risk based priced.
- Credit Counseling prior to close of loan
- Alternative payment histories, landlord, length
of residency, employment - CUNA Mutual Lender Protection
- automatic payments strongly encouraged, but - CUNA Mutuals Lender Protection Program
not mandated.
- Detailed information about the collateral in-

30 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
cluding taking a picture. no purpose other than the pricing bases for the
loan.
- excellent disposable income and debt to in-
come ratios - Low credit scores require a co-maker or
shorter terms.
- go over their credit report with them. In visiting
with them, we get a better understanding of - May offer a co-maker if ﬁrst auto.
their intent to pay. Sometimes we require a
small loan history ﬁrst. - May require a qualiﬁed co-signer.

- grant unsecured consolidation loan for col- - May require guarantor. Also will not ﬁnance
lection items and or to lower other payments sales tax.
to make loan possible to be within debt ratio - Min credit score requirement is 580. We can
limitation. make exceptions when some of the above ap-
- Higher lending rates in a risk based program. ply and with management approval.

- If a member has a plan for a major - Minimum length of residence, income veriﬁ-
purchases,and wants to reduce the amount cation on all loans, minimum 3 references, If
of the ﬁnanced by the credit. We offer special BK, no derogatory after BK, no more then one
share accounts for that purpose. repo/foreclosure, length in ﬁle 9 months, no
tradeline greater then $5000 derog in last 12
- If no credit score, then we ask for about an months, tax liens $2500+ must be in repay-
80% LTV if no guarantor/co-maker is possible. ment, one year paid as agreed on a trade or
auto, no private party sales and minimum
- Insurance for defaults on lower scores $500 down pmt.
- It is really a combination of the factors listed - A program where new autos are deeply dis-
above. I’m not sure this is a clear picture. One counted by dealers which creates equity for
person does not have to have all the factors I the member along with extended warranties
checked.
- Our underwriting guidelines still allow a num-
- Just providing opportunity. Each person is dif- ber of variables that - when added together
ferent - may have short term or long term em- - enable us to offer collateralized loans to
ployment. May have large or little down. May members that have had credit problems in the
have some good credit or none at all. May be past -- In other words, good seniority, length
entering credit world or in it for 20 years. All of time with us, member’s willingness to take
depends upon person - but providing chance “ownership” (such as a good downpayment),
is what they need. etc. will allow the loan ofﬁcer to make a posi-
- Lender’s Protection tive determination on the loan.

- loan ofﬁcer underwriting training to mitigate - Parent/guardian cosigner if NO credit Low
risks credit scores due to BAD credit, we counsel
them how to improve their score but do not do
- loan ofﬁcers decision loans based on mem- the loan.
ber’s income to debt, time of employment and
residence, credit history trends, relationship - Payroll or automatic payments are voluntary
with cu, and collateral. beacon scores serve and can be stopped at anytime. We do not
weigh these payment types in our underwrit-

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 31
ing. We also won’t usually ﬁnance add-ons can determine whether the mbr has always had
such as MBI, GAP. We look for a strong LTV struggles or whether it was a more recent issue.
ratios so if we have to repo the vehicle, we are
more apt to sell it with little or no loss. Also - This is a hard question to answer. When we
with thinking future repo, we look to see how evaluate a low FICO member, we look a the
attached they are to theie community. If they speciﬁc circumstances of each member. So
have been established in their community for depending on the member, we may request
some time and have family/friends/work ties to use one or more of the requirements listed
the community, they are less apt to skip. above. . IT is also important to note that we
must separate between a member with a low
- Purchase a vehicle that is make sense for the FICO and a low-wealth/modest income fam-
borrower. ily. A low FICO is generally one that has not
paid their bills on time. Most low-wealth/mod-
- Reduced LTV through a larger vehicle down est income people have either no FICO score
payment with savings (member “buy-in” to the because they lack any traditioanl debts or have
vehicle). no Social sec. number.
- Require collections to be paid; 6-12 mo. good - Thoroughly understanding why the credit score
payment history required on all credit obligations was low and taking into consideration how it
- Require minimum 2 open tradelines with I1/R1 may have improved and what plans were in
status and must be current for last 6 months. place on the part of the member to improve it
Minimim credit score of 500. Minimim annual - to obtain another loan with CU the mbr must
income of $20,000. We offer 100% ﬁnancing have a positive payment record of 12 mo. or
on a $15,000 car, plus tax, Warranty and GAP. mot to receive and unsecured loan.
No cash down required. We limit term to 48
months. - Use non-traditional credit score from Trans Union

- Requiring risk mitigating products such as - use of Auto Title deposits to offset higher risk
Default Protection. exposure also, direct veriﬁcation of employ-
ment, residence and other non-traditional
- RESIDENCY STABILITY NECESSITY VS. credit references
LUXURY AUTO INSURABILITY DEBT RA-
TIO CO SIGNERS - We also look to see if the member owns a
home.
- risk based lending
- We combine our internal signature value
- «risk based lending imple- mentation taking into consideration if the member has
- Risk based pricing gone through our ﬁnancial education program.
Length of time on job or in the same ﬁeld is
- Special policies for credit scores in the D and considered. How long they have lived at their
E tier. residence is taken into consideration, income
and some other things in addition to collateral
- Stability in residence and employment. Struc- value. The higher the risk, the shorter term of
ture based on risk - less risk = less structure. the loan. co-signers are also very good.
high risk requires more structure to loan. We
also track mbr’s credit score twice a year and - We do not have a loan program speciﬁcally for
can trend their performance over 5 years. You low beacon scores. We do risk price our loans,

32 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
so members with a lower beacon naturally have - We have used non-traditional credit in the
to pay more down to obtain ﬁnancing. past. We request receipts from rent, layaway
payments, utilites, etc.
- We do not make loans based on Credit Score
alone. We look at the “whole picture” when - We just rolled out Lenders Protection through
making a credit decision. CUNA Mutual to help better serve these mem-
bers with their automobile ﬁnancing.
- We frequently lend to persons with scores
below 600. We rely on a strong employment - We look at the overall relationship with the
history (most of our members are Federal em- Member. How long have they been a member,
ployees) and a debit ratio that may not exceed previous loans that paid as agreed, checking
45% of gross earnings. Most of our members acct.,direct deposit are all positive factors in
elect to repay via payroll deduction--although building low scored members.
we do not require it, nor do we make it a con-
dition of the loan. We choose not to do this - We pay special attention to stable employment,
because persons frequently transfer to another debt to income ratios, and loan to value.
Federal facility and payroll deduction does not - we qualify our borrowers on an income to debt
automatically continue if they leave. ratio. We do not use risk base lending prac-
- We give board -appointed loan ofﬁcers ﬂex- tices at this time.
ibility to look for ways of approving loans. We - We underwrite all high-risk laon with Default
have no hard and fast rules for credit score or insurance from Lender’s Protection.
debt ratio.
- When low scores are a result of lack of credit
- We have a “Savers” loan, which the member history we have used alternative sources to
puts 10% of payment into a div baring account, document payments as well as documenting
which is secured until the loan is paid.. This diplomas from college graduation.
may allow no co-signer, and a reduced rate

- We have a program referred to as our Basic
Transportation loan. It is designed to help
members with lower credit scores have trans-
portation to and from work. Max loan amount
is $7500 and we limit the mileage on the
vehicle to 75,000 miles. We will also include
in the loan amount six months insurance pre-
mium if needed.

- We have also implemented a very competitve
risk-based lending matrix.

- We have developed a program that requires
minimum length of employment or member-
ship, together with non-traditional personal
attributes (including a background check) in
exchange for a dependable vehicle (vehicle
limitations are part of the program) at an afford-
able price and an affordable rate of interest.

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 33
Do you assist members in ﬁnding a car?
Response Response
Answer Options Percent Count
Agreement with Local dealer 59.6% 68
On line car buying 37.7% 43
Car sale through rental agency 35.1% 40
Own used car lot 2.6% 3
Own a Dealership 0.9% 1
Other (please specify) 105
answered question 114
skipped question 137

- a Special program involving dozens of local and introduced a program called SmartBuys.
dealerships. The program is speciﬁcally targeted to low-
- Agreement with Enterprise Car Sale middle income Members to assist them with
locating a reliable and economical car. I’d be
Auto Advisor Program happy to discuss further if you are interested.
- Auto Advisor service through third party - ___ “best price” and “best dealers” service

- Counsel members and also use a car buying
- auto advisors service
- Auto broker service - Credit Union Direct Lending
- Auto Broker utilized for the last 20 years! - CU Direct Lending, Autoland, local auto ﬁnder
- auto buying service - a local company where several credit union
- Auto Expert send reposessed vehicles.

- Auto Sales by Dealers - CUDL

- Car buying service companies (discounted - CUDL service
pricing): United Buying Service Motor Vehicle - Direct our members
Certiﬁcation Program
- F2F CUDL on website
- Car buying service through CU owned CUSO
- Fleet Dealers in our area
- Car buying services
- Generally speaking there is not enough time
- Car sales through sales agency. Auto buying in a day for credit union loan ofﬁcers to get in-
service. We recently partnered with Enterprise

34 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
volved in the car buying process for a member, - Note: Used Car Lot: We have an agreement
but they can certainly advise them to go any- with a local dealer at our headquarters location
where except a dealership for the best deal. to sell our repos and their good used cars.

- Have refferal program - Occasionally we sell repos because we offer
one rate ﬁnancing versus risk based on those
- If a member requests our help, we will speak loans.
to the car dealership in their behalf and attempt
to negotiate the sale. We have written agree- - On-line resources
ments with a few area dealers. However, we
will personally speak to the sales representa- - Only through Indirect relationships
tive at any dealership. Whether we’ll intervene - Our indirect lending department will assist
in a sale depends on how the car has been
priced. Sometimes is so high above “retail” - own a dealership ???? not sure what that
that we can’t stand it, so we’ll call and say “can means
you drop the price?” They usually do.
- Partnership with social service agency to pro-
- Indirect auto program vide ﬁnancial counseling
- Indirect Lending CUSO - use Members Auto Source - Auto Purchasing
Service through a FCU’s CUSO.
- Indirect Lending through Members Financed
Autos - pre-approvals and assist our members with
vehicle value information before they go to
- Indirect Lending with dealerships, Auto dealership.
Wholesale Direct Auto Brokers
- Pre-arranged pricing and auto locating through
- member ﬁnds auto car-buying services and buyers club
- N/A - refer to local smaller dealer that sell for less
- indirect relationships with all area dealers that - Re-marketing of previously ﬁnanced
will allow the member to contract at the dealer- vehicles(repo’s) to buyers who do not meet
ship. regular guidelines.
- no (13 responses) - The credit union works with an Auto Buying
- No we don’t. Broker Service

- No, we currently have no afﬁliation with any - the local dealer offers vehicle buyer services in
type of dealership in the area. Most members our branches and is CU owned
purchase cars from the owners. - a program which assists members with pre
- Non proﬁt BonnieCLAC does this for their negotiated prices and follow up on pricing.
clients. For those clients who have not com- - Utilize CUDL’s Auto Smart program to help
pleted their counseling program they have borrowers identify potential dealers and ve-
“loaner” cars that can be used in the interim. hicles
- Not at this time but will by 2nd qtr 2008. - We also have an Auto Resource Center which
is a vehicle locate service. We have strong re-

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 35
lationships with many area dealers and negoti- is worth.
ate deals for our members. We also sell our
off lease vehicles and have a strong relation- - We have a car buying service for our members
ship with a used car dealer. - We have a car buying service that assists
- We are a large indirect lender with over 250 members in locating a desired car. We use
participating dealerships. dealers that are part of our indirect network
and have agreed to give our members the best
- We are in the developing stages with our deal possible.
indirect program to offer online inventory with
speciﬁc dealers - We have a car buying service.

- We assist informing member with information - We have a partnership with Enterprise. There
as to the value of the vehicle. NADA & New are several sales lots in North Carolina that our
car book. members can visit.

- We do business with Enterprise (Rental), - We have a program that includes dozens of
where they offer no haggle buying and under used and new dealerships allowing purchases
Kelly Blue Book prices. The credit union will at cost plus.....
also take 25 basis points off of the base rate - we have an auto buying service at no cost to
- we do carbuyer workshops in English and members.
Spanish, and advocate on their behalf. For - We have an Auto Scout,the member gets
example, we recently ﬁled a NYS Attorney preapproved lets us know what they are look-
General complaint against a dealer who we ing for and he go looking and negotiate for the
believe is “packing” extended warranties, etc. member.
on sales to Hispanic immigrants
- We have an Auto Scout,the member gets
- we do not assist in ﬁnding a car preapproved lets us know what they are look-
- We do not assist members with vehicle loca- ing for and he go looking and negotiate for the
tion services. Our stafﬁng does not allow for member.
that. - We have an indirect program with a local credit
- We do not assist the member in ﬁnding a car union. We purchase loans from them.
but we do review purchase agreements and - We have our own in-house auto buying ser-
will help negotiate sales price, especially with vice
dealers that have excessive mark ups which
impacts LTV. - We have referred members to a “car broker”
who will help with purchase of japanese autos.
- We do offer a car buying service through an He is known to many members and staff and
auto broker that members have an option of has done a great, affordable service, so if the
using for a fee. members asks for help we will suggest they
- We do refer to local dealer, however, do not contact this person. We also know certain
have a written agreement. dealers where members have been ripped off
by poor quality cars and we will tell members if
- We ﬁnd the value of the car thru NADA and we see them looking at a car from one of those
ensure that they do not pay more than the car dealers - warning them of our concern and

36 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
the experience of other members. We also - work with the member’s debt ratio and budget
will condition some loans on having the car to suggest a sales price and payment they can
cleared by one of two local mechanics that the afford
CU trusts to give an assessment of the vehicle
and the purchase price. Members have been - Yes, as much as possible. We provide them
very happy with this service. We also let mem- with the values of the vehicles they are looking
bers look at Consumer Reports information on at. Assist them with the negotiating process,
vehicles and talk about and share information sometimes a little too much! We also have a
on gas mileage. few local dealerships that sell their vehicles at
less than retail and we will tell members the
We may recommend dealers that we have an names of the 2-3 dealerships that do that.
Indirect relationship with, but we do not assist
members in ﬁnding a car.

- We partake in CUDL....so our members ﬁ-
nance at the point of sale....we drive our mem-
bers to our dealer partners

- we participate in an auto buying service,plus
we have relationships with local dealers

- We promote a program, which is the Credit
Union Systems’ indirect lending program.

- we publish our CUDL Dealers on our website.

- We require that they huy the car through one
dealer.

- We tried agreements with local dealers and
could not make the program work. If the
credit union could have an ownership inter-
est in a used car lot it would solve most of the
problems.

- We use an auto buyer- independent third party

- We will help the member with “on-Line” price
assessment of the car they are trading and the
car the are purchasing so that they can negoti-
ate intelligently.

- We will help them to value cars they do ﬁnd.
In one case, with a low-funtioning member, my
loan processor did ﬁnd a car for them in their
price range.

- We work with Enterprise and Carquotes.

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 37
What Risk Mitigation techniques do you employ?
Response Response
Answer Options Percent Count
Limit loan to Blue book value 65.6% 160
Set maximum loan duration based on age of car 62.7% 153
Verify the information provided. 50.0% 122
Schedule payment when member gets paid 41.8% 102
Require minimum time at job or in ﬁeld, at residence, etc. 38.5% 94
5 day collection call 27.9% 68
Set portfolio Loan Limits 24.6% 60
Make sure they carry the member elect insurances, etc. 24.2% 59
ProActive Collateral Recovery System 14.3% 35
Regularly analyze members’ credit scores 11.5% 28
Repo at 30 days 10.7% 26
Repossess the vehicle at 30 days late 10.2% 25
Forced savings for repairs 2.9% 7
Other 61
answered question 244
skipped question 7

- 60 DAY REPO - Any high risk loans are “queued” to the collec-
tion department to be followed on a regualar
- 7 day collection notice, repo at 45 days basis for any signs of “stress”. Collection
efforts would begin immediately once the loan
- Active collection techniques employed by becomes delinquent.
loan resolution team understanding reason for
delinquency, strong closing of loans by FSRs, - Applicants with less than 12 mos credit must
emplying solutions to work out of problem situ- be on job at least 6 months and are limited to
ations, close monitoring of early default loans a loan <= 60% annual income and 80% LTV.
These applicants and applicants with FICO
- All C & D borrowers receive collection calls on scores <620 are also limited to a 100k mile-
Day 1. Most other mitigation techniques sug- age cap. Employment/Income is also veriﬁed
gested above are employed, but none are set on these applicants.
by policy.
- As mentioned in #2 - we track scores twice a
- Analyze the ﬁnancial situation of the member. year and if the mbr is trending down - we will
Debt to income ratio not to exceed 40% of monitor the accts more closely.
their monthly income.

38 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
- Borrowers must have completed Financial Fit- age of car, require collision and comprehen-
ness training course sive on auto’s over $5k, member employed 90
days of more unless job change for better pay.
- Budget and action plans, ﬁnancial education
classes - Limit to black book values as they are more
accurate.
- Call at 14 days. Grace Period is 15 days
- Loan only 90% of value on credit score 619
- Charge fee on certain credit rebuilding loans and under

- Collectin notices genrated daily at 5, 15 and - Maximum debt/income ratio; require auto debit
25 days CUNA Mutual Lender Protection for payments
Collectin Policies based on rehabilitation ﬁrst,
recovery second - More aggressive collections but not abusive
repo rules. These members have a higher
- Collection Call at Day #10. than average luikelihood of incurring ﬁnancial
glitches but will be the most loyal as we prove
- Collections department personnel speak to that we are for them...
them. We tell them about the Credit Union
difference and that we are taking a chance on - Must be acceptable collateral wiithhin policies.
them that other FI’s would not take.
- A WELL STAFFED AND PROACTIVE COL-
- Debt structure considered e.g. retail v. install- LECTION DEPARTMENT.
ment, capacity, previous borrowing experience
for similar loan request; negative amortization - Price appropriately for the risk.
mortgages, and a keen emphasis on “re-
serves”! - repo at 60

- DIRECT DEPOSIT OF INCOME - Repo at 60 days. We normally do not allow
redemption after repo unless they pay loan off
- Hard close. in full. (Does not apply to Reese-Levering Act
vehicles)
- Have a proactive collection department
- Repo collateral @ 30 or 60 days depending on
- Here again each individual request will deter- if member is working with us or ignoring us
mine conditions.
- Repo is set to occur if loan is delinquent 60
- Limit Grade D to a % of capital. Price accord- days or more. The blue book value is limited to
ing to score. The lower the score, the higher the trade in value of the vehicle.
the rate.
- require 10% of total loan in shares
- Limit loan to a percentage of NADA value, dif-
fering by credit tier - REQUIRE loan Default Protection

- Limit loan to black book value - Require payroll direct deposit with automatic
payment distribution. GAP Insurance on new
- limit loan to retail of NADA, duration based on cars.

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 39
- run credit reports on all loans and questions COLLATERAL PROTECTION INSURANCE
mbr if need be about the report (things being POLICY VIA CUNA.
pd in full or still owing) Tax leins, judgements,
repo’s , foreclosures and bankruptcy - We found that a large precentage of our de-
linquent loans were young people just starting
- See answers to number 3. Complete applica- out, now we always ﬁgure in a rent payment
tions with references - especially for ﬁrst time even if the member is still living at home. That
borrowers. We also do monitor ﬁrst-time bor- way if they move out, they should be able to af-
rowers and ﬁrst payments very closely and will ford the vehicle and the rent.
make calls to them until we see regular pay-
ments occuring, preferably thru direct deposit - we have a ﬁrst time buyers program
and automatic payment. that limits amount ﬁnanced,down pmt
requirements,length of emp,references, letter
- Set maximum age and mileage of car. from emp and poi

- We have a strong loan closing and collection
- Solid Co-Makers when needed. department but it is not one size ﬁts all.

- start repo at 30-45 days - we have the ability to use lender’s protection to
protect the loan if it were to default
- Tiered pricing to offset our risk
- We use a credit bureau pre-approval to gener-
- Until recently we did not offer a loan for more ate the offers, using the criteria above in #3
than 48 months if the loan was for less than
$15,000. We offered 60 months if greater
than $15,000. Now we allow our members an - We use CUNA Mutual’s Lender’s Protection
additional 12 months if they purchase GAP (at Program
$225) through us.
- We will collect by credit score in the very near
- Used Vehicles - 100% Retail Value As Listed future. Lower credit scores will receive quicker
By The Blue Book attention when collecting and repossessing.

- Usually repo at 60 days - We will only lend up to 90% of the blue book
value.
- Various others....LTV limits, term limits, no BK’s,
POI etc.... - When we add forced placed insurance we
force member to increase their payment to
- We do a 5 day collection letter for members cover the cost
who are C and D paper.
- work with members for payments when issues
- We do collect higher risk loans differently than create late payment, repo beneﬁts no one.
we do low risk loans. Much closer follow-up.

- WE DO NOT RELY UPON MEMBERS TO
GET CAR INSURANCE. ALL OUR AUTO
LOANS ARE COVERED BY A BLANKET

40 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Do you offer insurance coverages with
the loan product?
Response Response
Answer Options Percent Count
Credit disability protection 90.8% 218
Credit life protection 88.8% 213
Guaranteed Asset Protection 77.9% 187
Mechanical Breakdown Insurance 60.4% 145
Debt Cancellation 11.7% 28
Assure insurance 2.1% 5
Walkaway 0.8% 2
Other (please specify) 18
answered question 240
skipped question 11

- All of the above are available, but not required. - Other insurance offered by the dealership.

- auto insurance - our dealers can sel whatever backend prod-
ucts as long as the don’t go over our max
- Collateral Protection Insurance is all from advances.
CUNA!
- The dealers offer these products and we in-
- Credit Disability is member paid and the clude the cost in our ﬁnancing.
Credit Life is paid by the credit union up to
$25,000. - The life and disability protection is part of our
Debt Cancellation package.
- GAP Insurance
- These are offered through an arrangement for
- GAPP coverage a discounted price from selected dealers

- Lender Protection - We also implemented same loan payment with
or without insurance. We simply extend the
- Life and disability it is optional. term of the loan to cover the cost of insurance
protection. So far, members dont mind the ex-
- Loan protection for all members paid by credit tra payments as long as the payment ﬁts their
union. monthly cash ﬂow/budgets.

- no - We also offer GAP.

- none

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 41
How do you market to potential low wage
members?
Response Response
Answer Options Percent Count
Encourage members to get CU 88.7% 180
ﬁnancing ﬁrst
Recapture Loans (with member 28.6% 58
premium)
First time auto Loan 25.6% 52
Timely payment reward 7.9% 16
Branch looks like a ﬁnance 1.0% 2
company location (different
branding than the credit union).
Other (please specify) 53
answered question 203
skipped question 48

- acquire many through indirect lending ble ﬁnancing a customer they can refer them to
us.
- Applicants come through social service agency
ofﬁce - Discounted rate for saving a certain amount
monthly along with the car payment.
- Area used car dealers are aware that we have
the best rates for high risk low-income borrow- - Establish credit with secure products and
ers and because they want to sell cars send monitor payback period and start limits with
applicants to us. All applicants must come into low amounts!
credit union for face to face interview with loan
ofﬁcer. - ﬁnancial education seminars

- Basic Transportation Program is noted in our - Hope you are not confusing the low wage situ-
newsletters, brochures and website. ation with the low credit score one, we have
experienced many people who make a high
- Constantly feature auto loans with rate price wage and can’t manage their money leading to
leader and deal locator service. a low credit score

- Credit Union lobby,Newsletters,payroll insert, - If a member has paid an auto loan with another
Bulletin Board at work sites. ﬁnancail institution “as agreed” for 12 mos., we
guarantee to reﬁnance without a credit analy-
- Dealerships know that if they are having trou- sis.

42 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
- LCU has Modiﬁed Direct and Indirect relation- being used for our Military members only.
ships with Used Vehicle Dealers that are risk
based priced for new and existing Members. - Our members are Federal employees. Even
the loweset wage earning makes at least
- Loans to 16 year olds with parent/guardian $25,000 annually.
cosigner.
- referrals from other members
- Local dealers recognize our CU as one most
likely/willing to help credit challenged borrow- - REPOSESSIONS VERY VISIBLE AND AUC-
ers TION ON OUR WEBSITE

- Lower interest rates - SCU has branchs inside several Wal*Mart
locations
- LOWER INTEREST RATES, AND INTEREST
RATES NOT TIED TO CREDIT SCORE. - They actually seem to ﬁnd us with little/no
marketing
- Make ourselves available for ﬁnancing at the
dealerships through our local Credit Union - through used car dealerships
Auto Loan Network - which requires the deal-
ers to - Various promotions have been held to encour-
age members to come in and meet with loan
- Marketing efforts are to total body of church personnel to see if better payment terms can
members as a whole. First time auto loans and be offered through a reﬁnance program.
reﬁnance of existing in addition to new/used
purchases are pushed. - Via quarterly newsletters, inserts in mortgage
bills, in lobby displays, web site
- Most of our marketing to low wealth members
is done through our Community outreach pro- - we are constantly reaching out and looking to
grams. We work with non-proﬁt organizations, improve marketing consistency in an effort to
and political leaders to help us identify and steer them clear of predators and get them out
market to low-wealth and immigrant individu- of bad loans when they don’t come to us ﬁrst
als.
- We do joint marketing with the non-proﬁt
- Most of our members ﬁt in this category. I do agency, borrowers must be referred by them.
email blasts to staff.
- We do recapture loans and are able to get the
- N/A member a better rate than they have else-
where.
- no special marketing. we use an outboand
sales center. - we don’t

- None of these...Encourage to get a garantor. - we don’t have any special programs on our
indirect side for low wage....we do have limited
- Offer Auto Buying seminars to educate loan amounts for our members who are col-
members lege students etc...these are all branch loans
though...not indirect loans.
- Our ﬁrst time auto loan program is currently

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 43
- We don’t proactively market to this segment

- We don’t speciﬁcally market to this area yet.

- We have a branch in a non-proﬁt cooperative
that serves unbanked people.

- We have trained our staff to conduct very in-
dept interviews. Marketing pushes people in
the door, the staff does the rest.

- We mail a pre-approval letter to these mem-
bers monthly

- We offer discounts to members that pay satis-
factorily when they pay off by reducing the rate
by .25%.

- We try to educate low wage members about
how much car they can really afford.

- We use a preselected list and market by invi-
tiation only

- we will reﬁnance loan from other institution to
lower payment without extending term if within
book value

- We work with 3 used car dealers in town who
refer potential customers to us

- when a mbr joins the CU we have a handout
with all of our information about loans, check-
ing, debt cards etc. If they come in asking
about a particular loan we will explain to them
what they would need to get the loan and if
they are not able to get the loan we go over
the credit report with the member to try to help
them improve their score so we can help them
the next time they come in.

- When market, we market to all our members.

- word of mouth mainly.

- Word of mouth. Advertising in Hispanic mar-
ket of radio and television.

44 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Do you use partnerships to assist in
serving this marketplace?
Response Response
Answer Options Percent Count
Financial Counseling 85.4% 88
Non proﬁt partnerships 29.1% 30
Partner with mechanic for pre- 4.9% 5
purchase inspection
Other (please specify) 38
answered question 103
skipped question 148

- Accell - If a members participates in the a Financial
Counseling Program, we offered a reduced
- again, we do carbuying workshops and ﬁnan- interest rate on their loan (range .25, .50, .75
cial ed at various partner locations or 1.00%). The rates are in a turn barrel and
the member is allow to pull one label which
- Balance indicates the rate deduction they receive.

- BALANCE - In the wake of current conditions, ﬁnancial
planning seminars and materials are needed
- Balance for all member segments!

- Balance - In-house auto buygin service.

- Balance - n/a (2)

- balance program - No (9)

- Consumer Credit Counseling - None (2)

- cplc.org and its many service outlets. - None of these...

- Federation’s PRIDE program supports with - our ﬁnancial counseling is done within the
25% support. credit union

- Good News Garage -Education on owning a - PEFCU has there own Financial Couselor and
maintaining a car includes practical session is offered free to our membership.
with mechanic.
- We have an inhouse community education

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 45
department

- We Have Our Own Financial Counseling Pro-
gram - Not Through A Partnership

- We have our own ﬁnancial counseling service

- We partner with a company that provides free
ﬁnancial education and debt management
counseling to members of participating credit
unions.

- We use the Balance program.

- We work with the local Consumer Credit
Counseling Services in the markets we serve
as well as the Family Support divisions for the
Bases we serve.

46 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Has your low credit score auto lending program
been successful? What lessons have you
learned?
Response Response
Answer Options Percent Count
Open Comments 71.7% 180
answered question 180
skipped question 71

- A need to price for the risk. A need to gain a - Although we have had RBP for 10 years we
ﬁrm commitment from the borrower at closing have been doing risk base lending a short
(i.e., the hard close). A need to collect aggres- time, maybe 1-2 years, so we do not have
sively, including repossession at no later than alot of history to work from. I would say it has
60 days. A need to monitor yield, delinquency, helped but we will need 1-2 more years to re-
charge offs, and net yield by individual paper ally effectively measure the results.
grade to ensure we’re pricing appropriate and
can make adjustments to both pricing and - Any lending program can be successful if you
underwriting standards when necessary. Our plan it correctly.
portfolio yield is more than 120bp above our
peers, and more than makes up for our above - As successful as risk allows. Member educa-
average charge offs. It is a business strategy tion on credit scores, debt-ratios, auto buying
that both fulﬁlls our social mission and has a and how to maintain a strong, positive relation-
positive ﬁnancial impact to the CU. ship with CU have mitigated risk.

- A strong loan closing is very important. Also, - Average success. Had to quit CMG program
we have a very aggressive collection program. due to large losses. We see good results from
our ﬁrst time buyers in our graduating senior
- Actually, we do not have any speciﬁc pro- program.
grames related to the low score members.
The credit decision is done by an analyst who - Continous monitoring of the lower tier delin-
analyze them individually . quency performance and open communication
with our collections group to ensure that credit
- Admittedly, our “program” is not formal. We granting guidelines are reﬂective of loss expe-
look at each applicant’s qualiﬁcations, no riences.
matter what their credit score, and try to ﬁnd a
way to make the loan and educate the member - Cover rent in debt ratio, have at least six
when appropriate. The credit score is a tool months of current job history, review credit his-
used primarily for pricing, not decision-making. tory with us, get co-signers, or extra collateral.
We also review credit after 6-12 months and

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 47
will reduce interest rate if credit has improved. a dealer take advantage of them up front. That
helps everybody from the start. -- The internet
- Currently reviewing with potential of making can be a very good tool and freind in todays
requirements less restrictive. world.

- Down payment requirement (10%) helps to - Good returns. You must verify employment and
offset some risk. income if you are buying these loans on an
indirect basis.
- Down payment should be required on ques-
tionable loans. Shorter term limits depending - Great success with low or no credit score ap-
on the age of the auto being ﬁnanced. Offer plicants, speciﬁcally matricula and ITIN holders
more education on the auto buying process.
- Has higher losses in the past but we recog-
- Even though there have been some lates in the nize this and limit the total outstandings in the
past 10 months, we have not yet had a repos- portfolio.
session. Our portfolio contains over 100 mem-
bers and $1.9 million. - I don’t think it is any more or less successful
than typical underwriting standards.
- Extremely. We ﬁnd it very important to accu-
rately value the vehicle and to do a lower loan - I have helped a number of credit unions
to value than on our regular lending. We also achieve success with high-risk auto lending by
attempt to obtain as much cash down as pos- training staff and management on how to do
sible so the buyer has a vested interest in the this lending well.
vehicle. We have been doing this for a very
long time. - If the member has good job time & payroll de-
duction we usually will do the loan but watch
- For us it’s important to have member loyalty doing ACH Origination from their bank - do it
to our CU and those members refer members directly with the employer. Much better re-
and some even co-sign to help newcomers. If sults!
we make a bad decision we tend to lose about
$5K on our used car repos. Not sure we’ve - if the member is “loyal” to the credit union, they
been doing it long enough to be successful. will pay us back and of course, if they have is-
sues, we will also work with them
- Fortunately, we have had very good luck with
our auto lending program. We ﬁnd that low - In 2002 - 2004 we participated in a lending
income members have a great sense of pride partnership with 2 auto dealers with rather
when they commit to these loans. Our delin- disastrous results. But we didn’t want this
quency rate is less the 1%, experience to dampen our hopes to serve
our members so we now do our auto lending
- Get them a payment they can afford. Get program without dealer partnerships. If a loan
them to take Mech. Breakdown Ins. (because applicant has a low credit score we will work
they cannot afford the repairs later). Make with them to tell them what they need to do to
them go through some Financial Counseling qualify for a car loan - including letting us get
to help understand the ramiﬁcations of failures. to know them by becoming a active members,
Start off into the vehicle at the reasonable putting savings away to help towards a down-
value. Help them make the deal and do not let payment to give us a better LTV. If they have

48 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
a high debt-to-income ratio, we ask them to - IT HAS NOT BEEN ENTIRELY SUCCESS-
put the equivalent of the payment and insur- FUL. ONE LESSON LEARNED IS TO BE
ance in a savings account for three months or WARY OF AUTOS REGISTERED OUT OF
more to see what it’s easy to live without that STATE. ANOTHER IS TO INCREASE THE
money. This usually convinces the member SHARE DEPOSIT REQUIRED, GIVEN THAT
that perhaps they are better off without the car AUTOS DEPRECIATE SO RAPIDLY. WE
or that a smaller car loan would be better than HAVE NOT GENERALLY DONE NEW CAR
the one they were thinking about. The key is LOANS, WHICH IS MAYBE A GOOD THING
member education. SINCE THE VALUES ARE HIGHER, YET
THE AUTOS LOSE FAR MORE OF THEIR
- It has a good ROA yet but the time employees VALUE. TAXI LOANS, HOWEVER, HAVE
spend collecting these loans has increased. BEEN A BETTER BET THAN PERSONAL
Direct deals are better than indirect deals and AUTO LOANS.
new members are deﬁnitely more risky than
existing members when it comes to lower - IT is beginning to be more now that we have
scores. closed some loopholes that have impacted our
losses signiﬁcently...i.e. tighter policies and
- It has been marginally proﬁtable. We are rais- retraining loan ofﬁcers. We will make to low
ing rates on C, D, and E paper to shore up this credit scores done in the member’s and credit
market proﬁtability. union’s best interest.

- It has been moderately successful with a - It is not uncommon for us to approve a vehicle
higher reposession rate. loan for memebers whose score is below 600.
We look at their work history, their payment
- it has been successful because we monitor it history with the credit union and their ability to
on a a regular basis pay. Most people in this category rely on their
vehicle to get back and forth to their job and
- IT HAS BEEN SUCCESSFUL FOR PUR- they will let their house payment get behind
CHASES. IT HAS NOT BEEN USEFUL TO before they will not pay for their vehicle.
TAKE OLD BEATERS FOR COLLATERAL
- Just returning. Lendr protection may be the
- It has been successful with delinquency and key
charge off %’s being better than industry. We
did underestimate the collection efforts for our - Just rolled it out within last 6 months. Volume
higher risk paper and had to tweak those rates is good, but portfolio has not matured enough
up accordingly. to determine if successful.

- It has been successful. We always educate - Just started this past October.
our members about credit scores & budgeting.
Lesson: Closing the loan properly is a must. - length of employment is a great mitigating fac-
tor and repayment of preceding loans with the
- It has not always been successful. Having the credit union.
member but some money down towards the
vehicle is a plus. GAP insurance is a deﬁnate - Looking closer at these deals and usually
these days to have. reviewed by more than one lender prior to
approval, remember that we are here to do

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 49
loans!! - N/A

- Loss ratios continue at the 3 - 4% level. More - N/A
than adequate to make this part of our portfolio
productive - Our Auto Lending it’s not successfull, because
we don’t have a demand for it. I think it has to
- Low credit scores can be considered a relative do with marketing, paper work, requirement
term. We consider low 600-650. We don’t do and convinience. I know you can go to a Car
many of these loans as the member must also Dealer and drive a car the same day. Taking a
qualify under normal underwriting standards loan with the credit union depends on the bor-
(debt to income--etc.). However, the loans that rowers, if they provide all the required docu-
we have approved have all been successful so ments, if the member qualify base on income.
far. Overall, our auto loans are successful, but
don’t make tha many.
- Low Fico scoring members must have a strong
proﬁle (CU relationships, job time/type, home - OUR DELIQUENCY RATE IS LOW. WE
time/type), and have proper cash down SEND REPO NOTICE EARLIER IF WE
HAVE THE TITLE. CARS UNDER $4000
- Low scores are indicative of fundamental ARE PERSONAL LOANS
underlying issues. Financial education, action
plans and tools such as our tracker loans ad- - Our Members Have Been Happy To Have A
dress the underlying causes making members Car And We Have Been Successful In Repay-
more likely to be successful. Without behavior ment; Many Low Scores Are Related To Past
changes, budgets and better planning, these Credit Which Has Been Corrected
loans will have higher losses making lending to
this market not sustainable. - Our partnership with CUDL and Lender’s
Protection has been vitial to ur sucess as a top
- Marginally Sucessful- Low Credit Members lender in the NC marketplace.
have their outlets for borrowing - It’s a tough
job to convince them we are serious about - Our program is approximately 7 years old. We
saying “Yes” to them. typically originate 50 or so each month. We
currently have about 5,600 on our books.
- Members with very poor credit or no credit are When the program was started, not enough
extremely risky. The Credit Union must ﬁnd emphasis was placed on the member’s abil-
compensating factors to make these types of ity to repay. We tweaked that after about two
loans. years and required a Senior Vice President
approval if the credit score is below 540.
- Moderately successful with Lenders Protection
Program. We do not promote it but rather use - Our program is less than 2 years old. Mem-
it as a tool to make loans that we would not bers are grateful to have a low interest loan.
otherwise. Delinquency has been very minor

- Modest success. - Our program provides rates based on credit
scores. members with 550 score or less
- N/A require qualiﬁed comaker of 650 or higher or
100% share secured. Our members are also

50 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
counseled as to how to clear up credit report - somewhat we must watch the credit scores &
and how to save money. unsecured debt

- Our teenage borrowers have gone on to be - Somewhat, but not as successful as we had
stable adult borrowers. hoped.d planned. This program has allowed
us to made loans to members previously
- Our terms for lower scores have higher rates. denied. But, even with policy changes and
For ﬁrst time buyers, or those with three trades assistance offered, we ﬁnd that members are
or less, we offer $10K max loan, with 10% still making still making impulsive purchases
down payment minimum. We can override the and using payday. Therefore, continued
max $10K loan with a Regional Director ap- ﬁnancial counseling is needed with emphasis
proval. Enterprise has been a good partner in on planned spending over impulsive and the
assisting us with members who need reliable value your credit union offers.
vehicles within this price range or close to it.
- Stability of employment is major concern.
- Pretty much. We just scrutinize their applica-
tion very carefully. - Stay within agreed parameters.

- Since we leave the door open to loan to - Still a work in process - too early to evaluate
anyone - regardless of their credit score - our
loan ofﬁcers have the authorization to meet - Still to early to tell.
member needs if the history of the member
assures us that their adverse credit is not due - The pre-close counseling includes awareness
to lack of ﬁnancial responsibility - but, due to of what the ﬁnancing means to them ﬁnancially
situations out of their ocntrol, such as illness, and for the future...we commit that if they pay
loss of income, etc. Therefore, over the years, us, they can depend on future auto loans as
we have built a reputation - both through the long as we can see positive ﬁnancial manage-
membership and our indirect dealers - that we ment efforts. They see us as a partner in their
will not discount any application solely due ﬁnancial success.
to their credit score. We will always consider
“character” and circumstances before making - the structure of the loan is important. Member
an underwriting decision. needs to have money in the vehicle. We have
been able to save the members money when
- So far, so good. On the indirect side, we use they initially had the loan ﬁnanced elsewhere
LPI - Lenders Protection(a CUNA insurance and we can reﬁnance that auto loan with the
program) to assist in writing lower credit on credit union. We normally can beat their rate
that business. by several basis points.

- So far. Most CU loyalists pay the credit union - This is not a special program but an extension
regardless of situation. of our philosophy of meeting members’ needs
and those of our community.
- Somewhat successful. People with low credit
scores that do get a loan here tend to come - To early to tell
back to us ﬁrst when they are car shopping
again. - to early to tell - looking for viability of high rate
lowering on successful payment history but in

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 51
its infancy stages. provide.

- To-date it has been successful. We don’t have - We do not have a long enough history to as-
a lot of sub 620 credit score members but we sess success.
have tried to be more aggressive in this area
-- trying to assume more risk. We have utilized - We do not have a speciﬁc low score auto lend-
risk based pricing and by being more aggres- ing program, but it is certainly incorporated
sive, we have reduced our denial rate by 50% into our overall lending. We make sure all poli-
in the last 6 mos. cies are followed and want to see some equity
in the collateral and job stablilty. Income and
- Too new to assess but originations have clearly residence is always veriﬁed with current pay
increase to D and E borrowers. Loss history is stubs.
needed.
- WE DO NOT HAVE A STRUCTURED PRO-
- Toughest lesson is that you can’t simply say GRAM.
you’re doing risk-based lending. As a tradi-
tional “A-paper” shop, we’ve found it difﬁcult - We do not offer a low score auto lending
to change the mind-set of the loan decision program!Our program has been successful by
makers. I would say that our low credit portfolio analysis of response to FICO score
score auto lending program is only marginally requirements equivalent to ﬁrst mortgage
successful. Between our “A-paper” reputation FICO scores that mirror less likelihood of
and the fact that our decision makers are still default; raising the bar for participation in the
maturing in the low score arena, the business program with higher FICO requirements; we
we put on is not relatively signiﬁcant yet. determined that FICO score of 750 was the
top tier for 35% of borrowers applying and the
- Very successful low rate being the reward. Lower scores have
corresponding rates much more scrutiny, since
- We believe that it has been succesful. We the colleratal depreciates 1% to 3% monthly,
underwrite based on judgement, then price the we have reﬁned loaning against the vaule,
loan based on the risk it presents. What one despite low or high credit scores!
really has to pay attention to are young people
having thin ﬁle A/B Credit Quality. They’ll - We do think that we have been successful
get ya almost every time. They don’t have the helping members that have lower scores - we
experience handling loss of income problems have learned that it is important to also analyze
that leads then to poor Credit Ratings later. the amount of unsecured debt that the member
is carrying.
- We do not have a “low credit score auto lend-
ing program”. These are just common sense - We do very little of this ﬁnancing
lending guidelines we use to reduce the risk to
the credit union when loaning to members with - we don’t actually go by credit score, we use
lower credit scores. debt to income ratio, low score usually has
issues that need to be addressed, we assist in
- We do not have a formal program. We look resolving
at each situation on an individual basis. Most
mainline lenders do not loan on older cars, so - We don’t actually have a “program”, but rather
our members appreciate the opportunity we look for ways of making loans to as many

52 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
members as possible. - We have always had auto lending for all me-
mebers, including those with low scores (or as
- We don’t have a speciﬁc low score auto lend- we call them - on the edge), even long before
ing program. we used credit scores. We always try to work
WITH the member at all levels, and by keep-
- We don’t have a speciﬁc program for low ing in touch, we have been able to keep our
credit score borrowers. delinquencies down. But the most important
thing is to keep at it before it becomes too big
- we don’t proactively market it, just have it avail- to work anything out.
able
- We have always lent to borrowers with scores
- We experimented an increase in delinquecies less than 600. Borrowers have an excellent
and charge-offs this year and had to tighten paying history.
up on our loan policy and underwriting criteria.
We increased ﬁnancial counseling by referring - We have been able to offer car loans...espe-
members to our our in-house ﬁnancial coun- cially the saver’s loan..Members like this be-
selor. We also feel that collection calls need cause, they have savings after the car is paid
to be done immediately (within 7 days from off... They now know how to SAVE
delinquent account) instead of waiting to call
them after 30 days past due. - We have been able to provide member’s with
ﬁnancing with rates that are considerably lower
- We ﬁnd that many times the A paper quality than they would recceive from other ﬁnance
borrower is slow to pay more than the D or E companies.
paper borrower which is surprising. Members
are so thrilled that the CU gave them an op- - We have been successful in those that we
portunity to borrow - they work hard at keeping have done. However, our portfolio balance in
their payments current. the low credit score area is fairly low.

- We have a good lending program. We strive - We have certainly seen losses in low credit
to put the member in the car they can afford score autos. We will not accept a low score
and not the one they want most times. Our new member through the indirect loan chan-
individual credit counseling help them to be nel.
clear about the amount of payment they can
afford. We also remind them that a car loan - We have had reasonable success given the
is more than a payment, it is several payments economic conditions of Michigan
(Insurance, tag/tax, gasoline,repairs etc.
- We have had record years of auto loan growth
- We have a higher charge off ratio than the oth- to this market and have learned some things
er auto portfolio. We are serving our mission along the way to improve it.
by assisting our members in auto ﬁnancing.
- We have implemented the program about 6
- We have a very low delinquency/loss ratio and months ago - it is too early to tell at this point.
have been on risk based lending/pricing for We have seen asset growth as a result of our
about 5 years. Look at each case for mitigating changes.
factors and try to make them work.
- We have learned that notall D & E credit

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 53
members are the same. We try to loan to D - We just started our ﬁrst time auto loan program
& E members whose scores are on the way in January, so the jury is still out.
up and D & E members who aren’t currently
delinquent that are trying to be responsible. - We learned the hard way in the beginning and
There are other D & E credit members who are dug too deep into sub-prime. We reviewed
just sorry with everyone. Those are the ones policies & procedures and changed the way
we stay away from. The only way to tell the we were lending and is proveing to be much
difference is to take the time and actually go more successful now.
through their credit report line by line.
- We partnered with a mid-prime company sev-
- We have not had much luck with low credit eral years ago, but discontinued last year as
score auto loans. Harder criteria and cash portfolio did not perform as it should have.
down at the CU helps to insure better pay his-
tory. - We recently revised our First Time Auto Buyer
Program and added a requirement that the in-
- We have only been doing it for a year so we do surance premium be part of the debt to income
not have a matured portfolio yet. ratio.

- We have seen some losses higher than peer - We specialize in auto lending and it has been
on our portfolio, but generally the interest rate successful. One lesson we have learned is that
earnings offset the losses. We do look closely whenever we’ve repossessed a vehicle and
at their prior relationship with the Credit Union given it back to the member, it was not the best
and their job stability. We also offer to look at decision.
a good cosigner(home ownership/high credit
score) as an option to approve ﬁnancing. - We treat our auto lending like all loan pro-
grams - we provide an opportunity - which
- We have seen success in offering vehicle many people in this realm (low income, low
loans to low scored members who have an credit score) need.
established relationship with our Credit Union.
In fact we do repeat business with the. We - We use risk-based pricing . Low score doesn’t
have learned we can build a lower risk loan ALWAYS mean someone will default.
with these members that we are not able to
extend to new members especially those ac- - We’ve been able to make a few loans to
quired through the Indirect Channel. members that would otherwise have to turn
to ﬁnance companies for loans. Given the
- We have seen that about 65% of the borrow- economy, loans of this type are riskier. When
ers in this program have been able to increase prudent, we will continue to help our members
their credit scores through an afﬁliation in this fashion.

- We haven’t pushed this program at this point. - We’ve had no major problems so far.

- We incorporate risk based lending at all credit - We’ve learned the impact of lending to lower
quality levels. Many of our members are in the credit scores with short term employment.
620 and below score range, so we are more
diligent in obtaining pertinent information be- - Yes
fore making the loan decision.

54 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
- Yes counseling on how important it is to keep cur-
rent and pay their bills on time. Our big thing
- yes is about education for our members to teach
them how clean up their bad credit so if they
- Yes - close the loan hard at time of closing. want to buy a brand new car or a home they
Also we tell member that building credit with would have a better chance with their credit
us will help them for future needs score up because they have listened to what
we tried to teach them. The lesson we have
- Yes and no -- we have increased our lending learned is that not all members listen to what
in the underserved communities we serve -- you have to say. They just want what they
but we have had to make modiﬁcations after came in for.
absorbing higher than expected losses
- Yes it has been successfully. Our credit union
- Yes and no. Having loan ofﬁcers with experi- deliquency has been less than .5% We rarely,
ence making sub-prime loans is critical. Hav- if ever have to actually repo a car. Although
ing good collectors is critical. Getting involved we have threatened to do so a number of
with the member before they visit a dealership times. I think its important for the credit union
is critical. to help the member make the buying decision.
Many of our members would buy more car
- Yes and No. We have grown balances and had than they could afford if left on their own. We
some success. It is important to have ongo- try to educate our members and help them to
ing training and monitoring to address issues choose a car that is affordable after the initial
along the way, especially when it comes to purchase.
non-members through the indirect channel.
Also, be aware of economic conditions in your - yes payroll deduction has been key to success
area that could have an impact on your portfo- of program. If they do not sign up for direct
lio. deposit, loan will not be made.

- Yes because of not going too deep in the low - yes so far.
credit score, insurance backed, and focus on
reasons for low score. - Yes, although it is still very new.

- Yes but we do know that it requires constant - Yes, but it is a small part of our overall lending
monitoring and immediate attention to delin- program.
quency.
- yes, early education and intervention is key!
- YES FOR THE MOST PART. WE HAVE
FOUND THAT MOST OF OUR REPO’S ARE - yes, good tracking and monitoring is the key to
FROM PERSONS LOSING JOB OR PLANT a successful program
CLOSING. THEN WE WORK WITH THE
MEMBER TO COME TO AN EQUITABLE - Yes, it has been. Imperative to ensure proper
SOLUTION USING REPO AS A FINAL documentation since these loans do tend to
MEANS. have higher delinquency and charge-off ratios.

- yes I think it has been successful. We have - Yes, it is successful but we have found that fol-
been able to help them get their ﬁrst auto with lowing up on insurance and lien on title is very

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 55
important. Lenders Protection Insurance that helps to
insure auto loans in the 580 - 640 credit score
- Yes, it’s been successful considering we’ve range.
been able to serve these lower score appli-
cants at reasonable rates as compared to their - Yes, We have a very good track record of
other alternatives; all while keeping delinquen- lending to lower credit score members while
cies/charge-offs in-check. maintaining moderate loan losses. We look for
ways to make loans to our members not send
- Yes, our low credit score auto lending program them away.
has been successful. We have learned over
many years that we can take more risks with a - Yes, we have been succesful. The key is to
relationship member than we can with a new evaluate each individaul on their own merit.
member (indirect channel) who has not devel- Let me reiterate once again that low FICO
oped that relationship with us. doesn’t mean low wealth. Low FICO means
bad creditworthiness and that can happen at
- Yes, the program has been cuccessful. A pru- all income levels.
dent review of the application, credit history,
ability to repay and collateral is a must. - yes, we have been successful using central-
ized underwriting. We understand that verfy-
- Yes, very successful. We have learned that the ing information on the front end is critical as
higher the risk the better the LTV must be. We well as speedy collections.
push for direct deposit / payroll deduction, ac-
ceptance of disability, gap and life insurance, - Yes, we have transferred the risk to the con-
and sometimes we require weekly or bi-weekly sumer in relation to default insurance. The
payments coinsiding with their payroll. consumer pays the premium in relation to the
interest rate charged.
- Yes, very successful. You need to price it high
enough and charge enough fees to offest the - Yes.
losses. Also, using the credit bureau pre-
approval model eliminated the subjectivity of - Yes.
having a loan ofﬁcer underwrite these loans.
- Yes. Aggressive Collection Activies On delin-
- yes, we also require an acquisition fee of quencies.
495.00 from dealers to reserve for loan losses.
be sure and verify all information on credit - Yes. Don’t focus on just losses, price for the
apps. risk taken and the overall proﬁtability will be
there even if losses are high.
- Yes, we are not doing anything in speciﬁc. Our
normal FOM is county employees. Many of - YES. EXTRAORDINARILY STRONG COL-
them have lower income jobs so we were use LECTIONS DEPARTMENT AT START OF
to meeting their needs. We only use credit LOW CREDIT SCORE LENDING PRO-
score of a rate. We look at the member in GRAM. MAINTAIN BALANCE WITHIN
whole. PORTFOLIO. 75% A & B, 25% OTHER.
REFINANCING OR WORKOUT LOANS DO
- Yes, we have a successfull ﬁrst time car buying NOT WORK. ONLINE AUTO AUCTION
program and we are also looking at CUNA’s FOR REPOS MINIMIZES LOSSES. EV-

56 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
ERYONE HAS A GOOD STORY WHEN credit score low because they do not pay their
THEY WANT SOMETHING. CONTINU- bills on time or is it low because of a medical
OUSLY KEEP TRACK OF ALL POLICIES bill collection account? Are they requesting
AND PROCEDURES FOR NECESSARY to buy a reasonable vehicle for transportation
CHANGES. or are they trying to buy a Hummer? I will not
generally loan to someone who has already
- YES. It is new, but so far it has been success- had a repo. I look very closely to see if they
ful. are building debt and the potential for them
to ﬁle bankruptcy. Today, I look carefully at all
- Yes. It’s an advange remaining a single seg applicant’s mortage loans. If they have an in-
credit union and fostering the trust and loyality terest only loan or a negative am, I underwrite
of our membership. their loan using what their payment should be
when that loan is fully amortized.
- Yes. Members will pay for their transportation
to their jobs. High FICO score does not guar- - Yes. Track them carefully for delinquency
antee members will pay for titled loans. with unique coding and act quickly to stay in
contact. Limit your exposure to deﬁciency bal-
- Yes. Monitor the program closely and make ances and tendency to walk away by requiring
adjustments quickly. Do a good job of track- enough money down.
ing, analyzing and reporting to Sr. Mgmt and
the Board of Directors. - Yes. We have a very low repossession rate on
low credit score loans. Using payroll deduc-
- Yes. We have learned the it is very important tion and ACH payments along with agressive
to set and stick to speciﬁc LTV guidelines and early collection calls keeps delinquency to a
other loan requirements (veriﬁcation of income, minimum.
set up direct deposit) to reduce the risk and
losses that may occur more often with this type - Yes. We offer better ﬁnancing rates to our
of loan. members and we have not seen any increase
in our delinquencies or charge-offs.
- Yes. We have learned when treated right, low
score borrowers are just as apt to pay timely as - Yes--always call if payment is 15 days late
high score borrowers.
- Yes--some members just need a break to get
- Yes. We take a second look at loans turned back on the right track. When we give the
down through normal channels. We base the change they become lifetime dedicated to the
decision in the individual and how they have Credit Union
paid car loans in the past
- You have to get in touch with them, sometimes
- Yes. Building the loan correctly is a key. Buy- at one day past due. Try to get direct deposit
ing a vehicle that is reasonable, getting cash or PRD.
down, payroll deduction, and hard closing
the loan are keys. We realize that when we
help these type of members, they will be loyal
forever.

- Yes. Learn from their credit history. Is their

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 57
Notes

58 Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders
Notes

Steer Clear: How Credit Unions Help Car Buyers Avoid Predatory Lenders 59
National Credit Union Foundation
601 Pennsylvania Ave. NW, Suite 600, Washington, DC 20004
5710 Mineral Point Rd., Madison, WI 53705
800-356-9655, extension 6772
www.ncuf.coop
www.cuaid.coop