National Credit Union Administration

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National Credit Union Administration Access
Across America Summit Short Term Lending
Overview By Kirk Chewning Executive Vice
President TranDotCom Solutions
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What is a traditional Short Term Loan/Payday Loan?
Loan Amount 100-1000 Loan Term 4 days to 37
days Loan Fee 15 to 30 per hundred
borrowed Typical Criteria Must have a job and a
paycheck Many lenders require a checking
account Limited credit check (May use sub prime
industry credit bureaus) - Teletrack CL
Verify - Do not use traditional FICA
scoring Loan amount typically based upon a of
income May require principal pay downs after 2
week due date
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Customer Services Graduation Theory Short Term
Lending is NOT to Check Cashing
Financial Graduation Theory
Wealth

• Investment
• Asset Accumulation

The short term loan market place consists of
members with an average income of 30K a year
and an active checking account
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Banked

• Bank Line of Credit
• Savings
• Credit Cards
• Short Term Loans

Unbanked

• Check Cashing
• Debit Cards
• Money Orders
• Remittances

The short term loan market differs greatly from
check cashing customers
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Value of a Short Term Loan
   
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Difference 80 savings Little to no
embarrassment No credit degradation Limited
future issues unnecessary costs w/vendors
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Short Term Loan Customer Profile Facts

• 68 are under 45 years old only 4 are over 65
• 82 have a high school diploma or better with
  52 having some college or a degree
• 42 own there own homes
• 100 have a steady income and an active checking
  account
• Payday advance APRs are often lower than
  customers alternatives
• 100 payday advance with 15 fee 391 APR
• 100 bounced check with 48 NSF/merchant fees
  1,251 APR
• 100 credit card balance with 26 late fee
  678 APR
• 100 utility bill with a 50 late/reconnect fee
  1,304 APR
• Approximately 20 of members today have used a
  short term loan
• Several data studies have been done with sub
  prime credit bureaus and TranDotComs database
  to determine this
• 96 are aware of the finance charge, and 78
  recalled it being disclosed as an APR
• 92 believe payday advance is a useful service
  only 12 were dissatisfied with last advance
• TranDotCom Solutions TurboCash processed over
  1B in short term loans in 2006

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Typical Short/Branch Term Lending Store Metrics

• 1,100 square feet or less
• Typical store takes 1.5 years to mature
• Makes 500 loans per month
• Average loan amount 300
• Typical store front fee of 17.50 (Call Centers
  average 25-30)
• A monoline store earns about 22,500 per month
  in fee income
• Average store has 230 active customers that do
  on average 2.17 transactions per month
• Average store has 69,000 outstanding
• Average store has 4,000 in bad debt per month
• Average store may net 10,000 a month or more

   
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Source TranDotCom Solutions
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Short Term Loans - Growth

• Short Term Loan Growth in of stores
• 1992 Less than 1,000 stores
• 2006 Over 25,000 stores
• Over 8 Billion in Fee Revenue in the U.S.
• Over 20 Million customers Over 160 Million
  transactions
• Current Growth Rate of advances annually
  Exceeds 20
• Over 5 companies have gone public in the short
  term lending space in the past 3 years
• Over 50,000 employees serving the industry

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Short Term Loan Metrics
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Short Term Loan Channels Process
Internet
Branch
Marketing Source
Marketing Source
Credit Union Website
Member or Customer comes into branch
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1
Marketing Website w/Application Pages and
E-signature
Provides Pay Stub CSR reviews Member Statement
verifies information
2
Inputs application into a Loan Management System
hits submit
Loan Management System
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System automatically underwrites loan

• LMS Underwriting rules
• Credit Quality
• Regulation

Approved or Denied Loan Documents w/APR ACH
Authorization or adverse action letter are auto
populated to screen printed

• Approved or
• Denied Tentatively
• Loan Documents w/APR
• ACH Authorization are
• auto populated instantaneously
• for customer to sign

2
4

• LMS Underwriting rules
• Credit Quality
• Regulation

• Sub Prime Credit Bureau 1
• Auto Denial Reasons
• Scoring

5
3

• Sub Prime Credit Bureau 2
• Auto Denial Reasons
• Scoring

• Sub Prime Credit Bureau 1
• Auto Denial Reasons
• Scoring

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CSR has Member sign loan documents

• Final Verification Process
• Call Center does 4-8
• processes to further verify
• the customer and process

Fund loan via cash, check, ACH, or Debit Card
If OK Loan Originated Funded Via ACH
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Why should Credit Unions participate in short
term lending?

• Credit Unions have the opportunity to offer a
  lower price
• Federal CUs may want to try a price of 18 with
  a X application
• 10-15 for CUs per hundred vs. 15-30 per
  hundred (over 50 less)
• Better price for consumers/members more
  economical
• Provide price competition for first time in
  industry
• Over 15 of current credit union customers use
  short term lenders
• Over 10,000 Million customers in the current
  market place and growing

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Why should Credit Unions participate in short
term lending?

• CUs have access to a system that can limit
  Renewals/Rollovers which is major point of
  contention from consumer interest groups and
  regulators
• CUs have the ability to require and
  automatically administer required principal pay
  downs on each renewed loan or after a specific
  renewal number.

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Technology to ensure the elimination of the cycle
of debt
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Why else should Credit Unions participate in
short term lending?

• 5. Attract younger average income new members
• 6. Provide complete array of financial services
  for its members serving the true credit union
  general mission
• Have new product to drive members back to the
  credit unions
• Currently turning away members
• Short Term loans in the credit union marketplace
  could react very similar to how car loans and
  positive pay have in the past! (very favorable)
• 8. Financial Literacy Ability to discuss face
  to face with customers financial responsibility

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Proactive
Reactive
vs.

• Short Term Loan
• Customer understands financial condition and
  wants to have a proactive product to solve the
  cash flow need
• Pricing is fully disclosed with loan documents
  signed by customer up front on each transaction
• Opportunity for education with each transaction
  from the credit union

• Positive Pay/Overdraft
• Customer lets reactive product work for them.
• APRs can be very large for short one-two day
  mishaps depending on product. Much larger than
  short term loans
• Fees/costs may be not fully disclosed to the
  customer prior to use.
• Lack of education prior to need of product

   
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What is the key to short term lending?
Keeping the cost of underwriting, portfolio
management, origination to a minimum - Must
have an automated instant underwriting
solutions - Cost to make loan must be under 15
including labor (Typically 70-130 per loan for
CUs) - A system where Tellers can originate
loans - Best practice programmed underwriting
rules make process even faster and consistent -
Underwriting is integrated with relevant third
party sub prime credit bureaus - Teletrack - DP
Bureau - State regulatory database integration
where applicable (Veritec) - Loan guarantees
available through LoanSafe - Fully integrated
with ACH - NACHA or CSV formats
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New Customer Acquisition
Collections
Existing Customers/ Renewals
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How to get started?
1. Decide on model - Models available for all
credit unions and CUSOs (State chartered,
Federally chartered, centralized call center
model, CU commission approval by state, state
short term loan license, etc. - For Federally
chartered CUs we recommend a 18 interest with a
X application fee required regardless of
approval 2. Implement a lending strategy -
Underwriting rules, rates, loan documents, and
operating procedures 3. Go Live - Provide
financial products your members need
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Existing Credit Union Alternative Financial
Participants

• Check Cashiers
• Bethex Federal Credit Union (NY)
• Charter Oak Federal Credit Union
• SSA Baltimore Credit FCU (MD)
• Tax Preparation Services
• Alternative Federal Credit Union (NY)
• Food Processors Credit Union (CA)
• Safe Savings Accounts
• Charlotte Metro Federal CU (NC)
• Serving New Americans
• Gwinnett Federal Credit Union (GA)
• Other Relevant Lending Products
• CUNA Credit Union (WI)
• New England Federal Credit Unions VT

• Payday Lending Products
• ACCO Federal Credit Union (PA)
• ASI FCU (LA)
• Bethex Federal Credit Union (NY)
• Brewery Credit Union (WI) Current Client
• Haroborstone Credit Union (CUSO in WA)
• Mazuma Credit Union (MO)
• North Side Community Federal Credit Union (IL)
• Prospera Credit Union (WI) Current Client
• LaDOTD Credit Union (LA) Current Client
• Xtra Cash CUSO (MO KS) Current Client
• Indiana Credit Union League Current Client

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Key Takeaways Short Term Loans

• The short term lending industry is 15 years old
  and growing rapidly
• A short term loan product is a proactive
  financial tool which allows a CU to educate
  members further on personal financial matters
• Offered at a reduced rate for consumers the
  credit unions can offer the product while truly
  serving its members and making sizable returns
• The traditional risk of the product can be
  mitigated by a loan guarantee
• The product can be offered in a branch, or be
  marketed to be processed at a central loan
  processing center for further efficiencies and
  economies of scale
• Easy to implement Internet based application
  products are easy to implement quickly
• In many cases approximately 20 of your members
  are using this lending productit may be
  responsible to assist them

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Questions? Thank you! Contact Information
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Kirk M. Chewning Executive Vice
President TranDotCom Solutions 678-355-1551 ext
1203 Kchewning_at_tdcemail.com