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NCUF’s non-prime auto lending program to be tested by Filene Research Institute

The National Credit Union Foundation (NCUF) recently announced that the Filene Research Institute will test its non-prime auto lending program in Filene’s new accessible financial services incubator. Funded by a $700,000 grant from the Ford Foundation, the incubator will test, package, and scale innovative, viable, financial products that benefit low-and-moderate-income US consumers.  Given the increased attention that subprime lenders are showing to the auto market this effort could not be more timely.  The Federal Reserve reported a 32.6% increase in the number of auto loans made to borrowers with a FICO score of less than 700 in August (August 2013 compared to August 2012).

The non-prime auto lending program by the National Credit Union Foundation helps consumers gain access to reliable transportation which allows for increased access to jobs, housing, schools, and activities. Many credit-challenged consumers lack reliable transportation, and this program helps lenders fairly price and manage non-prime auto loans, incorporating the LIFT idea introduced by Filene i3.

“We searched nationwide to find financial products that are innovative in ways that benefit low-and-moderate-income consumers,” said Cynthia Campbell, director of innovation labs at Filene. “Chosen from more than 20 submissions, NCUF’s non-prime auto lending program shows promise of doing just that.”

Car loans have been the “bread and butter” loans of credit unions for many years and the non-prime auto loan market is huge, with an estimated market size of $100 billion to $200 billion. Offering non-prime auto loans encourages credit unions to reach out to people that need access to affordable loans to purchase cars to improve their economic well-being. Non-prime (or subprime lending) refers to the practice of making loans to borrowers with weak or no credit histories or limited payment capacity. This can include delinquent payments, charge-offs, bankruptcies, judgments, high debt ratios, or low/no credit scores. Non-prime loan portfolios will likely have higher delinquency and higher loss ratios than prime loan portfolios, but credit unions can prudently structure their loan portfolios so that non-prime auto loans are a good pool of business that can add income to the bottom line, yet meet the economic needs of more members.

“88% of Americans drive to work.  Without a car, a person’s options for work, groceries, child care, and/or health care become extremely limited and can keep a person mired in poverty,” said Gigi Hyland, NCUF executive director. “This program helps credit unions offer non-prime auto loans to consumers who can benefit the most from a safe, reliable used car.  In doing so, consumers avoid the costly pitfalls that come with buying from the corner buy-here-pay-here auto lots and other predatory lenders.”

Using credit unions as the proving ground, Filene will test the product’s viability with mainstream financial institutions during an 18-month product incubation beginning in January 2014. Filene is still looking for forward-thinking credit unions to test potential products. Contact Cynthia at cynthiac@filene.org or 608.886.0087 for more information.