An appeals court decision, NCUA Chairman Rodney Hood’s agenda and the Federal Reserve’s decision to cut interest rates have one thing in common: They’re all signs of an increased interest in low-income lending, especially for community credit unions.
Marketing to low-income borrowers, many of who have a thin credit history or poor credit, requires a different strategy than most credit unions are used to, especially if they primarily serve suburban markets. We’ve got three important low-income strategies your credit union will need to successfully attract this market, but first, it’s important to understand the forces driving this trend.
On August 20, 2019 a federal appeals court dismissed most of a lawsuit filed by the American Bankers Association against the NCUA contesting FOM regulatory relief provided to community credit unions.
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However, the court did not dismiss a section of the lawsuit that involved allowing a community credit union to add a large city and its suburbs to its field of membership without having to serve its urban core. The NCUA must return to court to explain how it could enforce this rule, while also preventing credit unions from redlining, an illegal business strategy in which a lender refuses to make loans in low-income or minority neighborhoods within a service area.
NCUA Chairman Rodney Hood has gone beyond basic lip service when talking about the need for credit unions to serve underserved communities. The Republican has spoken about financial inclusion at most, if not all, public appearances since he was sworn in on April 8, most recently in an Aug. 20 speech at the Defense Credit Union Council’s annual meeting. Board Member Todd Harper, a Democrat, has also said he is deeply committed to increasing access to financial services for all.
NCUA staffers don’t always enforce the board’s intent at the examiner level, but Hood and Harper’s comments signal a shift from an era of post-recession risk management that has made it more difficult for credit unions to serve low-income or credit-challenged members.
The Fed’s decision to lower rates, combined with expert predictions of a looming recession, further increases the likelihood that community credit unions will find themselves serving more financially challenged members due to economic realities.
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As a marketer, how can you adjust your credit union’s strategy and message to increase low-income market share?
- Don’t Shame Low-income consumers already know they may not qualify for your products and services. If you’ve ever been in that situation yourself, you know the approval process can be humiliating. If your marketing message promises an automated, digital experience, don’t require everyone below A paper to speak to a loan officer. To the consumer, that feels like a bait and switch and many will abandon the process at that point. Fintechs already understand this aspect of human behavior and have adjusted their processes accordingly. Think about it: Nearly all underwriting decisions are based entirely on data anyway, so how does a phone conversation with a loan officer better manage risk? If your automated approval process is driven by simplicity, not data intelligence, you’re doing it all wrong.
- Lift them up Low-income consumers aren’t as price-sensitive as wealthier consumers with strong credit scores who know they will be approved no matter what. The low-income market wants financial services that will meet their needs now and help them improve their financial standing. Lead with short-term and long-term benefits, not pricing.
- Meet their needs Earlier this year, Fifth Third Bank launched its first-mortgage program, providing up to $1,500 toward closing costs for low-income borrowers or borrowers who purchase a home in a low-income neighborhood. The new loan can be combined with the bank’s assistance program, which offers up to $3,600 toward a down payment and only requires 3% down. The inability to come up with a down payment and closing costs is the most common reason low-income borrowers don’t qualify for a mortgage. If your credit union isn’t addressing this hurdle, you won’t get far with low-income members.
The signs are clear: Credit unions will increasingly serve low-income borrowers in the coming years. Financial cooperatives that embrace this trend early and adjust their marketing strategy will win the day and weather any potential economic storm.