Q&A with Patelco CU: A Strategy To Help Credit Scores Soar

(L-R): Patelco CU Vice President of Consumer Lending Josh Garrison and Financial Wellbeing Program Manager Kipp Riesland
(L-R): Patelco CU Vice President of Consumer Lending Josh Garrison and Financial Wellbeing Program Manager Kipp Riesland

EDITOR'S NOTE: CreditUnions.com featured Patelco CU Vice President of Consumer Lending Josh Garrison and Financial Wellbeing Program Manager Kipp Riesland. They discuss how Patelco is working to improve the situation of members with low or no credit through a small-dollar loan and financial wellness principles.

Patelco CU has a laser focus on the financial health and wellbeing of its members. In early July 2020, the California cooperative introduced its ScoreUp Credit Builder Loan program to tackle the pain points many members face when rebuilding credit.

Participants in the program can request a loan from $500 to $5,000 and a repayment term ranging from six to 36 months. Patelco places that loan into a secure ScoreUp Savings Account. Then, every month, the member deposits payments into that account until they reach the total loan amount, at which point Patelco releases the funds to the member.

The credit union has made more than 1,000 of these loans, and, so far, all signs point to the product making a tangible impact on credit scores.

In this interview, Patelco’s vice president of consumer lending, Josh Garrison, and financial wellbeing program manager, Kipp Riesland, discuss the development of the ScoreUp product, how it fits within Patelco’s operational focus, product results, and more.

How does the ScoreUp program work?
Josh Garrison: Members come to us interested in the product. We work with them to decide how large a monthly payment they can afford — we go as low as $22 a month — and they decide their term. We deposit the total amount into a savings account that’s on hold until they repay the loan in full. We charge no fees and a flat 3.95% interest.

We designed this loan to be a break-even product, not a moneymaker. We are making an investment in our membership with this product. We want to help our members boost their credit, but we are also trying to create lifetime borrowers.

There is also a payment assistance element to this product. Can you tell me about that?
JG: Not all credit-building programs are the same, and the individuals who could use these products are often vulnerable. They might not have the best payment habits, and what happens if they make a late payment? It affects credit. This loan can never hurt their credit.

If a member runs into trouble and their loan goes 25 days past due, we automatically close out the loan and release the built equity back to them. But they can start again. It’s better than getting a call from a member who thought we could help them build credit, they hit a rough patch, and it’s going to take them two years to undue that late payment. 

How does this product fit into Patelco’s financial wellbeing work?
JG: In the 12 months before we introduced this loan, we declined 30,000 consumer loan applications. Of those, about half were due to credit — whether they were below the cutoff or had no credit. We can offer these members financial counseling, but we didn’t have a product to meet them where they were in their moment of decline.

In addition to that group, we have a large group of people in our geographic area who are new to the country, typically working in Silicon Valley with a good job. They just don’t have credit to get a car or an apartment. College students just getting started are another group. We wanted to build something that offered the benefits of a secured credit card but without putting collateral upfront.

Lastly, one of our financial health metrics involves the percentage of our members who have $500 in a savings account. That’s the minimum amount in our ScoreUp product. We’re committed to increasing our member’s savings ability. 

In designing ScoreUp, did you take inspiration from any outside programs or products?
JG: We did partner with Duke University’s Common Cents Lab, which sent me a few whitepapers on the topic. I also probably scoured more than 20 programs like this at other credit unions and fintechs and talked to a few credit unions. The two things we learned were the dangers of late payments and we had to get members in this product for longer terms. The real benefits start after eight or nine months.

Kipp Riesland: Common Cents Lab is a financial decision-making research lab at Duke University that creates and tests interventions to help low-to-moderate income households increase their financial health. Each year it opens up applications for financial institutions to apply to partner with it on projects. It’s a competitive process — more than 100 applied, and we were one of 15 selected. The Lab really helped us through the ideation and development of this product.

Did the partnership with the Common Cents Lab help the development of ScoreUp in other ways?
KR: The Common Cents Lab is all about trying to improve the financial health and wellbeing of the low- to moderate-income demographic. You can imagine how ScoreUp fits into that vision and mission. Through our partnership, we’ve made small tweaks to the live product. We’ve introduced an online calculator that runs applicants through a budgeting exercise, getting into the nitty gritty levels on income and expenses to show them how much loan they can afford. The idea being that by showing members their repay ability, they won’t bite off more than they can chew and will stay in the product for longer. We’re still too early in the rollout to say for certain it’s working, but the indications so far are positive.

How do members qualify for this loan?
JG: Our baseline goal is to make this available to everybody. But there’s always a challenge in that. Our only qualification beyond having some source of income is the debt-to-income ratio must meet or exceed 65%, and right now we’re at an 82% approval rate. That’s exceeds our expectations, as we were hoping to hover around 75%. Other than that, there’s no requirement.

We do have the regulatory obligation to ensure we’re giving our members something that will fit into their budget. We don’t want a member to take this out and go immediately into payment assistance. 

When you first introduced this product, what were your goals?
JG: We were thinking we’d provide about 50 loans per month to start and see how we evolved from there. We did much better than that — right away we were doing about 115 a month. Part of that is because we marketed to our 30,000 declines. We reached out to them with this solution and showed how we could partner with them on their journey to improved credit. Many jumped at the opportunity. 

What is your marketing strategy? Are you still marketing to declines? Other populations?
JG: We are. It’s part of our strategy to offer a cross-sell at the point of decline. We’ve also automated our decision engines. If a member applies for a personal credit card or an auto loan and doesn’t get approved, our system offers the ScoreUp option.

We also have something called Check My Rate. Before applying for an auto or personal loan, members can put in a little bit of information and we do a soft pull — which doesn’t hurt their credit — and show them our offers. If their credit score is below our cut off and they don’t have an offer, we give them the ScoreUp option. It’s seamless, it’s all digital, and we’ve found good traction that way.

We’ve also trained our branch staff to understand the ScoreUp budgeting calculator, which has been a success. In the branches themselves, ScoreUp has a 88% approval rate and nearly a 63% acceptance rate (75% for those who went through the calculator exercise). Our membership development teams also like to use this product as a lead as they enter new markets, like the South Bay, where there is a higher percentage of new to country potential members. 

Thus far, is this product helping members increase their credit score?
JG: In as little as three months, 64% of members with ScoreUp have seen an increase in their credit score; 62% saw an increase of five points or more.

I’d love to target 70%, but this is still a new product. We’ll learn more. Will it be 70% at six months? What will it be at eight? Or 12? Or 18? We don’t know yet what the magic term is, in terms of how long until you see what improvement. When we do, we’ll build that out into our marketing. 

Once you figure that out, and members finish out those magic terms, what do you hope they'll do next?
KR: We are in the process of understanding the population that is attracted to this product and how we might need to treat them differently. Even in these early months, we’ve attracted a range of folks. And although 80% either have no FICO score or a score less than 630, we still have some applicants with scores in the 700s applying.

We’re still searching for what to do within that 80%. At what point will their scores have improved enough that we can offer them an unsecured card, for example, to help them round out their credit profile in a responsible way? Or, for those members who might have gotten themselves into credit trouble before ScoreUp, when do we need to sit down with them to say this is a great product, but one term isn’t enough? If they want to progress, we’re going to need to connect them to a certified financial specialist to start them on a multi-year journey.

There are disparate groups who have been attracted to this product, and the next steps for each are going to be different.

JG: From what we have seen, a good number have applied for a credit card or personal loan because of their FICO score improvement.

Another area we are looking at is auto loans. Applicants can get approved for different rates depending on their credit score. There are members who don’t realize they can be approved for a car and they’re getting charged high interest. We have another product internally, called Level Up, that reduces a member’s interest rate 0.5% for each 12 months of on-time payments, up to 1.5% reduction over the life of the loan. But as it relates to ScoreUp, before a member decides to get a car loan they may be better off taking advantage of a ScoreUp Loan First. That decision could be the difference between getting a 6% auto loan and a 3% auto loan. 

What lessons have you learned from ScoreUp to make the product or experience better?
JG: Right now, 65 percent of our ScoreUp members come through the branch, 31% come from digital channels, and 4% come over the phone. The challenge for us has been digital. They’re more likely to misunderstand it.

We have members who apply, get approved, and are like, “What?” when we tell them we’re putting the funds on hold. They thought they were getting $1,000. We added a video on our website that really explains it well and walks applicants through the process step-by-step. They can hear someone saying the funds are not available until they are paid off.

I think our budgeting calculator has been huge, both online and in our branches. At first, members would request $5,000 because it was the maximum. But when you show them they’d be paying $250 and not see the funds for three years, they get it. Once members apply after going through the calculator, the average loan size is less — about $600. They’re opting for that lower amount because they want to be in it for the entire time.

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