From the Desk of Roger Douville,
Back end products are an increasingly sensitive compliance issue for all lenders today. The CFPB is cracking down on who can sell what and where they can sell it. But these products do add value for the member. With the rising cost of vehicles and the skyrocketing cost of vehicle repair, these products provide peace of mind against budget busting surprise repairs.
NBC news published an article with data from Bankrate, in February, 2017 that reminded us 63% of Americans lack sufficient cash reserves to cover a $500 financial setback. What is even more eye opening is that “higher income respondents (defined as $75,000 or more in annual earnings) said they do not have enough cash to handle such an emergency”. That might explain why we see 60-day delinquency ratios close to 1% in even the top tiers for some programs across the country.
There is no doubt that being cautious about increasing loan advances on shrinking collateral values is prudent. Adding more unsecured negative equity to the loan amount seems counterproductive. However, forcing members to seek shelter in revolving debt options or payday loans to cover surprise life events is not worthy of the credit union credo of “people helping people”.
The fact is that these products are being used and provide real value for our members. A planned expense is better than a surprise expense any day. In refinance, like purchase, it’s not just about lowering the rate, consumers primarily want payment relief, something that they can budget and plan for. Not surprisingly, credit union back end products are among the least expensive for the consumer!
With that, our focus should be on educating our members. Properly disclosing the costs and benefits of these products. Let’s spend time and effort being “real” with our members and setting the proper expectations. rateGenius Loan Officers make educating members on the costs and benefits of GAP and VSC products a top priority. As lenders, we need to look at our programs and reassess what limits our programs have and whether or not they make sense for the member.
Are we simply relying on old lending standards to guide our advance policies in today’s economic environment because that’s the way it’s always been done? Are lower cap limits on these back end products actually counterproductive to our credit union goals? Or worse yet, negatively impacting the financial success of our members? Or can we discern that a bumper to bumper VSC program on a high end unit is logically more expensive than a mid-level program on a compact car?
All the best,
VP of Lending Services