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An Overlooked Product

By Blair Rugh 7 Sep 2016

When I review advertisements for financial institutions, I always see ads for deposit products, closed-end home loans and home equity lines of credit. I almost never see advertisements for plain old vanilla unsecured lines of credit, and I don’t know why.  Consumer lines of credit are probably the least regulated consumer products that a financial institution can offer. The lender has to provide a pretty simple disclosure when the line is opened and has to provide a periodic statement to the customer. If there is a significant change in the terms of the account, notice must be provided of the change, but other than that there are few regulatory requirements governing unsecured credit lines.

The other good news is that the lender can set virtually any terms that it wishes for the unsecured credit line (short of any unfair, deceptive or abusive act or practice, of course). The rate can either be a fixed rate, a variable rate tied to an index with minimum and maximum rates, or the rate can be determined from time to time at the lender’s discretion. The lender can select whatever it wants as the term of the loan and the terms of repayment. Also, it can charge any fees that it wishes within reason.

Finally, the cost of providing a credit line to consumer customers should be pretty minimal for most institutions. To my knowledge, core banking automation systems have the capacity to provide the servicing for credit lines.  If the customer also has a deposit account, most have the capacity to provide a combined statement for the deposit account and the credit line so there is little additional cost to provide the periodic statement the credit line requires.

From the customer’s standpoint, the credit line is a valuable product for the financial institution to offer. It can provide the customer an immediate source of funds for unexpected expenses. The CFPB and the other regulators have virtually killed the goose that laid the golden egg of overdraft protection; the credit line is another way of offering that product. Charge a reasonable fee for each overdraft transfer. It won’t generate as much income as the old overdraft protection programs, but anything is better than nothing. Charge an annual fee for the credit line availability. Most customers would be happy to pay it.

Most financial institutions obtain the credit report and credit score of a new customer opening a deposit account. Most customer service representatives are not credit experts, but given the information that they obtain about a customer at account opening such as length of employment and salary, coupled with the credit report, the credit decision, particularly for a low dollar credit line is pretty easy. My guess is that virtually all new deposit account customers will qualify for a credit line of some amount. The credit decision for existing deposit account customers is even easier. For example, criteria could possibly be any customer who has a direct deposit and has handled his or her deposit account in a responsible manner is going to qualify. The only question is for how much?

The other benefit to the lender is that it gives one more hook into the customer. The more relationships that a customer has with his or her financial institution, the more difficult it is for the customer to leave or, better yet, he or she is less likely to want to leave. The cost of customer acquisition for financial institutions is increasing; you don’t want to lose what you have. Also, the CFPB is in the throes of cracking down on pay-day and other small dollar, short term lending which will likely increase the demand for small dollar credit lines, particularly for lower income persons, depending on the final pay-day rules. Those credit lines could be a significant star in a lender’s CRA crown.

Explore promoting consumer credit lines. Ask yourself why not? I don’t think you will find many answers.

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