Many financial institutions offer skip-a-payment programs to allow customers to defer a loan payment in exchange for a fee or donation. While these programs can be beneficial to both the customer and institution, consider these issues before implementing or continuing such a program.
The Pros
Even though the skip-a-payment program allows customers to defer their loan payment for the month, interest continues to accrue, and the loan is extended an additional month – keeping the loan on your financial institution’s books for a longer period of time.
Skip-a-payment programs can also generate fee income for your bank or credit union. Most financial institutions tier their fees based on the loan amount, but generally doesn’t exceed $50. These fees are usually charged to help defray any administrative or overhead costs involved with the program. However, some states do not allow a fee on skip-a-payment programs. Your financial institution’s registration with the federal deposit agencies may also play a factor in charging fees on skip-a-payment programs.
Regardless of your institution’s ability to charge fees, all banks and credit unions can benefit from the customer loyalty that comes with skip-a-payment programs. Some financial institutions use the skip-a-payment fees to donate to charitable organizations. Others use the fees to fund scholarship programs in their community. Such contributions enhance goodwill and can even gain press attention – a factor that encourages awareness.
With the nation’s skyrocketing unemployment rate and the plummeting economy, a skip-a-payment program is useful to customers during this time. Plus, if customers and members go to their banks and credit unions for help with their finances, these institutions can counsel them on responsible money management. This definitely would not happen if they go to predatory lenders like title companies and payday lenders. To ensure that customers aren’t over-extending themselves, some financial institutions put stipulations on the program, such as being able to use the program once every 12 months and not more than three times over the life of the loan.
Many financial institutions have shared reports of how their customers were able to have money for holiday gifts or an extra cash cushions during unemployment because of skip-a-payment programs. Some banks and credit unions have even gone a step further and eliminated the fees involved with skipping a loan payment to help people during these hard economic times.
Other skip-a-payment practices include:
• Two skipped loan payments for one fee as compared to the standard one-skip practice
• Two-month, no-cost extensions of monthly loan payments
• Offering the program all year round, instead of only during the holidays
Cons
In a word – compliance. Implementing and maintaining a skip-a-payment program triggers all kinds of laws and regulations – the Truth In Lending Act, the Equal Opportunity Lending Act/Regulation B and Regulation Z to name a few. This is easy to overcome but you will have to leave room on your marketing material for the necessary compliance verbiage.
Skip-a-payment programs are permitted on non-real-estate, consumer loans, whether closed or open-end, secured or unsecured. It’s important for banks and credit unions to fully understand what’s involved with offering a skip-a-payment program to their customers/members. Work with your state and federal agencies, regulators and examiners to make sure your program and eligibility requirements are within the law. Furthermore, all promotional materials and loan contracts should be approved by an attorney.
Here are a few questions to consider when offering a skip-a-payment program:
• What are the latest regulatory changes regarding skip-a-payment programs?
• What affect do these changes have on closed-end credit?
• What affect do these changes have on open-end credit?
• How do these changes affect periodic statements, which are required for open-end credit?
• Is the skip-a-payment fee always considered a finance charge under Regulation Z?
• Are there any additional considerations?
From a customer point-of-view, skipping a payment is tempting, especially during the holiday shopping season. However, when they participate in the skip-a-payment program, they’re simply taking more time to pay off debt. While that does mean more money in interest charges for your financial institution, it also means more debt for your customer. Each financial institution has to make sure that their skip-a-payment program is done right, responsibly and doesn’t put customers in a bad financial situation.
Another potential issue is whether skip-a-payment programs actually help. Most financial institutions only make a skip-a-payment offer to people who have loans in good standing. However, the people who would benefit the most from deferring a loan payment may already be in trouble with their loans, and therefore not eligible for the offer.
Ultimately, like any product or service, skip-a-payment programs need to be constantly evaluated for their usefulness to the financial institution and the financial institution’s customers.
