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Small Dollar Consumer Loans

Nonprofit Lenders Making a Difference

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To create innovative solutions for asset building

organizations helping low- and modest income

households build credit and financial access.

Good Credit is an Asset

Mission driven nonprofits and other entities are uniquely

positioned to help the households they serve build credit

as an asset – often the FOUNDATIONAL asset.

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• Is there a need for CDFIs to provide SDLs?

• Is there demand among CDFIs to provide SDLs?

• What are the challenges to implementing SDLs?

• Are SDLs a good financial capability tool?

• What are some good models for underwriting SDLs?

• What are some high level ways to support nonprofits

offering or wishing to offer SDLs?

What this report

OFFERS

• Synopsis of findings of research conducted in

2012

• Recommendations for nonprofits offering or

considering offering SDLs & other stakeholders

to support them

What this report does

NOT OFFER

• A comprehensive assessment of the

SDL landscape

• Details about current SDL programs

• Definition of a responsible SDL

What is an SDL?

For Purposes of CBA’s Report…

• Closed-End Loan with a minimum 90 day term

• Repaid in equal installments

• Made for the personal, family or household

purposes

Why SDLs?

1 in 7 Americans lives in poverty...

Non-bank financial services is a $100 billion

dollar industry that traps consumers in

vicious cycles of debt and instability...

Responsible

SDLs Matter

• Traditional Financial Institutions

•

Underserved not generally target market

•

SDLs not widely marketed

•

Unbanked consumers unable to access

• Retail Consumer Finance Companies

•

May trap consumers in cycle of repetitive borrowing

• Nonprofit Lenders

• Demographic alignment: serve underserved communities

• Mission-driven: client success = organizational success

• Financial Capability by design: product + education

• Nonprofit lenders are increasingly providing small

dollar consumer credit options to help low income

households transition out of poverty and build

economic security.

• Nonprofit lenders experience real and perceived

challenges as they attempt to improve efficiency,

manage risk and bring small dollar loan programs to

scale.

• Identified over 100 nonprofits making or interested in making SDLs

• 44 organizations responded to 2012 survey

• 10 follow up interviews

ACCION Texas

ACE

BiG Austin

Black Hills Community Loan Fund, Inc

Business Center for New Americans

Butte County Self Sufficiency Loan Fund

CASA of Oregon

Champlain Valley Office of Economic

Opportunity

Central Vermont Community Action Council

Citizen Potawatomi Community

Development Corp

Community Action of Northeast Indiana

Community Development Finance

ECDC Enterprise Development Group

First Nations Community Financial

Four Bands

Greater Newark Enterprises Corporation

Greater Southwest Development

Organization

Hartford Community Loan Fund

Innovative Changes

International Institute CDC

Iowa Able Foundation

IowaMicroLoan

Just In Time for Foster Youth

Justine PETERSEN

Kansas Assistive Technology Cooperative

Kentucky Domestic Violence Association

META Mountain States Group

Mission Asset Fund

Montana Community

North County Lifeline

North Side Community Federal CU

NYC Dept of Consumer Affairs Office of

Financial Empowerment

Office of Rural and Farmworker Housing

Salt River Financial Services Institution

The Capital Good Fund

Transitional Living Communities

UCEDC

Ways to Work

WECO Fund Inc.

West End Neighborhood House

Wind River Development Fund

Women's Economic Ventures

Women's Opportunities Resource Center

Majority of respondents report that they offer or plan

to offer:

•

Installment

products

•

As direct

lenders

•

To help clients

build credit &

meet other

consumer

needs

14 18 34 13 15 A S A P A Y D A Y L O A N A L T E R N A T I V E T O H E L P W I T H A S T R A T E G I C P U R C H A S E ( A P P L I A N C E , C A R , T O H E L P B U I L D C R E D I T T O A D D R E S S A S P E C I F I C N E E D ( E . G . C O V E R I M M I G R A T I O N C O S T S , E T C . ) T O A D D R E S S A S P E C I F I C U N D E R S E R V E D T A R G E T M A R K E T

HOW DO SDL PRODUCTS MEET CLIENT NEEDS?*

*

R E S P O N D E N T S C A N S E L E C T M U L T I P L E A N S W E R S

“Additional safe and affordable credit products will help clients

cover short-term needs while also providing financial counselors

with another tool to help clients build or improve credit.”

-- NYC Dept of Consumer Affairs Office of Financial Empowerment,

New York, NY

“It will directly help to meet our mission of helping low-income rural

families build assets.”

-- Office of Rural and Farmworker Housing, Yakima, WA

Findings: Key Challenges

53% 53% 58% 33% 42% 33% [ O N L O A N O R I G I N A T I O N / C R E D I T A P P L I C A T I O N F A C I L I T A T I O N ] [ O N S E R V I C I N G L O A N S / C R E D I T ] [ O N C O L L E C T I O N S ]

Findings: Key Challenges

83%

CONCERNED THAT THE INTEREST RATES THEY CHARGE

OR PLAN TO CHARGE ARE OR WILL NOT BE ENOUGH TO

COVER THE COST OF THE LOAN PRODUCT

80%

CONCERNED THAT THE INTEREST RATES THEY CHARGE

OR PLAN TO CHARGE ARE OR WILL NOT BE ENOUGH TO

COVER THE RISK OF LOAN LOSSES

Findings: Key Challenges

5 3 % 5 3 % 3 3 % 3 3 % D E L I N Q U E N C Y R A T E S L O A N L O S S R A T E S

DELINQUENCY AND LOAN LOSS RATES AS PERCEIVED BARRIERS TO SDL

PROGRAMS

Findings: Technology

6 5 .2 2 % 3 9 .1 3 % 8 2 .6 1 % 4 3 .4 8 % 8 6 .9 6 % 3 4 .7 8 % 7 7 .7 8 % 3 3 .3 3 % 8 3 .3 3 % 3 3 .3 3 % 6 6 .6 7 % 3 3 .3 3 % 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% I M P O R T A N C E B A R R I E R I M P O R T A N C E B A R R I E R I M P O R T A N C E B A R R I E R

IMPLEMENTATION ISSUE: TECHNOLOGICAL CAPACITY

Findings: Regulations

5 3 % 4 7 % 3 2 % 3 2 % 3 3 % 1 7 % 9 % ₉%

REGULATORY ISSUES AS PERCEIVED BARRIERS TO SDL PROGRAMS

Prospective Providers Current Providers

“Our state has embraced our desire to compete with predatory

lenders. They have bent over backwards to accommodate our

questions and work with us on our license application.”

--Montana Community Loan Fund, Missoula, MT

“Regulators have been a significant impediment to expanding

operations. It has been difficult to get them to grant us a consumer

finance lending license and they have even been extremely strict on

the wording of educational materials, marketing materials, and

signage, often causing long delays in material distribution.”

--Community Development Finance, San Francisco, CA

• Addressing a critical need

• Balance sustainability with client impact

• Limited resources

• Need for flexibility in underwriting &

servicing

Findings: Implementation

Issues in General

• Data Analytics

• Social Relationships

• Psychometrics

“The [social element and] level

of involvement is not only

critical - it allows folks to

exercise power over their

finances. MAF is merely the

facilitator, recorder and

guarantor of the social loans.”

--Mission Asset Fund, San

Francisco, CA

Findings:

Interventions are: Relevant, Timely, Actionable, Ongoing

Findings:

“CGF provides financial coaching for borrowers and “Coaching

Loans” for loan applicants who do not qualify for loan products.

Coaching Loan participants build credit and receive financial

education in order to prepare to be a successful borrower in the

future.” --Capital Good Fund, Providence, RI

“The process educates the borrower about the American financial

system - credit report, monthly payments, etc.; and it helps the

client establish and develop a credit score which is an important and

critical asset in this country as it affects all other financial activities

and decisions of the client.”

Findings:

Findings: Recommendations

Nonprofits should leverage their unique position to:

• Meet the short-term credit needs of their clients

• Provide a responsible alternative for underserved

households without access to other SDL options

• Help households build credit and other financial assets

• Leverage as a powerful financial capability tool

Findings: Recommendations

Nonprofits should explore existing -- and new -- options:

• Refer to/partner with community credit unions, banks, or other

nonprofit lenders where feasible or optimal. Examples include:

• Texas’ Scalable Small Dollar Loan Program

• Mission Asset Fund’s Lending Circles

• Ways to Work’s vehicle purchase program for working parents

• Assess cost/benefit of referring to/partnering with responsible

for-profit social enterprise lenders

• Develop a turnkey small dollar loan platform similar that could

enable nonprofit lenders to efficiently review applications and make

approval decisions that would increase loan cost recovery by

Findings: Recommendations

Funders, policy makers and intermediaries can and should support

nonprofit SDL lenders:

• Funders can offer grants to cover staff time, overhead, and other

operating costs as well as grants or forgivable loans to help bolster

loan capital needs and loan loss reserves.

• Policy makers can advocate for funding 12 US Code § 4719 - Grants

to establish loan-loss reserve funds, authorized by the Dodd Frank

Act in 2011 but currently unfunded, to help certified CDFIs defray

the costs of operating small dollar loan programs.

• Intermediaries like CBA should create and promote forums for

nonprofit lenders to help identify and share lessons learned and

best practices in the small dollar loan space.

What to look for:

Accessible to

your clients

Flexibility and

Affordability

Potential for

graduation

Programmatic

•

Articulate the need, but also the demand

•

Cultivate allies

•

Design a good product

•

Measure success

Operational

•

Staff for success

•

Be consistent but flexible

•

Use technology to your advantage

•

Manage data carefully

•

Collect correctly

Regulatory

•

Know your state’s lending licensing and other rules

•

Comply with federal laws

Financial

• Create an SDL Learning Community to

share & connect

• Update CBA SDL Lender Member

Products and Programs

• Advocate for CDFI Loan Loss Reserve

Fund

Sarah Chenven

202-730-9390

[email protected]