Transcript Slide 1

Borrow and Save
Building Assets with a Better Loan
A Federation Pilot
The Federation
•
For over 40 Years, the Federation has invested in credit unions that serve
loan and moderate income communities
•
We have designed products and programs to help credit unions serve
underserved communities
•
We created an investment product, PRIDE, that shares the risk CUs
offering alternatives to high cost predatory loans
•
We placed reserves at CUs to support alternative to payday products
•
In 2011 we launched Borrow and Save
•
Our 250 credit union members with over $15 billion in assets that serve
2.2 Million members are our weapon in the fight to offer fair and
affordable financial products
What is Needed in the Marketplace
A Loan Product That
Provides Cost Savings
And Builds Savings
2013 Annual Conference : Financial Inclusion Through Cooperative Finance
Credit Union Alternatives in the Marketplace
Many effective alternative to payday products save borrowers $$millions by offering
affordable small dollar loans
State Employees’ Salary Advance Program with rates from 5% to 11% and with
monthly volume of $35-40 Million saves borrowers upwards
of $3M /Month
Better Choice-A Pennsylvania credit union-wide alternative to payday product
64,000 totaling more than $32M and saving consumers over $23M in fees and
interest
But…
When we Look at Why People Borrow
Small and Short-Term
Living with Economic Insecurity
Why People Borrow Small Amounts &
Short-term
Use of Borrow & Save Loans
18%
16%
16%
14%
14%
12%
12%
10%
10%
8%
8%
7%
7%
6%
6%
6%
5%
5%
4%
4%
2%
0%
What is Also Needed in the Marketplace
 A product that allows for the short term need while
addressing longer-term financial stability
 a fairly priced loan product, that included savings and
financial counseling was the place to start
Borrow and Save
Product Design and 18 Month Pilot Launch
 Required Common Underwriting Guidelines
 A small-dollar loan (Loans not to exceed $1,000)
 Mandatory savings requirement with percentage of savings to be determined by
the CDCU
 Loan term between 6 and 36 months
 No more than 3 rollovers per year.
 Not more than one loan out at a time
 Adherence to NCUA guidelines on maximum interest rates and fees
 Tracking of loans including repayment history, the amount of savings and uses
Product Design and Pilot Launch
Four credit unions of varying asset size were selected as part of
the pilot
Name
Location
Asset Size
Membership
Union Settlement Federal CU
North Side Community FCU
Santa Cruz Community CU
Freedom First CU
New York, NY
Chicago, IL
Santa Cruz, CA
Roanoke, VA
$ 6,928,160
$ 10,762,869
$ 103,119,009
$ 292,114,693
3,644
3,347
11,496
44,932
Name
Amount
Rate/Terms
Additional Requirements
North Side
$500- $1000
16.5% APR
Borrowers must make at least $1000/month to qualify
for the $500 loan and must make at least $1500/month
for the $750 or $1000 loan. The $500 loan is paid back
in six months, while the $750 or $1000 can be paid
back in six months, eight months, or one year
Up to a year
One loan per year
per member
$25 Application Fee
FICO scores not factored into loan decisions
Borrowers with FICO scores below 600 North Side are
required to have one-on-one financial counseling
sessions
Savings Incentive
If a borrower saves at least $25 per month and makes
timely payments, North Side will reimburse 6.5% of the
interest and half of the loan application fee. The
member will also be entered into an iPad raffle contest.
Freedom First
$250-$1,000
Between 7.25% and
18% APR
12-36 month
repayment period
No Application Fee
50% of the loan amount will be put into a locked
savings vehicle to be released at maturity of the loan.
FICO scored pulled for informational purposes only
Savings Incentive
Upon repayment of the loan, the “saved” second
portion (a minimum of 50%) of the loan funds will be
available to the member as a “planned savings”. Upon
successful repayment of the loan, the member will
have the option to deposit a portion or all of the funds
into a CD with the possibility of a preferred interest
rate, only available to members that participate in this
program.
Results
Aggregate Portfolio
Number of Loans
Total Loans $
Total Savings $
Savings Requirement
Average Loan Size
Average Rate
Average Term
Savings per borrower
# of repeat loans
Delinquencies %
Write-offs %
Union
Settlement
North Side
Freedom First
Total
83
76
140
299
$66,550
$74,500
$255,266
$396,316
$13,118
$22,123
$129,395
$164,636
15%
$25/mo.
50%
$740
$980
$1,823
25%
16.5%
18%
6 months
1 year
1 year
$176
$291
$924
25%
0
2
4.00%
3.00%
5.00%
2.00%
4.00%
1.40%
Savings Impact
Union Settlement
North Side
Freedom First
Aggregate Savings
Required Savings
Total Savings
Change (%)
Savings/loan
$ 11,911
$ 5,700
$ 129,395
10%
288%
NA
20%
24%
51%
$ 13,118
$ 22,123
$129,395
Potential Savings to Borrower from Borrow & Save Loan
Union
Settlement
North Side
Freedom First
Total
Loans
Interest
per
annum
Fees
CU Loan
Cost
Payday*
Loan Cost
Difference
Accumulated**
Savings
Total
$66,550
$16,638
$1,660
$84,848
$332,750
$247,903
$131,188
$379,091
$74,500
$255,266
$366,066
$3,353
$11,487
$16,473
$1,900
$0
$2,880
$79,753
$266,753
$385,419
$372,500
$1,276,330
$1,830,330
$292,747
$1,009,577
$1,444,911
$22,123
$129,395
$160,122
$314,870
$1,138,972
$1,605,033
Sustainable for the CU?
Credit Union
Interest Rate Income
Fees Income as % of loan
Loan Losses on Borrow and Save
Cost of Funds*
Operating Cost*
To Retained Earnings
Additional Costs
Financial education
High-touch underwriting
Other technical assistance
Marketing
Data Collection
Union
Settlement
25.0%
4%
2%
.13%
9.0%
18.0%
North Side
17.0%
4%
4%
.45%
5.2%
11.0 %
Freedom
First
18.0%
0
1.4%
.8%
4.9%
11%
Key Findings
 Borrow and Save loans perform well for the credit union
 There is demand for Borrow and Save with multiple purposes and uses
among borrowers
 Small dollar loan borrowers build savings and credit and reduce the need
for rollovers or repeat loans
 Credit scores and membership tenure are not predictive of repayment
 The Borrow and Save loan is a sustainable product for credit unions
Best Practices

Maximize the amount put into savings; Savings can cushion against losses


Use credit scores for informational and support service purposes only
Requiring long-standing membership to access the product does not significantly impact write- offs

Financial Literacy and debt counseling are important components of the program

Consider an open-ended loan program which can minimize paperwork and servicing. ATMs, the phone,
and the internet can be used to access and manage funds
Small increases in interest rate to boost profitability will likely not affect uptake. Pricing is key


Build-in to your program design opportunities for borrowers to “graduate” into savings, investment and
lower cost loan products. This works both as a low-cost incentive and an income generator for the CU

Factor in all the extraordinary costs associated with the product to determine profitability
Key Marketing Concepts

Market as a positive way to build credit and savings

Distinguish this product from other small dollar loan products in the
community and at the credit union

Incentives are a useful marketing tool but not an essential long-term
“draw” for this product and can be minimized to save on costs

Partner on the marketing with social service providers, faith leaders
and other local organizations

Open the program to new members
2013 Annual Conference : Financial Inclusion Through Cooperative Finance
Welcome to Freedom First, the Credit Union
Where People Bank for Good!
Expanding the Program
For Additional Information
Melanie Stern
[email protected]
212-809-1850
2013 Annual Conference : Financial Inclusion Through Cooperative Finance