Borrow and SaveBuilding 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

2013 Annual Conference : Financial Inclusion Through Cooperative Finance

A Loan Product That Provides Cost Savings

And Builds Savings

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

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Credit B

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Home Rep

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2%

4%

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8%

10%

12%

14%

16%

18%

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7%

5%6%

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10%

8%

12%

16%

7%

5%

Use of Borrow & Save Loans

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 SaveProduct 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

Name Location Asset Size Membership

Union Settlement Federal CU New York, NY $ 6,928,160 3,644North Side Community FCU Chicago, IL $ 10,762,869 3,347Santa Cruz Community CU Santa Cruz, CA $ 103,119,009 11,496Freedom First CU Roanoke, VA $ 292,114,693 44,932

Four credit unions of varying asset size were selected as part of the pilot

Product Design and Pilot Launch

Name Amount Rate/Terms Additional RequirementsNorth Side           

$500- $1000 16.5% APR Up to a year 

One loan per year per member

$25 Application Fee

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

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 IncentiveIf 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 IncentiveUpon 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

  Union Settlement

North Side Freedom First Total

Number of Loans 83 76 140 299Total Loans $ $66,550 $74,500 $255,266 $396,316Total Savings $ $13,118 $22,123 $129,395 $164,636Savings Requirement 15% $25/mo. 50%  Average Loan Size $740 $980 $1,823  Average Rate 25% 16.5% 18%  Average Term 6 months 1 year 1 year  Savings per borrower $176 $291 $924  # of repeat loans 25% 0 2  Delinquencies % 4.00% 3.00% 5.00%  Write-offs % 2.00% 4.00% 1.40%  

Savings Impact

Potential Savings to Borrower from Borrow & Save Loan  

LoansInterest

per annum

Fees CU Loan Cost

Payday*Loan Cost Difference

Accumulated**

SavingsTotal

Union Settlement $66,550 $16,638 $1,660 $84,848 $332,750 $247,903 $131,188 $379,091North Side $74,500 $3,353 $1,900 $79,753 $372,500 $292,747 $22,123 $314,870Freedom First $255,266 $11,487 $0 $266,753 $1,276,330 $1,009,577 $129,395 $1,138,972Total $366,066 $16,473 $2,880 $385,419 $1,830,330 $1,444,911 $160,122 $1,605,033

Aggregate Savings Required Savings

Total Savings Change (%) Savings/loan

Union Settlement $ 11,911 $ 13,118 10% 20%North Side $ 5,700 $ 22,123 288% 24%Freedom First $ 129,395 $129,395 NA 51%

Sustainable for the CU?

Additional CostsFinancial educationHigh-touch underwriting Other technical assistanceMarketingData Collection

Credit Union Union Settlement

North Side Freedom First

Interest Rate Income 25.0% 17.0% 18.0% Fees Income as % of loan 4% 4% 0 Loan Losses on Borrow and Save 2% 4% 1.4% Cost of Funds* .13% .45% .8% Operating Cost* 9.0% 5.2% 4.9% To Retained Earnings 18.0% 11.0 % 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

2013 Annual Conference : Financial Inclusion Through Cooperative Finance

Melanie Sternmstern@cdcu.coop

212-809-1850