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 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

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

NameLocationAsset SizeMembership Union Settlement Federal CUNew York, NY$ 6,928,1603,644 North Side Community FCUChicago, IL$ 10,762,8693,347 Santa Cruz Community CUSanta Cruz, CA$ 103,119,00911,496 Freedom First CURoanoke, VA$ 292,114,69344,932 Four credit unions of varying asset size were selected as part of the pilot Product Design and Pilot Launch

NameAmountRate/TermsAdditional Requirements North Side $500- $ % 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 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-$1,000Between 7.25% and 18% APR 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 Union Settlement North SideFreedom FirstTotal Number of Loans Total Loans $ $66,550$74,500$255,266$396,316 Total Savings $ $13,118$22,123$129,395$164,636 Savings Requirement 15%$25/mo.50% Average Loan Size $740$980$1,823 Average Rate 25%16.5%18% Average Term 6 months1 year Savings per borrower $176$291$924 # of repeat loans 25%02 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 Loans Interest per annum Fees CU Loan Cost Payday* Loan Cost Difference Accumulated** Savings Total Union Settlement $66,550$16,638$1,660$84,848$332,750$247,903$131,188$379,091 North Side$74,500$3,353$1,900$79,753$372,500$292,747$22,123$314,870 Freedom First$255,266$11,487$0$266,753$1,276,330$1,009,577$129,395$1,138,972 Total$366,066$16,473$2,880$385,419$1,830,330$1,444,911$160,122$1,605,033 Aggregate Savings Required Savings Total SavingsChange (%)Savings/loan Union Settlement$ 11,911$ 13,118 10%20% North Side$ 5,700$ 22,123288%24% Freedom First$ 129,395 NA51%

Sustainable for the CU? Additional Costs Financial education High-touch underwriting Other technical assistance Marketing Data Collection

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

Expanding the Program

For Additional Information 2013 Annual Conference : Financial Inclusion Through Cooperative Finance Melanie Stern