Products-in-a-Box: Initial Planning and Infrastructure

Much of the success of high-impact small dollar lending hinges on strong relationships—with community partners and borrowers. Doing the initial research and planning needed to develop a loan product that fits well within your organizational structures as well as within your community is critical. In addition to fostering organizational and community buy-in, offering a new loan product may require initial investments in staff capacity and technology. Investing in infrastructure that allows for program growth may be costly upfront, but could save your organization time and money down the line. Ultimately, the key is building a lending model that allows you to cultivate and maintain strong and supportive relationships through efficient and transparent processes.

Assistive Technology

Housing Stability

Immigration

Reentry Opportunity

Strong partnerships are key to effectively supporting borrowers. Different types of partners can help you achieve different program goals. Partners can help you:

  • Better understand your target population and design a loan that meets their needs. For this reason, it is important to involve partners with deep experience serving this target market from the beginning.
  • Jointly fundraise or share costs.
  • Outreach to potential borrowers.
  • Refer clients to each other’s programs.
  • Serve as “character references,” and trusted brokers for potential borrowers.
  • Provide other financial capability services and opportunities for borrowers.
  • Provide foundational and/or additional social service, financial, or other types of support to borrowers before, during, and after the loan.
  • Support your lending program with technological solutions and ideas.

Assistive Technology

Housing Stability

Immigration

Reentry Opportunity

Raise Funds and Loan Capital

Many CBA members specifically expressed difficulty with finding funds to cover the operational expenses associated with lending and other financial capability services. The Richmond Federal Reserve found that nonprofit lenders whose primary missions are driven by lending are able to recover 47% of their annual lending costs, whereas those for whom lending is an ancillary service typically only recover 16% of lending costs.38 Either way, combined with riskier loan products, balancing the provision of safe and affordable loans with covering the costs of providing those loans is challenging. Seeking to balance the pursuit of funding by offering services or products that can subsidize other services and/or finding creative ways to fund a program can be a way to achieve a sustainable balance. Nonprofit lenders typically depend on a mix of private and public funding to sustain operations and maintain loan capital.

Funders of Nonprofit Lenders

  • U.S. Treasury Departments’ Community Development Financial Institution (CDFI) Fund.39 To receive CDFI funding, an organization must become a certified CDFI, which can be an extensive process. CDFIs are non-depository nonprofit loan funds, community development corporations, banks, credit unions, or venture capital providers that offer access to financial products and services within low-income communities. The US Treasury offers financial assistance awards to CDFIs in the form of loans, grants, equity investments, deposits and credit union shares to help programs expand their products and services. The CDFI Fund also awards technical assistance (TA) awards to organizations with or aspiring to achieve CDFI certification for capacity development.
  • Banks and Credit Unions.  Banks and credit unions often have foundations or community giving programs. Banks in particular can qualify for Community Reinvestment Act (CRA) credits for giving a grant, loan or other type of equity investments, such as Equity Equivalents (EQ2s),40 to a community-based nonprofit lender.
  • Foundations. Foundations that support financial capability programs are good targets for program funding. These differ by region, but the Asset Funders Network website offers a comprehensive list of foundations and funders that typically support nonprofits working on financial capability.
  • Individual donors. This article entitled “15 Techniques Used by Top Nonprofits to Boost Donor Acquisition and Online Fundraising Results,” has tips to help you grow your donor base, including encourage people to give monthly, give people a way to stay in touch with the organization, and be transparent about where donated money is put to use.
  • Alternative financing models. Nonprofit lenders are experimenting with new ways to fund and facilitate the provision of small dollar loans. See Appendix B for different models and program examples.
  • Municipal and/or local governments. Increasingly, municipal leaders are investing in the financial health of their communities. There may be opportunities to seek funding or partnerships with local government agencies. Cities for Financial Empowerment Fund is a good resource for learning about ways local governments have supported financial capability efforts.

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Housing Stability

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Reentry Opportunity

38 Hoy, Tammie, Jessie Romero, Kimberly Zeuli. (2012, May). Microenterprise and the Small-Dollar Loan Market. The Federal Reserve Bank of Richmond, EB12-05.
39 This information is from the U.S Department of the Treasury Community Development Financial Institutions Fund website: https://www.cdfifund.gov
40 EQ2s are long-term subordinated loans that function similar to equity. They were created to expand access to investment vehicles for CDFIs, and investors receive CRA credits. For more information on EQ2s see: Lipson, Beth. (2002, March) Equity Equivalent Investments. Retrieved from https://www.cdfifund.gov/Documents/(22)%20Equity%20Equivalent%20Investments.pdf

There is no way around it, providing SDLs is a time and cost intensive endeavor. In a survey of CBA members who offer or were thinking of offering SDLs, 45% saw lack of staff time as a barrier to project implementation and were concerned with the time it may take for staff to service loans and collect payments.41 So, before implementing a loan product, it is important to ensure that everyone at your organization has the time and skills to execute their roles effectively. Below is a sample organizational chart developed by FIELD at the Aspen Institute. It provides a helpful visual of all the roles required to run a loan program. In many nonprofits, one person will wear many hats, so not each box necessitates a distinct staff person, but it is important to make sure that each box falls under someone’s job responsibilities.

CDFI Organizational Chart

While each organization is different, and time will depend on how high-touch you design your loan program to be, below are some key considerations for staff, leadership, and board around their responsibilities and capacity.


Staff Capacity

In a recent survey of CBA members, one member emphasized that caring about the mission and having experience working with the target client population are among the most important attributes to look for in lending staff. The other technical aspects of lending are teachable. However, ensuring they have the proper training is critical (see suggestions in Recommendations for Staff Training section below).

  • Of the members surveyed, there was a wide range of answers about how staff spend their time. For example, the Northwest Access Fund, a nonprofit CDFI loan fund that offers assistive technology loans and does all their loans remotely, has one full-time loan officer who services their 344 active loans. In the prior year, she did the underwriting and closing for 102 loans. Another organization has a half time employee who services about 50 loans a year.

The box below provides an example of how Rachel Stein, the loan program manager at Innovative Changes, a CDFI based in Portland, Oregon that offers SDLs, spends her time.

A DAY IN THE LIFE OF A LOAN OFFICER

CBA sat down with Rachel, a full-time Loan Manager at Innovative Changes, a CDFI with a relatively “high-touch” approach, to learn about how she spends her time. Last year, Rachel processed about 140 loan applications, 90% of which were approved. She is responsible for servicing a total of 327 active loans, and, as one might expect, often feels stretched for time! Keep in mind that every loan program will be different, depending on a number of factors, but, as a reference point, the below pie chart shows how Rachel estimated her use of time. It is important to note that some of the activities involve other staff in addition to Rachel. For example, there are other staff at IC$ that provide financial education and assist with servicing loans.

pie chart

As you design your program and hire and/or train staff to deliver loans, here are some considerations to keep in mind:

  • Will you have staff dedicated to lending, or will lending staff also have other duties?
  • How many loans do you plan to offer a year?
  • Will staff meet with borrowers in-person or remotely or both?
  • Are there ways to automate repetitive parts of the loan process that won’t detract from your relationship with the borrower?
  • How much do you plan to standardize your loan process, versus make decisions on a case-by-case basis?
  • How much authority will Lending staff have to make decisions about loans (i.e., does it have to go to a committee for approval and in such cases what supporting documentation does the loan officer have to prepare)?
  • How much financial education do you plan to infuse into the lending process?

Recommendations for Staff Training:

CBA Training Institute has a variety of trainings and tutorials on credit building, Metro2 credit reporting and the Fair Credit Reporting Act (FCRA). In addition, it offers resources and training to practitioners on the ins-and-outs of the credit reporting industry and supports clients in credit building activities (see Appendix E: CBA Training Institute Opportunities). Resources include:

  • Credit as an Asset Training including an e-learning catalog and a Master Trainer Certification Program
  • Credit Builder’s Toolkit of interactive tools and resources for practitioners
  • Customized credit building consulting and program development services for organizations
  • A member’s corner devoted to providing technical assistance to CBA members

In addition to CBA there are a variety of organizations that specialize in lending, financial capability, and in culturally-specific training.

Lending training: Many of the resources below are not specific to consumer lending, but many of the microlending concepts are applicable and/or transferrable.

  • The Opportunity Finance Network, a network of CDFIs, has frequent capacity building and training opportunities for CDFIs (and nonprofit lenders).
  • The National Development Council offers a wide range of online and in-person trainings, a few of which are relevant for small-dollar consumer lenders.
  • ACCION has trainings and resources targeted to microfinance managers including trainings on financial analysis, leadership, and managing portfolios for growth.
  • There are other organizations that offer resources for nonprofit lenders such as:
  • The Aspen Institute, the Association for Enterprise Opportunity (AEO) (primarily focused on microenterprise lenders), and the CDFI Fund.

Financial education and coaching training: Even if your program is not offering financial education or coaching, it may be helpful for staff to have knowledge of the approach.

Assistive Technology

Housing Stability

Immigration

Reentry Opportunity

Leadership Capacity

Depending on the expertise of leadership, the size of the organization, and types of programs and services, the leaders of CBA member organizations reported playing different roles in their lending programs. Some leaders were involved at multiple points of each loan: approving applications; reviewing closing agreements; and overseeing collection efforts. Others focused more on big picture operations: obtaining and maintaining program funding; meeting reporting requirements; managing overall portfolio risk; building partnerships; and the legal aspects of the program.

As you design your loan program, here are some considerations to keep in mind that will have implications for your leaders’ time:

  • How do you set up quality control infrastructure that ensures policies and procedures are followed, and that staff are efficient and effective?
  • How can you best utilize leaders’ skills to support the lending program?
  • Do you need to hire someone with specific expertise?
  • How involved do organizational leaders want to be with each loan?
  • What other experts do you need to involve in order to minimize risk, ensure compliance, and the quality of the loan program?

Board Capacity

Board members can also provide guidance on the big picture aspects of lending. Many nonprofits seek to fill gaps in expertise through their board members. CBA members have found it useful to have board members who are bankers, lawyers, community partners, and advocates for and members of the populations they are lending to. Having board members with both the community perspective and the business perspective is key to balancing the organization’s mission and the sustainability of the loan program. CBA members reported that board members were commonly involved in:

  • Developing and reviewing policies, procedures, and product terms
  • Regularly assessing program risk
  • Revisiting loan loss reserve amounts and loan costs
  • Participating in loan oversight or review committees
  • Conducting market analyses for new products

Loan Oversight Committees

Loan oversight committees or loan review committees can be a sub-committee of the board, or a committee independent of the board. Loan committees can help develop and review policies and procedures, strategically manage risk in the loan portfolio, take the burden off of individual loan officers for determining risk, and provide objectivity in making loan determinations. In addition, loan oversight committees can help make decisions around loans in delinquency status or serve as a body for denial of appeals. On the other hand, a loan oversight/review committee can add another administrative layer to your program, which may slow down the lending process. Some CBA members turn to a loan committee to make determinations for their larger-sized loans, but make decisions around smaller loans through internal staff review.

PROGRAM EXAMPLE

The Chehalis Loan Fund, a tribal loan fund that offers small business, consumer, and home improvement loans, has a loan review committee that is made up of four (4) board members. The loan review committee only reviews loans applications for amounts over $5,000, and they meet as a committee as needed.

Considerations for setting up a loan oversight committee:

  • Who will be on the committee? Most CBA members have board representation on their loan committees. For some, the loan review committee includes a sub-committee of the board. Other organizations choose to bring in other non-board members with lending and/or subject matter expertise as well. Consider including past borrowers, or members of your target population on the review committee as well.
  • How many members will you have on your committee? For example, the Chehalis Loan Fund has four members, whereas the Northwest Access Fund has 14, and other organizations might have committees with only a couple of members.
  • Will the committee have scheduled meetings or meet on an as-needed basis? (This can depend on your loan volume).
  • Where/how will the loan review committee meet? Will they meet in-person? Are there ways they can make decisions remotely?
  • What kind of time commitment should a loan review committee member expect? (This will be influenced by answers to the questions above).
  • What type of loans will the committee approve? For both the Chehalis Loan Fund and the Northwest Access Fund, the loan review committees make the determinations for larger loans.
  • What will constitute approval? Does the whole committee need to agree on the determination or just a majority?
  • How will borrower identifying information/characteristics be masked for objectivity?

41 Credit Builders Alliance. (2012). Small Dollar Consumer Loans: Nonprofit Lenders Making a Difference. Retrieved from https://www.creditbuildersalliance.org
42 Adapted from: The Aspen Institute. (2017). Microloan Portfolio Management. [PowerPoint slides]. Retrieved from
https://assets.aspeninstitute.org/content/uploads/2017/10/FIELD-Microloan-Portfolio-Management-Webinar-2017.pdf
43 American Institutes for Research. “Trauma-Informed Care.” Retrieved from http://www.air.org/topic/families-communities-and-social-systems/trauma-informed-care
44 ACES Connection. “Trauma-Informed Care Toolkits.” Retrieved from http://www.acesconnection.com/blog/trauma-informed-care-toolkits-1
45 Center for Evidence-Based Practices. “Motivational Interviewing.” Retrieved from https://www.centerforebp.case.edu/practices/mi

Other Technology Many financial service providers are seeking new ways to leverage technology for the financial inclusion of low-income households. Technology-based platforms can be a great way to engage younger borrowers, or borrowers with hearing or sight impairments. For borrowers less comfortable with technology, paper-based options may be the best way to go. Incorporating technology into your program can be as easy and low-cost as adding links to web-based tools on your website, or it can involve more planning and resources. Here are some moderately low-cost ways of using technology to enhance educational opportunities and access to your loans:

  • Online eligibility screening tools
    • LiftFund has an “Are you prepared for a loan” quiz on their website.
  • Online loan calculators for control of payment size and frequency
    • The Capital Good Fund has a calculator on their website for applicants to see an estimate of how much their loan payments may be.
  • Virtual financial coaching
    • Working Credit NFP partners with employers to offer their employees an in-person credit-building workshop, followed by virtual credit coaching and access to a credit builder loan. Working Credit typically uses Go-To Meeting or Skype for coaching appointments and a staff person emphasized that finding meeting platforms that don’t require clients to download an app is key!
  • Virtual loan orientations
    • The National Disability Institute has their loan orientation for taking out an assistive technology loan available on their website.
  • Online applications and document upload options
    • Individuals applying for a loan through the Community Loan Center can fill out their application and upload documents online. Once they have a loan, they can use the online Customer Portal to see up-to-date information on the status of their loan.
  • Automated texts and appointment/payment reminders
    • Fig Loans automates all their emails and text reminders to clients, which are sent on a regular basis. The texts even have a way for clients to respond. For example, clients are prompted to press 1 if for any reason they will be unable to make their upcoming loan payment. This will walk them through setting up a loan modification.

Technology can also be used to automate application, for underwriting, and for loan servicing processes. Automating parts of your loan program may increase efficiency. However, sometimes efficiency can come at the cost of building strong relationships with borrowers. It is important to find the right balance for your program.

TABLE 1: TOP 7 LOAN SOFTWARE PROVIDERS USED BY CBA MEMBERS

  1. DownHome Solutions
  2. DownHome Solutions
  3. Common Goals TEA
  4. PIDC Portfol
  5. The Service Bureau
  6. GMS
  7. The Trakker
  8. Nortridge Loan Software

Once you have a sense of your organizational needs you can start collecting information on different software companies or developers, their capabilities, add-on options, and pricing. Often, software companies will provide demos so that you can get a feel for the platform. CBA does not recommend one software over another; each organization needs to find the right fit for their needs. However, Table X has a list of the top 7 software providers used by CBA members. Additionally, Appendix B (“Top Ten Metro 2 Software Considerations”) has considerations for choosing loan software that is compatible with credit reporting as well as including the contact information for those loan software providers.

Loan Software

Purchasing loan software is a large upfront investment. The more you plan to scale and automate your program, the more it will cost initially. However, choosing or developing your own software that meets your organization’s needs for now AND in the future, can save you time and money in the long-run. Each loan software program has its own special features, strengths, and points of frustration. Before launching into a comprehensive scan of loan software and/or developing your own, conduct an inventory of your organizational needs. Think about:

  • Staff time and technical expertise
  • Loan portfolio size and targeted growth
  • Types of products that you offer (or plan to)
  • Types of reports you will need to pull (credit reports, CDFI reporting, etc.)
  • Outcomes that you plan to track (see section on outcome tracking)
  • Which processes you plan to automate versus do manually
  • How you plan to integrate lending with the other services that your organization provides
  • Desired functionality for borrowers (for example, does the software have the ability to show borrowers up-to-date information on their loan?)
  • Need for remote access
  • Number of users who will need access to the platform