The lending life cycle begins upon first contact with a potential borrower. Lenders can leverage different points in the lending cycle to build a relationship with their borrowers and support them in building their financial capabilities. While the lending cycle ends once the borrower has fully repaid their loan, this does not necessarily mean an end to the lender’s relationship with the borrower. Lenders can offer graduation products or other services to keep engaging borrowers in their path forward. Below we highlight teachable moments and best practices for engaging borrowers and streamlining processes throughout the lending cycle.
Effective outreach and marketing is about cutting through the noise to find the borrowers you aim to serve at the right time (e.g. when they’re making a loan decision) and providing the right messaging to reach them. Here are some ideas:
- Build partnerships to find the “right” borrower at the “right” time. As discussed in the partnership section, partners can be an essential bridge between your loans and the community that you aim to serve. Getting partners to keep your marketing materials on hand, ensuring that partners fully understand the benefits of your program offerings, and designating someone on staff who is usually available for partners to call when they are with a potential applicant, can be essential ways of showing that you are able to work together to meet consumers’ needs.
- Maintain visibility in the community. While partners may know about the loan product, it may not be at the top of their mind. Maintaining an active presence in the community at relevant meetings and events, requires staff time, but can be worth it. In addition, offering “refresher” orientations or information sessions on the loan product can be a helpful way of nudging partners, especially those which may experience frequent staff turnover, to remember to send clients your way.
- Design messaging to pique customer interest and allay concerns. In a CFSI survey, SDC borrowers ranked “how quickly I can get the money” and “I can qualify for the loan” as the most important attributes in selecting a loan product. For these borrowers, accessibility and speed trump other important factors such as price and having a clear sense of terms. Lenders can highlight chances of qualification and speed of funding to mitigate the concerns of credit-challenged consumers who might avoid applying for fear of being rejected.
- State the facts up front. In your outreach and marketing, it is important to not overwhelm consumers with information, but provide enough information so that they can assess whether a loan is right for them. Disclose the full cost of the loan to the borrower in simple, clear, and easy-to-understand language.
Many CBA members reported application as the largest challenge in the lending process. Borrowers will submit some documents, but not all, and applications linger in incomplete status. A staff member from the Capital Good Fund said, “We get a lot of loan applications a day but the challenge is the conversion rate.” He recounted that “people aren’t submitting documents in the right format or information is unclear, so it’s hard to move from application to underwriting.” Below are best practices for making the application as streamlined and efficient as possible:
- Create eligibility assessment opportunities. Finding ways to help potential applicants identity if they are not eligible for the loan before investing time and resources into the application process. This can done by:
- Training partners to prescreen referrals:
- Innovative Changes offers a monthly training for partners on their loan products and how to make referrals. Partners are required to take refresher trainings to ensure quality referrals.
- For its citizenship loans, the Latino Economic Development Center (LEDC) has its partner only refer individuals who have completed CASA’s citizenship classes. CASA helps individuals complete the loan application packet before referring them to LEDC.
- Develop measures to ensure that applicants have explored other low-cost or free options (see section on partnerships).
- Online eligibility assessment tools:
- Some CBA members have eligibility quizzes so that potential applicants can screen themselves.
- Loan orientations:
- In order to provide information on the loans, answer questions, and allow borrowers to self-select and receive application assistance, some nonprofit lenders encourage or require applicants to attend an in-person or online orientation.
- Training partners to prescreen referrals:
- Streamline application processes: Ideas for making the application easier for borrowers and more efficient for organizations include:
- Set up computer workstations within your office for retrieving and printing documents, and filling out the application.
- List clear step-by-step procedures on the website with links to all pertinent documents (see the National Disability Institute example below).
- Give borrowers a loan application checklist. Create an online portal for submitting documents (make sure it is secure to protect sensitive borrower information).
- An online chat feature on the website so that applicants can ask questions the application:
The Capital Good Fund has a live chat feature on their website that allows applicants to get questions answered in real time.
The National Disability Institute’s (NDI) Assistive Technology Loan Program
NDI offers a clear guide to applying for an assistive technology (AT) loan on its website. It breaks the application process into small actionable steps:
- Get informed: NDI has links to AT guides by state, and a loan program fact sheet that answers FAQs on the loan. (See Appendix C)
- I think the loan is right for me. Now what?: NDI has a link to a budget/spending plan and a link to their interactive online orientation course that takes about an hour (the outline of this course is a great place to get ideas for your own orientation!).
- I’ve completed the orientation course. I’m ready to apply!: NDI has an application checklist, a link to the application, and contact information of staff that can assist with filling out the application.
- What happens after I send my application?: NDI outlines their internal next steps for reviewing the loan application. Ideally this section would include a concrete timeline so that borrowers know how long the process takes.
Using application as a teachable moment: The application process can be a great time to engage applicants in creating a budget and learning how to pull and review a credit report since these are typically components of underwriting anyway. This requires staff capacity and time. If your organization offers other financial capability services and/or utilizes volunteers or financial coaches, this may be an opportune stage at which to integrate those services.
- Assessing ability to repay: Taking the time to walk applicants through creating a realistic budget can be eye opening for the individual, and helpful for underwriting. It can also help with determining a loan payment due date that aligns with the borrower’s cash flow. Appendix A has a sample budget, networth worksheet, and bill calendar, all of which can be helpful for this process.
- Building credit strength: Showing an applicant how to pull their free credit report, and creating an inventory and action plan that includes their loan as one component that helps them work towards a larger financial goal, can motivate successful loan repayment. Appendix A has CBA’s Credit Strength Road Map© of tools for helping clients create a credit action plan.
In addition, the borrower should leave the appointment with a clear idea of when their first payment is due, how they can make payments, what to do if they are unable to make a payment, and other opportunities for engagement with your organization (see next section on Servicing and Supporting Repayment). Here are a few considerations for conducting loan closings:
- Who will create loan documents? Who will review the loan documents for accuracy?
- How/where will loan closings be conducted? In-person? Can you do them remotely to increase accessibility?
- Will checks be disbursed directly to the borrower or a third party?
- Who has the authority to sign the checks or initiate a funds transfer?
- How much buffer time will there be until the borrower’s first payment?
- What materials will a borrower leave with besides copies of their loan closing documents? Examples could include:
- A magnet/card with their payment date, options for making payments, and contact information of their loan officer
- A tip sheet on how to be a successful borrower
- Brochures/flyers with information on other program offerings
Once an applicant presses the actual or symbolic “submit” button on their application, it is important to set up clear expectations about the process moving forward including a clear timeline for when they will find out about the loan. Clear internal processes will allow you to easily communicate with applicants about what’s next. Here are some considerations to take into account when setting up your loan determination process:
- How quickly do typical borrowers need the loan? The faster your organization can turn around a loan application, the more satisfied borrowers are likely to be. However, most AT loans are not urgent, so taking the time that you need to do due diligence on loan application reviews, as long as it is reasonable, should be okay. Of the CBA members who provide AT loans, most were able to make a loan determination and schedule a loan closing within two weeks of receiving an application.
- Who has the authority to approve loans? For most nonprofit lenders, the loan officer does the first application review. They ensure that the application is complete and provide a recommendation for loan approval or denial. The next steps vary from organization to organization. Some nonprofit lenders have loan committees (see box above for considerations when setting up a loan committee), others rely on the executive director to make a final determination, or some do both.
- What’s realistic? A plan that ensures both speed of approval and a due diligence application review is ideal, but in reality, there may need to be compromises on both sides. Other factors to think about include:
- The complexity of loan applications
- The capacity of staff and board to review loan applications in a timely manner
- The level of responsibility/authority given to the loan officer in the policies and procedures manual. While staff should have flexibility, decision-making discretion should be applied carefully in order to protect borrowers, the staff making the decisions themselves, and the organization.
When a loan is approved, the next steps are fairly straightforward. It involves the loan officer preparing the loan documents and setting up a time for the loan closing. However a loan denial can be more complex. There can be different types of loan denials and many ways of framing a denial. For instance, the program director from Northwest Access Fund says that they never consider a non-approval to be a denial; rather it is just an incomplete application. Many CBA members seek to continue building relationships with “denied” applicants and help them get to a place where they can be a successful borrower in the future. A loan may be a longer-term goal for some applicants, whereas for others, they may be closer-to-ready to receive a loan. Some nonprofits offer conditional approvals to applicants that seem just too risky to approve, but near-ready to take out a loan. A conditional or contingent approval means that the applicant must take additional steps to demonstrate that they have the capacity to repay a loan. Some examples of contingent steps for approval include:
- Depositing the loan payment amount into a savings account for three months
- Getting current on bills, a bank account, or a credit card
- Paying off some debt to lower their debt-to-income level
- Demonstrating reliability through use of another product such as a smaller credit building loan
- Attending financial education classes or coaching sessions
Under the FCRA, if a lender uses a credit report/score to deny credit or make an unfavorable change to the credit terms (such as a higher interest rate under risk-based pricing) they are required to communicate with the borrower. The required notification information includes:
- How lender used the credit report/score
- How consumer can obtain a free credit report
- How consumer can dispute mistakes on their credit report
- Name of credit rating organization that produced the credit report
- Specific reason/s for the adverse action
Furthermore, the lender may be required to provide a Credit Score Disclosure Notice along with the adverse action notice. This includes:
- At least one score used in the determination (number, type of score, entity that created the score, and date of score)
- Credit score range for the model used
- Key factors tat adversely affected the consumer’s credit score
Appendix C has a sample adverse action letter and credit score disclosure notice.
Loan closing are an important time to model clear and transparent lending. Ideally, the borrower will be aware of the terms of the loan going into the loan closing appointment. The loan agreement and amortization schedules can be great tools with which to communicate about the terms as applied to the borrower’s specific loan. Reviewing the clauses of the loan agreement in terms that the borrower can understand, allowing the borrower to ask questions, and ensuring the borrower is aware of the costs associated with the loan are essential components of a loan closing appointment.
Explaining the Fees and Legalese The jargon around fees and interest rates can be the most intimidating part of taking out a loan. How does a consumer know that they are making a sound financial decision? Taking the time to review and explain the different types of fees, what they are for, and why and when they are charged, can help consumers be more informed and know what questions to ask the next time they use credit. The Truth in Lending Act (TILA) generally requires that you disclose the loan terms and APR of a consumer loan (see example TILA from Innovative Changes below, and another example in Appendix C4), but taking this a step further, and breaking it down by reviewing the amortization schedule as a visual tool to explain how interest works can also be a great teachable moment.
Helping borrowers make payments on time is a win-win. Lenders avoid costs associated with delinquency and default, which helps to support the sustainability or growth of their loan programs. Borrowers can build a positive credit history while using a loan to solve financial challenges or pursue financial goals. To support successful repayment, lenders should create repayment structures that align with borrower cash flow and offer resources to encourage on-time payments. Three key factors of repayment include getting the right payment amount, and offering options for timing and method of payments that work for the borrower. On top of that, providing ongoing engagement (in a low- or high-touch way) can help organizations retain borrowers and effectively support their successful loan pay-off.
Initially, lenders should work with borrowers to structure loans to fit the borrower’s budget and cash flow, presenting a range of options for loan size and term. Amortization tables, or online loan payment calculators, are useful tools for helping the borrower envision the costs of different payment sizes.
Many CBA members allow borrowers to choose a date that works best for them. Program staff can help borrowers find a payment date that most consistently fits their cash flow. A lender may urge or require that a loan payment be scheduled around the time that someone receives their paycheck or income.
For the sake of simplicity and efficiency sake, many CBA members prefer that loan payments be automatically deducted from a borrower’s paycheck or bank account. This reduces the hassle for the borrower and can reduce costs on the program lending side. However, automatic payments may not be conducive for those with inconsistent income, unbanked individuals, or older borrowers who prefer checks and money orders. Payment options and considerations for those individuals include:
Ongoing Borrower Engagement
Payment reminders Lenders can help borrowers stay on-track by providing timely reminders to engage borrowers before a payment is due. Research around behavioral insights has found that the framing of payment reminders can make a difference in a borrower’s repayment rate, as well as the frequency and method of the reminder:
Use payment reminders as a teachable moment Since you have your borrowers’ captive attention (hopefully), payment reminders can be a good chance to infuse financial tips or ideas. For instance, Innovative Changes adds a “tip of the month” to their monthly payment reminders. The tip of the month could be something simple such as explaining the phrase “pay yourself first,” or timely and relevant, such as information on a new product or online tool. See Appendix C for a Sample Payment Reminder.
Frequency, method, and format of payment reminders: Many CBA members email or mail the automated statements produced by their loan software to borrowers on a monthly basis. Others send automatic text reminders, postcards, magnets, or calendar reminders.
While not a loan, as a part of its Borrow Less Tomorrow or BoLT program, Clarifi, a credit counseling organization with offices in New Jersey, Pennsylvania, and Delaware, experimented with sending different reminders to clients about upcoming payments on their debt management plans. Clarifi found that low-frequency (twice a month) and action-oriented text reminders had the greatest impact on improving a client’s likelihood to make their payment on time.
Behavioral insight research has found that in addition to messaging, the formatting of reminders is extremely important.
ideas42, a behavioral insight think tank, worked Accion, with a small business lender that operates globally, to redesign their payment reminders since borrowers using ACH were having difficulties making on-time payments. On the new statement format, information on the due date and payment amount were displayed prominently. In addition, they included a recommended date to check for sufficient funds and a Post-it note to help plan for the deposit of funds. NSF fees among borrowers that received these new payment reminders decreased by nearly 25 percent.56 Graphic from: CFED, ideas42, Citi Foundation. (2013, December). Small changes, real impact: Applying behavior economics in asset-building programs.
Behavioral Insights Used by the Behavioral Interventions to Advance Self-Sufﬁciency (BIAS) Project
BIAS Researchers used the acronym SIMPLER to test different behavioral techniques to improve human service programs. These techniques, described below, can be applied to loan programs to streamline application and support borrower repayment. For more on the BIAS project and behavioral techniques visit MDRC’s website.
Financial education and coaching opportunities
If your organization offers other types of financial capability services, engaging borrowers through those opportunities can support successful repayment. For example, Asian-American Homeownership Counseling (AAHC) Inc., a nonprofit lender and foreclosure counseling agency, communicates that their application fee includes the cost of financial education classes or coaching appointments. While borrowers are not required to attend, AAHC sets the expectation of continued engagement from even before the start of the loan.
Incentivized repayment: Some CBA members are experimenting with incentivizing repayment. Here are some ideas:
1. On-time payment raffle: For each month that borrowers make an on-time payment, their
The Cleveland Housing Network struggled with late rent payments. In order to incentivize on-time payments and grab residents’ attention on the 1st of the month, they created a raffle. Residents who paid on-time each month were entered into a monthly raffle that included two $100 prizes and one grand prize of one month’s free rent in August. Ideas42 found that residents who received information about the raffle were twice as likely to pay their rent on-time than those who did not know about the raffle.
2. Performance-based loan terms: After making a certain number of on-time payments or attending a financial education class/series or coaching session, a borrower’s loan terms become more favorable (i.e. their interest rate is reduced or they receive a credit for one month’s payment).
Filene Research Institute’s LIFT (Lower Interest For Timeliness) program provided interest rate reductions to borrowers as they established a track record of on-time loan payments. Participating credit unions would reward their borrowers with a 0.25 percent APR reduction after three consecutive months of loan repayments. Filene found that borrowers participating in the program had lower rates of delinquency than borrowers in a control group.
3. Referrals to another product: After making a certain number of on-time payments, a borrower becomes eligible for a referral to a larger loan, or another desirable product, such as a secured credit card or matched savings account.
The Business Center for New Americans (BCNA), in New York, offers $500 to clients with no credit score. After six months, as they see clients’ scores rise (typically to 660), clients can become eligible for larger business loans of up to $50,000.
Using Incentives in Human Services Toolkit: Although not specific to lending, Building Better Programs created a helpful toolkit that walks practitioners through designing and using incentives to increase program engagement. The research and toolkit can be found here.
MONTHLY CREDIT REPORTING
Credit reporting is another key step in servicing loans. In a survey of its members, CBA found that credit reporting not only allowed borrowers to show an active line of credit on their credit report and improve their credit scores, but also had a positive impact on their organization’s loan portfolios: increasing on-time payments; decreasing charge-off rates; and motivating client interest in further improving their credit. As data furnishers credentialed by the credit bureaus, organizations are required to communicate to their borrowers about certain aspects of credit reporting(see the box on Your Responsibilities as a Dat Furnisher below) Four key monthly steps for reporting a borrower’s loan through CBA include:
- Generating a Metro2 report (specific format required by the credit reporting agencies) and uploading it to CBA
- Correcting data as needed
- Addressing consumer disputes
- Keeping staff, CBA, and borrowers up-to-date on credit reporting policies and procedures, as well as major changes to your loan portfolio and staffing
Visit CBA’s website on reporting for more information.
56 CFED, ideas42, Citi Foundation. (2013, December). Small changes, real impact: Applying behavior economics in asset-building programs.
Inevitably, unexpected circumstances may prevent borrowers from prioritizing their loan payments. These can be stressful situations for borrowers, which may lead to damaging their credit. Delinquency or defaults on loans are also a costly occurrence for lenders.
Loan design can play a role in reducing delinquencies or default. Communication, flexibility, and standardized procedures are key for addressing late payments and delinquencies.
In addition to regular payment reminders, if a borrower is late, reaching out early to remind them that you are there to work with them can be integral to retaining borrowers and helping them get back on track. Borrowers may fail to get in touch because they are ashamed of being unable to pay. Many CBA members pride themselves on their proactive messaging to borrowers. Rather than, “Why are your payments late?” they instead ask borrowers, “How can we make this loan work for you?”. Messaging should be supportive and remind borrowers that your organization wants to support them in maintaining a positive credit history.
Mission Economic Development Agency (MEDA) started its Volunteer Income Tax Assistance (VITA) Credit Builder program with the primary goal of helping clients establish or improve their credit by opening a secured credit card at tax time. Clients were connected with a text message-based reminder platform that sent advice based on a cardholder’s specific activity (e.g., maintaining a high balance or missing a payment). During the pilot, 61 percent of clients enrolled in the text platform missed a payment due; however, 85 percent of these clients received a reminder text and made the payments within the next twelve days, avoiding a reported delinquency that would have harmed their credit.
No matter how well a borrower is underwritten, financial challenges can emerge during the loan term that can set them back. In these moments, it is important to engage with borrowers, reassess their situation, and develop an individual plan that will work for them and you as the lender. CBA members detailed different approaches for loan modifications and inability to pay:
The Oklahoma Assistive Technology Foundation (OkAT) gives borrowers the opportunity of three rescue payments. Rescue payments do have to be repaid and may be added to the end of the loan (not forgiven, but flexible). If after three months the borrowers still cannot start repaying the loan, the loan is considered in default. OkAT sends the remaining amount to collections.
Oportun, a for-profit CDFI Loan fund, aids customers who are willing but cannot make payments by offering a hardship restructure with a reduced interest rate and a longer-term period, which produces a lower payment amount for struggling clients.
Innovative Changes allows for six types of loan amendments (modifications):
Standardized Collection Procedures
Collections can be an emotionally taxing part of the loan process for staff and borrowers alike. It is important to set a clear timeline for collections. If a borrower is unable to be reached, collection can be a straightforward process. However, this process gets more complicated if a borrower resumes communication with your organization. Showing that you are there to help your client successfully repay the loan and are willing to be flexible, while also holding the borrower accountable to repayment, is a hard balance to attain. In addition, at some point, the cost of collections may not be worth the potential recovered costs of the loan. As mentioned above, a loan review oversight committee can support program staff in strategizing about collection procedures and making decisions around difficult cases. Here are some considerations for developing standardized collection procedures:57
- Who is responsible for collections? Will your organization do collections internally or contract it out? What are the pros and cons, including costs, of either option?
- How far are you willing to go to collect on a loan? When is a loan considered in default? When is it delinquent? When should it be charged off? Will you file a claim in court? Will you pursue a judgment?
- Have you built in the flexibility you might need?
- Who has the authority to make the decision about next steps?
- What type of report/s does leadership see regularly to help them stay current with problem loans?
57 Adapted from CDFI Fund Capacity Building Initiative’s presentation on “CDFI Loan Policies and Procedures”
In the past, Innovative Changes (IC$) would call to give borrowers a last chance before they filed a claim in court. After filing, the borrower could enter into a mediated agreement to set up a new plan to repay the loan. This process was time consuming and costly for IC$. Now, IC$ is revisiting its collection plan to balance cost, effort, and fairness to borrowers. This will include tightening their collection timeline to reduce the amount of staff time spent on collections.
Credit building does not end with the last payment of the first loan. Without continuing to build active credit, an established or improved credit score may go down, and eventually go away. Paying off an installment loan, for example, can be celebrated with the addition of a new safe and affordable active tradeline and continued support to ensure that clients are successful with their ongoing credit building ventures. Graduation product options could include:
- Larger, longer-term installment loans
- Lines of credit
- Revolving credit cards—secured or unsecured
- Access to a matched savings account or other asset building opportunities
- Ongoing one-on-one counseling to support achieving individualized credit building goals
Offering these opportunities in-house, or having referral options at your fingertips can be a great way to incentivize repayment throughout the life of the loan and to continue engaging and supporting borrowers in building a strong financial future. And, having an account with a mainstream financial institution, is one of CBA’s credit strength “access” indicators!
Capstone Community Action (CCA) in Vermont refers clients to a local credit union for a secured card. The credit union waives their annual fee for CCA clients and lowers the required deposit from $500 to $150. This partnership allows clients to continue having an open line of credit that improves their credit score.
How do you know if your loans are making a difference in people’s lives? How can you figure out ways to improve your program? In particular, how can you measure your borrowers’ credit strength? The answer is outcome tracking! Tracking outcomes takes an initial investment in setting up data collection systems and ongoing staff capacity to collect the data, but the time spent collecting outcomes can help you:
- Identify opportunities for growth
- Better understand the needs of your borrowers
- Get a pulse on your borrowers’ experience in working with your organization
- Say something about the impact that your organization is making on the lives of individuals and their financial capabilities
- Obtain and maintain program funding (funders often require tracking)
- Ensure quality program implementation and regulation compliance
It is important to note that tracking borrower outcomes and collecting borrower feedback is not the same as conducting a rigorous program evaluation. Rigorous program evaluation, often done through randomized control trials (RCT) that have a treatment and control group, allow you to delineate the causal impact that your program has on the people you serve, and potentially generalize the results to a larger population. Some CBA members have partnered with researchers to conduct such program evaluations (see Table X for examples). Conducting a RCT is aspirational for many organizations, but all organizations should continually (using less rigorous methods) track outcomes in order to improve their programs.
- Mission Asset Fund partnered with San Francisco State University’s César E. Chávez Institute to study the impact of Lending Circles on credit improvement. They found that pairing Lending Circles with financial education resulted in increased credit scores (by an average of 168 points) and a reduction in debt (by an average of $1000). You can read more of their findings here.
- Working Credit NFP partnered with Northeastern University’s Dukakis Center for Urban and Regional Policy to conduct a randomized control trial to study the impact of Boston’s Youth Credit Building Initiative on its young adult participants. They found that the combination of education, credit wellness counseling, data-informed feedback, and for some the use of a secured credit builder loan helped participants lower rates of delinquency and establish credit or boost their credit score to a prime score. The results from the study can be found here.
Most organizations track outcomes in a variety of ways:
- Borrower Surveys can shed light on their customer experience, their perception of their financial capabilities, and other important information. Pre-and post surveys can measure self-reported changes in knowledge, attitudes, behaviors, and/or quality of life over time. Surveys at key moments throughout the loan process can also serve as opportune moments to capture change over time and borrower feedback. Surveys generally have low response rates, so building them into already scheduled customer interactions, or incentivizing survey completion, can increase participation rates.
- Financial documents and forms with demographic information, bank statements, household budgets, tax returns, and credit reports and scores are also useful forms of information that can help you track indicators of an individual’s financial capability over time.
- Administrative data is any data on that you collect on borrowers through your loan software or other client management systems, including on-time loan payments, loan modifications, attendance at financial education classes, or coaching sessions.
- Interviews by phone or in-person are a way of capturing more in-depth information about a borrower’s story and the impact of the loan on their life. This can be a great way to collect borrower success stories to share with community partners and funders.
- Focus groups with your target population, community stakeholders, and staff, are a key way to collect input at the design phase, and as you seek to improve facets of your program. If you plan to host a focus group, consider having a third party facilitator to allow for candid conversation. For borrowers, think about ways to reduce barriers to participation (e.g., provide food, child care, stipends, convenient timing).
NeighborWorks America’s “Measuring Outcomes of Financial Capability Programs: Success Measures Tools for Practitioners” has tools for tracking an individual’s (adult and youth) financial capabilities, household composition and dynamics, and wellbeing.