When a loan is more than a loan

It’s CDFI (Community Development Financial Institution) grant-writing season, which means that I am spending a lot of time with my credit union friends reviewing and recommending strategies designed to provide relevant financial products and services to low- to moderate-income and minority consumers – and of course help them win grant awards. The grant process is a rigorous one that results in a very Comprehensive Business Plan.

Answering and addressing each of the many questions contained in the CDFI grant application requires the credit union and its team look at its products and services a little differently. One of my favorite questions in the grant application is:

Explain how your financial products and services meet a double-bottom line by providing both social returns for borrowers and financial returns for the organization.”

Let that simmer for a minute

Think about that for a moment at your product and services level. Do your loans, products and services meet a double-bottom line? How about providing social returns for borrowers? Most of us are just focused on the financial returns for the organization. Imagine for a minute what success might look like if credit-union products and services created a double-bottom line that resulted in meaningful member impact and contributed to longterm sustainability. Marketing something like that would be a PR dream! Word-of-mouth growth would be off the charts.

So what does it look like?

Here is an example of how one grant awardee answered this critical question:

The financial products and services the CU provides are designed to improve the lives of its low-income target market and generate earnings to sustain its not-for-profit financial cooperative.

Social and Financial Returns for the Borrower: The products and services provided by the CU have a significant financial impact on the low-income consumer. For example, the used-auto loan product has a rate of 15 percent, compared to the average rate of 30 percent offered at the “buy here, pay here” vehicle lots. Financing for affordable used-auto loans is hard to find in the CUs market area. Vehicles for Change reports that 75 percent of the 4,000 families it helped purchase a vehicle got better jobs and/or increased earnings. Some 75 percent missed fewer days of work, and the average annual earnings increased by $7,000.

Credit Union staff provide financial education to thousands of members at one-on-one “teachable moments” to help them better manage their personal finances and debt obligations, understand loan products, and qualify for loans.

Financial returns for the organization: CU products and services are sustainable. As of September 2014, the average loan yield is 7.5 percent. This higher-than-peer (5.76 percent) yield drives interest income of more than $5 million annually. Staff are experts in used-auto loans, which comprise 70.2 percent of the entire loan portfolio.

A higher value loan and a meaningful double bottom-line

The example I shared here is a great example of when a loan is more than a loan. For low-income and credit-challenged consumers, an auto loan is a way to work, higher income, and improved quality of life. This is so much more powerful than, “I get lower rates and fees at my credit union.” It is more than about providing a great rate, which in this scenario is 15 percent.

Credit unions do not have to be a CDFI to create products and programs that can generate a double-bottom line. Most credit unions have access to consumers who may be on the lower to mid-range of the income scale with credit challenges. Many of these are people who need affordable and reliable transportation. When this kind of lending is done correctly, helping this group get a vehicle makes a big and meaningful impact to them. It also creates profitable loan pools for the credit union.

If you have access to this group, and your loan and income growth is less than you need, I hope you will consider serving these individuals. My experience is that both your credit union and the people you reach out to serve will win in remarkable ways.