The Credit Path

William Myers, Alternatives CU

We look at any member as on a continuum between poverty and wealth. Our job as the financial institution of the community is to move members along that continuum, to offer opportunities for movement, empower them to make decisions that will move them towards wealth. We design our services to take into account the different needs of members on four different sections of that continuum, the Credit Path.

** The first step ** for our poorest members is the transactor stage.
This is for members who come in who need access to financial system. The need to cash checks, money orders, to get official checks, to get change, to send wires to family out of the country. This is an access system for people who don't have savings or checking accounts, that is, people who don't have enough net income to have savings.

There are two common bank models of pricing for this level of services. Banks forgo charges for these types of transactions on the basis of compensating balances. That is, for customers who have a $10,000 CD, there are no money order fees. This, in effect, denies reasonable access. Check cashing outlets use predatory pricing, making transactions overly expensive. We price these services to reflect who we expect to buy them. We also price the service to make money for the Credit Union., in other words fair pricing so that we can continue to deliver services at this level. We as an institution will not have to say, "We don't make money on transactors so we don't need that kind of members." We're trying to encourage ourselves to develop profitable services for this niche.

** The second level ** is the saver and this is a traditional Credit union market.
We say, "once you save money on fees, develop a savings habit, put aside $5 out of each check cashed." Begin to accumulate net income in a savings account. Small savings account is something Credit Unions have been in a long time. To make this work we have to pay interest on these accounts. we have to price the account to encourage people to use them, we can't charge monthly fees.

** The third level ** is a standard level for both banks, which we call the borrower level.
We try to help people who developed a savings account to develop a credit record. Most of the lending is consumer lending: cars, personal loans, visa cards, line of credit. The idea is to give members familiarity with credit and a record that goes into the national credit bureau reports. This means that these members begin to show up on the scopes of other lenders. This is a broad stage where we offer many services. This year we've added a new loan type called the credit builder loan to specifically offered loosened credit for small loan amounts to move people up. We're considering a step-up loan to specifically offer to increase our lending to members that perform well on the credit builder. We've offered new guidelines for members with no credit. Our new Entry card is geared to this beginners market. We're trying to make sure that we can pick people up from the transactor or saver level and move them to the borrower level.

** The fourth level ** which for our type of CDFI we consider the top level of services, is what we call owners.
There are two types of services: Home ownership lending and micro-enterprise lending. In this country most of the personal financial wealth is developed through equity in home ownership. Homes are also an important part of expressing a commitment to community.

The other side of the fourth level is micro enterprise lending. A lot of the lending we do is for small start up businesses, mom and pop stores, secondary income. Many are spousal loans where a couple will have one paycheck job and their sanity and hope is a small business they're starting. They look forward to the day the business income will grow and they can leave the paycheck job. In the meantime the paycheck provides stability.

These products that provide opportunity for ownership are our top lending products. We've been experimenting with this model over a few years and have measured our impact. In consumer lending, the borrower stage, we've reached something like 80% of borrowers being low income. We have substantial impact in these products. We can't measure the income of those at the transactor level because they haven't yet applied for a loan and given us credit information. For the ownership level, our affordable mortgage is targeted to be attractive to those who do not qualify for secondary market loans, though of necessity this is a somewhat higher income member. The loans are designed to extend the frontier of mortgage lending through our 24 additional underwriting criteria.

William Myers -
Manager, Alternatives Federal Credit Union

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