For many working poor, bridging the gap between generally declining incomes and the ever-higher cost of living is a challenge often met by increasing consumer debt, typically through credit cards and alternative lenders. Borrow & Save is designed to help borrowers break the continuous cycle of borrowing from high-cost alternative lenders and move towards healthier savings habits.
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About Borrow & Save
The Federation is conducting a two-year pilot program through which five CDCUs, three nationwide and two in New York City, will offer a Borrow & Save loan to members. Our goal is to assess the impact of this type of product, to see whether it helps low-income people reduce their dependence on borrowing by providing an alternative to predatory financial products and by building a small emergency savings fund.
The Federation will support participating credit unions in three ways:
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We will provide a one-time grant of up to $5,000 to support the credit union’s time and effort in publicizing the program, tracking the loans and savings, and following up with clients.
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If required by a participating credit union, we will make a special risk-sharing deposit of $10,000-$25,000 at a rate of 2.5%. This deposit will absorb up to 25% of any losses resulting from small dollar loans made, assuming all record-keeping and reporting is carried out according to agreement.
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The Federation will help the credit unions to conduct market surveys, using focus groups and borrower interviews to improve the design, marketing and impact of the product.
Borrow & Save Product Description
Based on Borrow & Save program guidelines, a typical $500 small dollar loan at one of the five participating CDCUs requires no collateral, no credit report, is processed within 24 hours or less, carries an interest rate of 18%, a fee of $20, and a term between three and six months.
By contrast, short-term loans from a typical pawn shop, loan shark or payday lender have fees and interest equal to $15 per $100 borrowed for a period of just 14 days. The net result is that CDCUs’ payday alternatives costs the borrower $40, while payday lenders’ short-term loan end up costing consumers approximately $450 in interest and fees.
The new Borrow & Save product has an added bonus, in that it incorporates an asset building component that requires a portion of the loan go directly into savings.
Borrow & Save loans incentivize additional savings by providing the borrower with a savings bonus when the loan is fully repaid.
Participating credit unions will also couple Borrow & Save loans with debt counseling and financial literacy as a way to help borrowers become more financially secure.
Credit Union Responsibilities
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The credit unions selected will offer a short-term/small amount loan with savings, with a maturity term up to 12 months.
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The credit union may customize the rate and savings requirements in any way they choose. Credit Unions use their own underwriting criterion.
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The credit union will track and provide quarterly reports on each loan, its repayment history, income of participant, the amount of savings the borrower achieves, and the uses of funds (if available). No reports will include personally identifiable information.
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Semi-annually, for two years, the credit union will survey borrowers about their experience with the loan to gather information about the impact of the loan on their financial well-being.
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With the assistance of the Federation, the credit union will conduct focus groups annually for the pilot period, to collect participant feedback on the progress and impact of the loan.
Borrow & Save Program Launch
Federation, NYC Community Development Credit Unions, Launch Affordable Small-dollar Loans with Savings Component
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From left to right: Love Gospel Assemply President/CEO Vanessa Robinson-Santiago, former Federation President/CEO Cliff Rosenthal, NYC DCA Commissioner Jonathan Mintz, and Union Settlement FCU CEO Audia Williams at the Borrow & Save Program Launch. |
“Borrow & Save” to Help New Yorkers Avoid Predatory Lenders & Build Wealth
On September 19, 2011, at Union Settlement Federal Credit Union, one of the oldest community development credit unions in New York City, officials from city government, local credit unions, their members, a sponsoring bank, and the Federation gathered to announce a new credit union product that demonstrates that responsible lenders in New York City can and do offer alternatives to high-cost, predatory lenders that have become so pervasive in low-income communities across the nation.
Borrow and Save, which will be offered at two New York City CDCUs, is designed to help borrowers break the continuous cycle of borrowing from high-cost alternative lenders and move towards healthier savings habits.
Federation President/CEO Clifford N. Rosenthal; Union Settlement Federal Credit Union Board Chairman Gina Rusch and New York City Department of Consumer Affairs (DCA) Commissioner Jonathan Mintz, joined executives and credit union members from the two participating credit unions for the announcement.
According to Melanie Stern, Senior Program Officer at the Federation, who is in charge of administering the program, “the goal of the new program is to get consumers on the right track to financial health through responsible products that enhance positive financial behavior and builds assets,” she said.
To demonstrate how CDCUs can and do offer affordable alternatives, while also promoting asset building, the Federation, with support from Morgan Stanley, has provided a total of five grants to CDCUs nationwide through the new pilot program, including two in New York City to Union Settlement Federal Credit Union in East Harlem and Love Gospel Assembly Federal Credit Union in the South Bronx.
To read the full press release, click here.
