Small Dollar Credit Builder Loans: Adding Insight to Build Impact

FUND CI continues its deeper dive in the its recent report Bending Toward Justice: Credit Scores as a Measure of CDFI Impact with Talia Kahn-Kravis, the Credit Builder Alliance’s Manager of Innovations and Business Development.

CBA is an innovative national nonprofit network dedicated to building the capacity of a diverse and growing network of hundreds of nonprofits across the country. CBA was created by and for its nonprofit members as a bridge to the modern credit reporting system and to date has helped millions of individuals with poor or no credit participate in the mainstream financial system by building credit.

Benefits Beyond Profitability

The majority (60%) of survey respondents indicated that their SDCBL products were not profitable, yet 76% identified that they were successful, highlighting that a program’s benefit can extend beyond its profitability. Kahn-Kravis confirmed that the survey findings aligned with her experience working with lenders, as the same amount of technical assistance, if not more, goes into providing these small loans, making them more costly. Nonetheless, 80% of respondents intend to continue to offer the SDCBL products to support borrowers needs as well as for internal benefits, such as creating a pipeline of borrowers for other products.

One way that CBA sees providers reducing the costs is to streamline processes and reduce the time involved, such as utilizing streamlined underwriting procedures or partnering with fintech companies to automate some portion of the process. While not appropriate for all loans or business models, partnering with a fintech company can allow the nonprofit lender to retain control and remain the face of the products while leveraging technology to improve processes. Nonetheless, Kahn-Kravis notes that many providers will likely continue to subsidize their SDCBL product through the CDFI Fund or other sources of funding.

SDCBLs in the time of COVID-19

Kahn-Kravis noted that in the initial phase of the pandemic, there was an uptick of consumer loans as people use these loans just to get by. While the CARES Act provided some assistance, CBA members see that there is a lot of volatility for low-income families and people right now, given job insecurity and health concerns. Kahn-Kravis notes that “Members are providing new loans to help their clients avert emergencies, but they are also really stepping up to make sure their loans aren’t going to hurt their borrowers. Our members have been delaying loan payments, using special disaster coding to the credit bureaus, and forgiving loan payments to name a few options. We are proud to see our members proactively and nimbly adjusting their programs to support their clients during this hard time.” Many members have also transitioned to more remote services to better serve their communities. Reflecting their basis in the communities they serve, Kahn-Kravis shared “The trust is still there. The relationship building is still there. There is something missed when you don’t get to see people, but perhaps there is added accessibility by being remote.”