Loan Zone: Education Program Boosts Member Financial Health and Revenue

young female financial advisor counseling credit union member
By Ann Solomon , Vernice Arahan

3 minutes

New research shows financial counseling is a powerful—and profitable—community support tool for credit unions.

Community development credit unions are mission-driven institutions that serve low-income, underserved communities across the country. Reflecting the needs of their members and communities, CDCUs specialize in high impact products like payday loan alternatives and credit-builder loans, as well as such key supportive services as financial counseling and education. Historically, these supportive services have been viewed as charitable activities and a cost center for financial institutions. However, new research conducted by Inclusiv, New York, and Neighborhood Trust Financial Partners, New York, has revealed that financial counseling can generate a positive return on investment for credit unions.   

Inclusiv and Neighborhood Trust conducted their research through Pathways to Financial Empowerment, a joint program launched in 2015 that combines technology-supported financial counseling with credit union products. The Pathways platform enables holistic and detailed impact analysis by combining data from multiple sources including credit report and score plus credit union account data.

Clients served through the Pathways program are considered high-risk by mainstream financial services. They generally have low incomes, poor credit and high debt. Those clients who took out new loan products early in the program have a median income of only $28,000 and a median credit score under 600. However, as the research shows, by working one-on-one with members to improve their credit and financial health, financial counselors are able to convert these high-risk clients into excellent borrowers.

As a result, Pathways-enhanced loans are repaid at impressive rates. The delinquency for Pathways borrowers is just 3%, lower than the U.S. personal loan delinquency rate of 3.6% for all credit tiers and half of the 6% average default rate for payday loans. Perhaps most exciting, a deeper analysis of counseling’s return on investment for three Pathways credit unions found that loan revenues associated with counseling far exceeded the cost of program delivery for two of the three organizations. 

Together, the 20 credit unions utilizing the Pathways platform have served almost 9,000 clients and conducted more than 12,000 counseling sessions over the last three years. The Pathways model focuses on financial counseling clients taking concrete steps to improve their financial health. To date, 49% of clients report achieving at least one of their action steps, such as disputing collection amounts and utilizing appropriate financial products. Looking at clients six to 12 months after an initial counseling session, 58% of clients improved their credit score. More impressively, almost one in five subprime clients improved their credit score enough to rise above the 620 threshold, significantly expanding their access to affordable products. Among this group, the average score increase was a dramatic 66 points. 

Pathways’ impact on clients is measured not only by their credit and debt profiles, but also by their expanded access to affordable credit and what that means for their lives. The platform enables the ongoing tracking of members’ product uptake to aid in this assessment. Through the first quarter of 2019, clients of the program had already taken out over 3,000 new loans—totaling nearly $22 million—at their credit unions after receiving financial counseling. These loans primarily consist of small-dollar personal loans, credit-builder loans and auto loans, but they also include other types of credit, such as credit cards and home equity loans. The impact these products have on clients’ lives can be profound. For example, Pathways clients who have taken out small-dollar personal loans at their credit unions are saving from 100% to  600% in interest when compared to a typical payday loan.

This new research demonstrates the great promise of integrating financial counseling into credit union lending as a true win-win. Members save in loan payments by avoiding high-cost, “alternative” lenders while credit unions generate new revenue by effectively and profitably lending deeper into their markets. Credit unions have a critical role to play in expanding access to financial services and affordable loans to underserved consumers. Financial counseling is a powerful tool to help credit unions fulfill this critical role in their communities and has improbably emerged as a profitable, not just charitable, program offering. 

Ann Solomon is VP/strategic initiatives at Inclusiv, New York. In that role, she leads design and implementation of innovative programs and products to increase the financial capability of low-income and underserved people. Prior to joining Inclusiv, Solomon was a researcher in sustainable and responsible investing and previously developed affordable housing for low-income people in Brooklyn, New York.

Program Officer Vernice Arahan leads logistical and outreach support for Inclusiv’s initiatives to enhance the financial capability and access to safe financial products of underserved communities. Prior to Inclusiv, Arahan worked with the Bureau of Space and Design and Office of Refugee and Immigrant Affairs in the New York City Human Resources Administration as well as the Asian & Asian American Center at Cornell University.

Learn more about this program at Pathways Boot Camp, Sept. 19, 2019, in Los Angeles.

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