The Filene Research Institute and the FINRA Investor Education Foundation began distributing free resources to help credit unions set up small-loan programs with employers to help workers avoid payday lenders.
The implementation and marketing materials are part of a campaign to ramp up the Employer-Sponsored Small-Dollar Loan program to credit unions nationwide.
The loans are designed to allow workers to get up to $2,000 in cash, often the same day that they apply. Eligibility doesn't depend on credit scores, but instead on the credit union's assessment of the worker's ability to pay.
Borrowers must:
- Be employed in good standing with their employer and on the job for at least 12 months;
- Have a valid photo ID;
- Have no active bankruptcies or judgments; and
- Agree to establish a payroll deduction.
After the loan is paid off, the debits continue but go to the worker's savings account, unless the worker opts out.
The loans carry an APR of 17.99% and can be extended for terms of 90 days to one year. The cost of borrowing $500 for 90 days would be $16, compared with $450 in fees and interest on a typical payday loan, according to Filene.
The employer contributes a “nominal annual fee,” according to the program's marketing materials.
The loans were pioneered by NorthCountry Federal Credit Union of Burlington, Vt. ($536.3 million in assets, 41,226 members) in 2007. Since then it has expanded to 40 employers across northern Vermont with workforces of 50 to 150 people.
Fees at NorthCountry averaged about $500 a year per employer, depending on the number of employees and risk factors. The fees were usually about the same as loan write-offs, which averaged about 12.5% of the average portfolio, NorthCountry CEO Robert Morgan said.
“It's easy to protect the credit union from material loss, and have a big impact on people's lives,” Morgan said.
The Ford Foundation awarded a $700,000, 30-month grant to Filene in 2014 to test NorthCountry's program.
Filene's Accessible Financial Services Incubator replicated and implemented the loan at 13 financial institutions in eight states in partnership with 48 employers. The tests “confirmed that the loan is feasible, scalable and meets important needs for employers and low- and moderate-income employees,” Filene said.
The feasibility study, implementation guide and customizable marketing materials are available for download at Filene.org/ESSDL.
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