Road to Aiding Abuse Survivors Rocky

Michigan State University Federal Credit Union is experimenting with small-dollar loans to help a group of people often under high stress and in unstable conditions: Survivors of domestic violence.

For the past five years, the East Lansing, Mich.-based credit union ($4.2 billion in assets, 269,344 members) has worked with a network of local domestic abuse shelters and a Michigan State researcher to find the right mix of parameters that will allow it to make loans that will help these women – and a few men – regain their independence and enhance their financial power.

“Their dedication is just amazing,” said Katie Gaynor, content and media manager for the Filene Research Institute, which has been an advisor on the project since it was conceived five years ago and has been publishing reports on its progress.

“They’re testing, they’re innovating, they’re trying it out,” she said. “Even if it doesn’t work, we want to be transparent about it.”

Predatory lenders have focused its lending programs to lure people at their most vulnerable moments into cycles of debt to maximize investor profits.

For credit unions, whose mission is to help members lead better lives, the challenge is whether they can muster a similar commitment to find ways to channel human struggles into lending programs that give people both immediate relief and the long-term benefits of building their financial strength, resilience and power.

Melissa Osborn, a domestic abuse survivor and advisor to area credit unions, envisioned the loan program in 2014. She called Ben Rogers, then managing director for research at Filene, a non-profit credit union think tank in Madison, Wis.

A working group was convened in May 2014. It included Adrienne Adams, a researcher in the field from Michigan State, and representatives of six domestic abuse survivors groups in the Lansing area. And it included Michigan State University FCU.

“We couldn’t do this without the credit union,” Adams said.

CUNA Mutual Foundation provided a $2,500 grant to fund the program’s loan-loss reserve. Filene has also funded evaluation and research of the program.

The first iteration of the program provided loans up to $2,500 for terms up to 60 months with interest capped at 6%. The loans could be used for any safety-related need defined by the survivor.

Approval did not require a credit score. Many of the survivors had credit that had been damaged by abusive partners who spent household money irresponsibly and took on debt in the survivor’s name.

Instead, a prequalification committee was formed consisting of one representative from each organization. The idea was that the advocates were in the best position to judge the creditworthiness of the survivors.

From November 2015 to August 2016, 16 people applied for the loans and 12 loans were made. The first iteration was suspended in August 2016 when five of the loans were delinquent or charged off.

An initial review suggested that the approval process had used overstated income and understated expenses, which meant the loans were unaffordable when granted. Income was self-reported based on the applicants’ best estimate. Expenses were estimated with the aid of a one-week spending tracker.

The second round was launched after January 2017, when nine advocates from six agencies were trained on the application process and financial education curriculum. Greater efforts were made to ensure loan recipients stayed in contact with their sponsoring agency.

Also, a loan officer from the credit union was added to the prequalification committee. And the credit union would pay the loan funds directly to the third party, whether it was a creditor, landlord or car dealer. The maximum loan was reduced to $1,250 and the term reduced to a maximum of 30 months.

The new program went two months without a single application. Adams called around and found that many advocates were hesitant to recommend the program for clients because they suspected the survivors were not financially secure enough to repay the loan, and didn’t want to set them up for failure.

Some said a longer, six-week financial education requirement was too burdensome. Other advocates said their own workload was a barrier.

From April to September 2017, three survivors applied for a loan, and two were approved for $1,250 each to be repaid over 30 months. One planned to use the money to buy a vehicle to get to work; the other planned to pay moving expenses to get away from her abusive partner.

“Both new loans quickly went into default,” Adams wrote in report published by Filene in January.

One made no payments on her loan. “At the time she applied for the loan, the survivor was the ideal candidate: Long-standing, intensive advocacy relationship; a low credit score partially attributable to an economically abusive intimate partner; and income from multiple sources that was more than adequate to cover expenses.”

Her advocate, who met with her for three months after the loan, was not aware that she had not been making payments. The survivor left the agency’s transitional housing early, lost her job and had no further contact with the advocate.

On the other loan, the borrower made one payment. In that case, the advocate went on medical leave for six weeks after the loan was granted and never had contact with the borrower again.

The borrower had also been considered a good candidate: She had a history of working intensively with her advocate, was earning enough to cover the loan payment and other expenses, and even had a savings cushion.

Both loans were charged off.

Ultimately, eight of the 14 loans in the first two phases were charged off, with losses of $17,507.

Adams found that those who were repaying their loans had also encountered unexpected financial setbacks, but showed resourcefulness in weathering them, in part because they had strong bonds with their advocates. The borrowers also made statements expressing commitment to the agencies that had helped them.

“They took a chance on me. It’s important to pay them off,” one said.

Adams said the feedback suggested that repayment rates might be improved with greater financial and advocacy support for the borrowers.

The third iteration, which is expected to begin in late summer, will deal more carefully with the timing of loans, Jeffrey Jackson, the credit union’s chief lending officer, said. Should the loan wait until the person is out of their abusive situation, or should it be earlier to help them to extract themselves from the situation?

“We have not figured that out yet,” he said. “At the point of trauma, if you ask them if they need $2,500, they’re going to say ‘yes’ no matter what.”

The third iteration will have two new guardrails. On one side, the borrower will have the continuity and regular contact of a program manager from the Michigan Coalition to End Domestic and Sexual Violence. The statewide nonprofit will be responsible for managing the program through a single program coordinator.

That person will reach out to the borrowers monthly to check on how they’re doing and assess their needs. If barriers are arising, the advocate will help the survivor craft a strategy for overcoming them.

The other guardrail is a built-in safety cushion for unexpected expenses or other reversals that resulted in past loans going bad. The coalition is raising money for a pool of emergency savings. The idea is that a contingent grant equaling 10% of the loan amount would go into a restricted savings account.

“If a survivor is in repayment, and they have something come up that makes it difficult to make a payment, they can ask the credit union to dip into that emergency savings to cover a payment,” Adams said. “Anything that’s left in that savings when the loan is repaid goes to the borrower.”

Loans like these can help a person make a fresh start and rebuild their credit history, giving them more power and financial control over their lives.

But Adams said loans are merely a means to an end, and she is still struggling to determine when a grant would be more appropriate.

“Not everyone has the capacity to repay the loan,” Adams said. “We are in the collective, committed to doing everything we can do to make this succeed, but maybe we’ll reach a point where we realize it isn’t going to succeed.” She added, “We haven’t reached that point.”

For Michigan State University FCU, domestic abuse survivors are just one group the credit union helps. It also provides small loans through Habitat for Humanity and the Lansing branch of the Catholic charity The Society of St. Vincent de Paul.

“We’re there to try to help those partners help people,” Jackson said. “The populations that don’t understand how financial institutions work are the most vulnerable. They need a trusted community partner that will help them negotiate the system.”

“There are a lot of needs out there, and we’re in the position to do the right things for the right reason,” Jackson said. “It helps their dreams come true, and it helps our employees see we’re making a difference in people’s lives – and that’s the mission we live by.”