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A Worthy New Year’s Resolution

Did you tell yourself in January that 2018 will be the year you keep your New Year’s resolutions? One month in, are you still holding up that promise to yourself? Only 8% of people keep their New Year's resolutions. Some resolutions are harder to forget than others, especially when the unexpected occurs.

Do you have $400 to keep warm?

Picture this, you are relaxing at home when suddenly, you hear a screech in the basement and a burning smell permeates the house. You rush downstairs to see what is going on and quickly realize that something is wrong with your furnace. Oh yes, did I forget to mention it is -5 degrees outside?

Now, imagine that you are one of the 46% of Americans who are unable to come up with $400 in an emergency. In this mindset, process that for households making less than $40,000 a year, 66% would be unable to come up with $400. For minority households in this income level, 80% of black and 73% of Hispanic households would fail to be able to come up with $400, compared to 60% of white households in this income bracket.

You frantically call around for repair quotes and discover that a furnace repair will set you back well beyond the $400 you can’t already come up with. What do you do? Can you borrow money from family or friends? Do you take out a payday loan to get the repairs completed knowing you’ll be spending over 400% APR in interest?

The Challenge to Meet Basic Needs, Let Alone Make an Emergency Repair

This is real life. This happened to me and my family on New Year’s Day as I had that panic moment of how to care for my family. But, I am fortunate. I had the financial means to make the repairs. This is a very real scenario for countless others, including some of the 149 million Americans who could not come up with $400. For these individuals, they face much more difficult financial choices.

Furnace repairs are not the only difficult choices consumers need to make on a day-to-day basis. A recent survey indicated that one in four families don’t seek medical attention because of financial difficulties. Couple this with the fact that many hard-working middle and low-income Americans simply don’t make enough damn money to cover the basic necessities like housing, food, transportation, and clothing, let alone save.

Between 1979 and 2015, U.S. real weekly wages have increased from $1,479 to $2,004 (26% increase) for the top 10% of earners and decreased from $414 to $397 (4.3% decrease) for the bottom 10% of earners. As of 2014, low-income households spend an average of 82% of their income on basic necessities compared to 66% for high-income earners. If low-income consumers are spending more and more on basic needs and other essentials for building a better life (or just to get by), it becomes much easier to see why almost half of us can’t save and come up with $400 in a pinch.

A Worthy Credit Union Resolution: Provide a Better Small-Dollar Loan

The bottom line for struggling consumers year-round is that the NEED for short-term, small-dollar loans is great. Unfortunately, there are a multitude of small-dollar loans available to consumers where they live and online that are easy to get help in the short-run, but set the consumer up for a repeating cycle of debt. It’s not likely to stop anytime soon.

We must do better. There are countless examples of credit unions partnering with consumers to meet their short-term needs through payday alternatives while building a trusting relationship with a member to build their financial future through credit building, savings programs, financial education, and affordable loans. We’ve tested several small dollar loan programs in Filene’s Financial Empowerment Incubator and our data shows it works for both the member and the credit union.

Employer-Sponsored Small-Dollar Loan

One program Filene is particularly excited about is the Employer Sponsored Small Dollar Loan, or ESSDL; developed and tested with the support of the FINRA Investor Education Foundation. ESSDL is a small dollar loan an individual can receive through their employer. Underwriting is based on old school credit union principles: relationships; and is based on term of employment and if the employee is in good standing. The employer partners with a credit union who facilitates the loan.

ESSDL shows incredible promise to tackle some of credit unions’ most pressing issues: growing membership and reducing delinquencies. By working with an employer, the ESSDL program has demonstrated the ability to tap into new membership bases (much like older employer seg. models) and be a reliable source of repayments through the trust established in the loan process. Filene and FINRA now have FREE implementation materials and technical assistance available to any credit union interested in starting the program. Learn more by registering for Employer Sponsored Small-Dollar Loans webinar on Mar 20, 2018 12:00 PM PDT.

Additionally, Filene is excited to release the results and implementation materials from the Reaching Minority Household Incubator this Spring. This Incubator was designed to identify, test and replicate programs serving minority groups and other financially vulnerable populations. Through the support of Visa and the Ford Foundation, Filene joined forces with nearly 40 credit unions to expand their reach to underserved households by testing programs like the ITIN Lending program. This program included a variety of consumer lending products, including credit cards, personal loans, and vehicle loans, to non-citizens with the same rates as traditional consumer lending products.

Learn more about programs aimed at closing the financial access gap through Filene’s Reaching Minority Households Incubator.

Even with all of this excitement, the sad reality is that while the credit union opportunity to provide critical lending programs, like a better small dollar loan, is TREMENDOUS, the actual number of institutions doing it is small. Only 11% of credit unions currently leverage the NCUA PAL program and 10% offer some sort of payday loan.

I have no doubt that credit union leaders have a lot on their plate in this new year. Budgets, planning, and constantly trying to better understand the needs of their members. Hopefully, though, there is room and motivation for one more worthy resolution: to take action and meet the growing needs of ALL their members. Credit unions have always found ways to get their members into a warmer situation even when their financial furnace goes out.

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