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March 04, 2003
Federal Credit Union and Nonprofits Go 50-50 on Loans to Low-Income Individuals
    by William Baue

Alternatives Federal Credit Union's Community Partnership Lending program doubles the amount of money nonprofits can loan to underserved communities.

Low-income individuals who have tainted or nonexistent credit histories often have trouble securing credit. Traditional financial institutions generally are reluctant to make loans to such individuals because of perceived risk. However, community investment practitioners recognize that strategies exist to mitigate this risk. For example, Ithaca, New York-based Alternatives Federal Credit Union (AFCU), through its Community Partnership Lending program, teams up with nonprofits and social service agencies to split the financing of loans to low-income individuals.

"We're really talking about the 'unbanked'--people who normally would not be able to walk into a bank and get a loan," said AFCU Chief Operating Officer Leni Hochman. "Because these people don't have a relationship with Alternatives or any other financial institution, we rely on the trust that's been established between the client and the agency."

The structure of the Community Partnership Lending program significantly externalizes the risk from AFCU to the nonprofit agency. The nonprofit raises whatever amount of money it can through grants or donations to finance loans to its clients. It then deposits this money in AFCU. AFCU matches the amount deposited, essentially doubling the funds available for loaning.

"If there is a loan loss, it comes first out of [the nonprofit's] deposit and only later out of ours," Ms. Hochman told Nonprofit agency accounts have been able to absorb all of the losses incurred thus far in the program.

The nonprofits get significant benefits in return, in addition to a doubled loan pool. AFCU services the loans without charging an administration fee; AFCU instead sets the loan rate at three percent above the rate on the security deposit, and this margin covers the program costs. The current interest rate for the Community Partner Lending program is six percent. AFCU also advises the nonprofits on loan policy, helping them identify the degree of risk they want to assume.

For example, AFCU handles a loan for people that live in Ithaca Housing Authority (IHA) public housing. These people have graduated from IHA's eight-class financial management program, called the Three-Pillar Foundation. The three pillars of this program consist of financial education, peer group support, and access to the loan.

IHA requires Three-Pillar graduates to submit an application for access to the loan. The application asks for the applicants' credit histories. IHA has established a loan review committee that consists of representatives from four local banks, including AFCU, to evaluate all applications. Traditional financial institutions would reject many of the applications that IHA ultimately accepts, because the program specifically seeks to help the underserved.

"We allow more people with risk factors in; that's the purpose of it," said IHA Family Self-Sufficiency Case Manager Marion Deats. "[Our program has] offered people an avenue to attain home-ownership and hence self-sufficiency."

IHA raised the initial funds in 1996, and has been financing loans from this revolving pool ever since. Loan repayments free up money to initiate new loans.

"With the six percent interest rate, there is constant replenishment," said Ms. Deats.

There is also loss. IHA and AFCU have jointly financed 18 loans worth a total of $44,923.78 since they first signed a contract together in 1997. They have had four write offs worth a total of $7,120.84.

"The write offs are a leak on the available funds," Ms. Deats told "These defaults are unfortunate, but we assumed that they would be there."

AFCU echoes this sentiment, placing it into a larger context.

"Financial institutions in general would consider some of these write-off rates excessive," said AFCU's Community Partnership Lending Manager Mary Ziegler. "Keep in mind that the organizations that partner with Alternatives Credit Union determine who gets the loans. Some organizations will accept a higher write-off rate to be able to attempt to help more clients."


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