How This Small Indiana Credit Union Works To ‘Bridge The Gap’

Afena Federal Credit Union ($80.1M, Marion, IN) is using a $1 million commitment from a local foundation to make a positive impact one Bridge the Gap loan at a time. That’s the name of the program the 7,900-member cooperative launched on Nov. 1, 2020, in partnership with the Community Foundation of Grant County.

The loans are small-dollar, low-interest notes intended to help keep the borrowers away from payday lenders in the near term and by helping to build credit scores and also includes savings and financial counseling elements.

“The foundation agreed to provide $1 million over five years to collateralize the loans, which already are making a difference,” says Karen Madry, Afena president and CEO.

“Families have borrowed money for everything from putting food on their table to keeping their lights on in their homes. Some have borrowed to pay off credit cards and to stop the harassing phone calls,” Madry says. “The program is well received because the monthly payments can be as low as $35 per month, which makes it easy and affordable without causing the member to dig a deeper hole for themselves.”

“Participating in an impact investment like the alternative payday lending program has been on our radar for quite some time,” adds Dawn Brown, Community Foundation president and CEO. “It’s both exciting and timely that we are able to partner with Afena our local Community Development Financial Institution (CDFI) to help our most marginalized families recover from COVID-related financial pressures and plan for a more stable and thriving future.”

“Afena FCU is based in a county that had the third-highest poverty rate in the Hoosier State prior to the pandemic,” she says, “and more than 50% of its members are classified as having either very low or extremely low income, earning less than $35,100 and $21,060, respectively. When the federal poverty level is $26,500, it’s clear these families struggle to make ends meet.”

“These statistics and many more made a great case for the need to develop a program designed to help these families, providing them with a safe place to turn where they are not judged based on their credit score,” she says.

“They’re also trying to keep borrowers away from the storefront lenders, of which there are at least seven in her two-county market, and interest rates can be as high as 400%,” Madry says.

The Real Ability To Pay Back The Loan

“Through June 1,” Madry says, “the credit union has underwritten and funded 84 loans for $187,730. The average loan amount has been $2,234.88, of which $1,489.33 has gone to the borrower in cash and the rest paid out into a savings account. The average interest rate has been 6.81%, ranging between 4.25% and 9%, depending on the length of the loan, which can be from three months to five years.”

“The term is based on the real ability to pay it back without stretching the household budget,” Madry says.

“The recipients have an average annual income of $23,704 and credit score of 411,” Madry says. “That includes 24 borrowers so far who had credit scores of zero. The average monthly payment has been $82 or $20.50 a week.”

“Not only does this help the member have the peace of mind that they can afford the monthly payments, it helps to ensure they’ll make payments regularly, a behavior that can have a dramatic impact on improving their credit score and building fiscally responsible habits,” Madry says.

The Bridge the Gap effort also did not call for any dramatic change in behavior on the part of Afena’s small staff. It aligns closely with what we already were doing every day, Madry says. The only difference is that this program is specifically designed for a group of individuals that need looser underwriting guidelines. It’s closely aligned with our lending philosophy and supports our mission and vision.

Marketing Through Multiple Channels And Partnerships

The Bridge the Gap program is marketed through social media, employers, internal newsletters, and word of mouth.

“With pandemic restrictions being lifted, we’re looking forward to ramping up our marketing efforts by visiting churches and social service agencies that work with families,” Madry says. “Our goal is to partner with as many local businesses as possible to encourage them to provide this information to their staff and clients.”

“That ramping up is part of a relaunch that begins this month with new underwriting guidelines and marketing messages. The marketing had actually been paused in April while the credit union assessed some loan losses.” Madry said “six loans totaling about $9,500 have been charged off.”

“We went into this program knowing we were not going to get it completely right right out of the gate. We anticipated having to modify it as needed to minimize our risk,” Madry says.

“Most of our losses are first payment defaults from new members,” she adds. “It seems that some people have the impression that this is free money’ rather than a loan. With our relaunch we will be limiting the loan amount for new members with very colorful credit to small-dollar loans not to exceed $600.”

How The Loans Are Underwritten

Madry stresses that the Bridge the Gap program is premised on not holding members to standard underwriting rules, but to instead give the members a chance to prove themselves credit-worthy.

“At Afena all of our underwriting decisions are heavily weighted on the member’s motivation. We pride ourselves in listening to our member’s story and understanding their situation,” she says.

The credit union also heavily considers previous payment patterns, the reason for the loan, and the receptiveness to financial counseling. Length of employment also has now been modified to a minimum of two years of continuous employment and at least one year with the same employer, with the exception of March to June 2020 when the county was shut down by the pandemic.

The credit union seeks to ensure the ability to repay by not allowing the borrower’s debt-to-income ratio to exceed 65%, and the relaunch also includes changing the income threshold from 200% of the poverty guidelines to 80% of the area’s median income to allow more families to qualify.

Madry says “denials are mostly because of credit reports that don’t reflect any positive payment trends, trends of accounts being turned over to collections (pre- and post-pandemic), and numerous new credit inquiries and/or newly opened tradelines.”

“We’re experienced at determining if their story matches the credit report,” Madry says.

We’re experienced at determining if their story matches the credit report.

The Bottom Line: The Program’s Goals

“We feel this program will help attract new members in our target market by lending money to people who may not otherwise be credit worthy, improving the financial health of financially vulnerable individuals by improving credit scores, and creating a financial plan for them and monitoring their success,” Madry says. “That will ultimately uplift our community as a whole, while creating life-long members, people who will return to us for future financing.”

Madry says “the goal now is to increase the portfolio to $1 million by the end of 2023 by providing Bridge the Gap loans to 500 low-income individuals or families, attracting 150 new members, and cultivating six-to-nine new community partnerships.”

“Our main objective is to create strong alliances where our community organizations will begin to refer their clients to us. While they provide assistance for their areas of expertise, we can provide financial assistance for both their clients and their employees.”

They’re already seeing some results. “Several organizations have reached out to us recently for strategic meetings to determine how they can partner with us and use this program to help their organizations reach their strategic objectives as it relates to providing financial assistance for their employees and clients,” Madry says.