The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions

Transcription

1 The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions The marketplace for credit products and services is evolving rapidly. Emerging and established companies are increasingly competing with offers from credit monitoring and guidance to credit-builder product and service solutions. These changes have implications for nonprofit lenders, business development service providers, and their clients. Data-driven credit scoring represents a form of underwriting decision support that enables high-volume and high-velocity lending. It has long been used to evaluate risk in consumer lending. Increasingly, the same approaches used to underwrite personal credit are being adapted and adopted for small business. And while personal and business credit should be considered independently, the distinction between them for start-up businesses is blurry. In spite of the benefits of standardization and potential from predictive modeling, business owners or aspiring entrepreneurs with no files, thin files, or damaged credit are at risk of being left behind. Nonprofits have been able to serve some of the demand for credit by small businesses but two-thirds of those surveyed for this report do not offer credit building products or services. Moreover, while nearly all (89%) micro lenders use credit scores to inform their underwriting decisions, fewer than half (49%) report repayments back to the bureaus. Although many of these nonprofit organizations are interested in the gap in credit reporting, three types of barriers stand in their way: 1) Organizations or funders are not sufficiently informed to make resource allocation decisions; 2) Even with complete information, resources to manage credit building activities are extremely tight; and 3) IT systems are not designed to report repayments, which create significant challenges. Against this evolving backdrop of needs and emerging solutions, mission-focused lenders and service providers must carefully evaluate their roles in the credit ecosystem. Fortunately, there are opportunities for partnerships among and between nonprofits and for-profits worth exploring. The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions August 2014

2 Research Background Collaboration Goals The Association for Enterprise Opportunity (AEO) and Credit Builders Alliance (CBA) joined in a research program over several months to generate insights into 1) the changing credit building landscape for business owners and aspiring entrepreneurs; 2) the barriers that prevent nonprofit lenders from reporting loan repayments of their clients, and 3) opportunities for AEO and CBA to collaborate on new programs to meet the needs of nonprofits. Data Sources Our analysis relied on three main sources of data: 1) Responses to an online survey of AEO member organizations; 2) Interviews with representative samples of nonprofit lenders that report repayments to the credit bureaus and those that do not; 3) Scan of the external landscape including interviews with several business credit start-up companies. The online survey was distributed through AEO s member network in April Forty-six organizations responded to the survey, including 25 current CBA members. Thirty-eight of the respondents were nonprofit lenders and eight serve low-wealth entrepreneurs but are not lenders. Twenty of the responding lenders identified as reporting, and 18 indicated that they do not report. All survey and interview respondents were from nonprofit financial institutions that are affiliated with the AEO network. Analysis of the survey results was coupled with one-on-one and group interviews with nonprofit business lenders. Interviews included organizations that report to credit bureaus, organizations that are working with CBA to establish processes required to report data, and organizations that do not report. For the purposes of analysis, survey respondents were considered reporters if their organization reports repayments directly to a credit bureau, reports repayments to a credit bureau through CBA or through a loan servicing partner. Non-reporters included both nonprofits that do not intend to report and organizations that expressed interest in reporting but face barriers to doing so. Institutions that do not lend were excluded from the analysis of barriers to reporting credit data, as they would have no loan payment data to report. The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions Page 2

3 Not All Nonprofit Micro Lenders Report Micro lenders are mostly aware of the importance of credit reporting to building credit for low wealth entrepreneurs and many have adopted credit reporting as an additional service to their borrowers and as a best practice in the lending community. However, though the importance of reporting is widely recognized, many micro lenders still do not actively report repayments to the credit bureaus. Through survey responses, it is clear that the acceptance and enthusiasm for building credit meet many hurdles that prevent lenders from reporting including resource constraints directly (like lack of staff or staff time) and indirectly (like lack of necessary software or a need for staff training). 89% of micro lenders surveyed pull credit for underwriting but fewer than half (49%) report repayments back to bureaus Of those organizations that report to the bureaus, 65% of respondents report repayments through Credit Builders Alliance; 30% report repayments directly to bureaus via proprietary systems and/or licensed products and 5% report repayments through loan servicing partner. 94% of the micro lenders that do not report repayments would be interested in reporting but experience barriers. Survey and interview responses point to a variety of ways that CBA, AEO, and other partners in the field can support credit reporting for micro lenders and reduce some of the barriers that prevent these institutions from acting on their credit building goals. Barriers to Initiating Reporting In total, over 86% of respondents were aware of CBA services and identified as lenders. With the wide awareness of CBA s services and role in the field, why aren t more lenders reporting? The survey and interview responses pointed to barriers directly and indirectly connected to limited resources as well as knowledge, training, and technology. While budget and staff limitations were reported, these direct barriers were not the top responses in the survey. 1. Training: The need for additional training is a top concern among both reporting and non-reporting institutions. The survey did not identify specific types of training staff may need to start reporting, which may include training on software, training on compliance, or other types of task. The need for training that creates a barrier may be indirectly based on the resources available to pay for external training sessions or simply the ability to have staff step away from their work briefly. There may be portions of this training that CBA or AEO might be able to provide to help reduce this barrier if more specific topics can be identified. The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions Page 3

4 2. Technology: Many respondents stated that their primary concern was a technological barrier that they did not have software that could create the right report. Specifically, they lack the ability to generate a Metro2 file from their existing loan management system. A Metro2 file is a specifically formatted text file that is used as the required form for credit data transmission, and is required by the national consumer credit bureaus for new reporters. Not all of the most popular loan management software packages used by nonprofit lenders are able to create Metro2 data. Each institution must weigh the benefits of each particular system against the cost (both cost of the software and licensing, costs sunk into an existing system, as well as training for staff or additional staff time for less automated systems). To purchase a new loan management system with Metro2 functionality can cost anywhere from $2,000 to upwards of $20,000, depending on the system. Some may require user training or customized modules, and ongoing licensing fees. Adding an external product may require less than $1,000, but may require additional staff time for set up and for each regular monthly report. As new software systems develop, new options may emerge that can overcome limitations in existing software packages. 3. Staffing and funding constraints: Both survey responses and interviews pointed to the importance of staffing and funding restraints. Responses from those with lower operating budgets were the most likely to include these specific barriers. Our interviews highlighted these difficulties, focusing on the lack of staff time to do the data preparation to set up to report as a primary barrier to reporting. Executive Directors were more likely to cite resource barriers. Half of the Executive Directors cited lack of funding and staff time compared to only 12% of respondents in other roles. Operational and fundraising responsibilities among Executive Directors could explain this discrepancy. Alternately, staff members who are involved with client services may be more concerned about training, software, and workflow constraints involving new tasks that impact their daily work. In efforts to expand credit reporting quickly among microenterprise lenders, advocates would do well to primarily focus on groups with higher income and staffing levels, where these resource barriers are lower, and to work with lower income organizations to identify sources of support for credit reporting services. The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions Page 4

5 Figure 1: Self-identified barriers to credit reporting by budget and staff size Impact of Access to Tools and Training While nonprofit lenders in this sphere face challenges of limited resources, there are also steps to be made to expand and strengthen credit building as an integral piece of asset building programs. Many survey respondents indicated that their programs do not currently have access to important credit building tools and are interested in accessing these. Many, exhibiting an understanding of the importance of credit building, expressed an interest in additional training and professional development. Demonstrating a combined approach, many reporters were more likely to indicate usage of multiple credit building services together (such as reporting loan repayments, educational credit reports, and outcome tracking by credit scores). The implementation of such tools displays that organizations are considering the credit needs of their clients on different levels, and making programmatic connections to support credit building. Interest in additional tools, training, and professional development was reported by most respondents. New educational tools, training, and support for developing credit building services can open new doors for more holistic approaches with stronger, more inclusive credit building programs. There is a clear demand for additional tools and products among both organizations that currently engage in credit building and those that do not. With CBA s private and public partnerships including bureau analysts, financial educators, and technology developers, CBA has developed a wide range of tools to improve access to products and resources, and is well positioned to develop new tools and partnerships to meet this need. The impact of CBA s outreach and training on the importance of building credit for entrepreneurs and small business owners has resonated within the microenterprise field. Lack of resources to implement can slow or prevent action on this intent, despite high levels of enthusiasm. The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions Page 5

6 Educational credit reports: Nearly all lenders indicated that they pull credit reports as part of their loan underwriting process. However, the only institutions that currently pull credit reports for educational purposes are the ones that currently report credit data. This may indicate that reporting institutions are more likely to fully integrate credit building into their programs and overall approach to client education. Similarly, a majority of reporting institutions stated that they track credit score changes to measure progress and programmatic impact, while only one third of non-reporting organizations do. Figure 2: Use of credit reports for reporting and non-reporting organizations Survey respondents that pull reports for educational purposes were more confident in the services they provided their clients and their ability to understand credit scores. All survey respondents that pull educational reports agree that they offer the right guidance to borrowers in understanding personal credit scores. These respondents also indicated a greater understanding of the importance of credit scores to entrepreneurs, how to read credit reports, what a strong personal credit profile looks like for their clients, and further guiding borrowers to understand their credit reports. Those that do not use educational reports showed more interest in improving their ability to coach clients on significance and improvement of credit scores, though both groups responded with interest in professional development, training in credit building, and additional tools and products to help clients build credit. Respondents that reported a lower annual operating budget also indicated a lower likelihood of utilizing credit reports for credit education and outcome tracking, despite the stated interest in doing so. Correspondingly, groups with larger budgets are more likely to already be utilizing credit reports both for underwriting loans, for credit education, and outcome tracking. This confirms that, even if the intention and appreciation for credit building exists, that does not automatically mean that the institution has the resource capacity to apply these intentions. Interest in additional training: The responses demonstrate that many are also interested in additional training on credit building tools and resources. Both reporters and non-reporters were similar in their desire to become more knowledgeable about product development and coaching techniques, and overwhelmingly agreed that they were interested in professional development and training in the area of credit building. Those not reporting loan data The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions Page 6

7 indicated an even stronger interest in improving their coaching abilities. Most respondents were also interested in accessing more in-depth tools and products to further improve their clients credit scores. This is an important indicator that there are still more ways in which CBA and partners can serve this field, facilitating credit building success. Credit scores and outcome tracking: Improvement of client credit scores is a powerful and concrete indicator of the scale and impact of a program or intervention. Less than half of lenders (45%) reported that they are tracking credit scores of their borrowers, but an additional 29% expressed interest in tracking credit report changes in the future. The survey showed that reporting organizations are more than twice as likely to track credit score improvement. It is not clear whether the appreciation for credit building emerges as a side benefit from the ability to report loan data or track credit score changes, or if it is what drives the initial adoption of these services. However, based on the interest in credit score tracking among both reporters and non-reporters, lenders are clearly interested. Confidence in services: Reporting institutions responded more confidently that they provide appropriate guidance and products to clients so that they can understand and improve personal credit scores. Reporting institutions also indicated that they allocate sufficient resources toward reporting and credit building. Most nonreporting institutions did not agree with the same statement, further supporting the idea that those organizations already reporting their portfolios are engaged in a more global approach to credit building. CBA members reported 95% that they are able to offer the right type and level of guidance to help clients improve their credit scores, compared to just 37% of non-members. Since engaging in reporting on-time payments is Figure 3: "My organization offers clients the right mix of guidance, products and services to improve their personal credit scores" by reporting and non-reporting organizations connected to the most fundamental process of credit building, and CBA members have access to additional tools and training, those actively accessing and engaging with multiple resources are more confident that their services meet the needs of their clients. Consumer and Business credit education: Across all segments of our survey respondents and interviewees, all shared that they were not confident in their understanding of commercial credit and scores. This lack of The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions Page 7

8 confidence may be due to unfamiliarity with business credit models, algorithms, and usage of scores in mainstream business finance. While their better education on consumer credit, highlights by contrast what they do not know about business credit reports and scores. Both reporting and non-reporting financial institutions strongly indicated that they would benefit from additional tools and products to support commercial credit building. Supported by the conversations that emerged in phone interviews, there is still a gap in understanding the importance of commercial credit and how it compares to consumer credit information. In our sample of interviews, we found that there was no consensus among micro lenders as to use of a commercial report instead of a consumer report in underwriting or education, and how different borrowers may be better served by commercial versus consumer credit reporting. CBA members are more likely to report: CBA members represent a majority of those who identified as reporting to the bureaus, and CBA members are 3 times more likely to actively report to the bureaus than non-members. The CBA members who do not report currently may be setting up to report (in the case of 3) or are not currently lending. One of the main reasons for this trend is that due to portfolio size minimums required by national credit bureaus, most micro lenders are not able to report directly, and so to report must work with CBA or a loan servicing partner. Response Segments Reporting Not Reporting CBA Members 13 7 Non CBA Members 7 18 Opportunities for Credit Building and Reporting As the credit landscape evolves, there will be both challenges and opportunities to build and report credit. Longstanding barriers including insufficient training and technology may be a thing of the past as new technology developments arrive, while legislation and regulatory changes may have unforeseen consequences in the nonprofit lending community. 1. Provide guidance on creating credit building programs: Nearly every survey respondent (98%) agreed that they understood the importance of personal credit for entrepreneurs. For the lender or coach, access to data can help an organization improve its own processes and policies and be cost-effective in the long run. CBA and partners need to find ways to catalyze that interest into action, and incorporate the findings of this research into future outreach and training programs so that nonprofit institutions can better implement their credit building goals within the reality of their stretched resources. The development of additional resources, tools, and new partnerships may help move the percentage of CBA members and partners who feel they have right tools and guidance to help clients improve the credit score from 65% to 100%. CBA is working to create teams that will provide targeted assistance and training on site for organizations having difficulty setting up to report, new referral partnerships for access to credit building products, and other consulting support for product development and outcome tracking. 2. Report both consumer and commercial data to major bureaus: More nonprofit lending institutions are focused on credit building and reporting due to client and funder demands. And now, specifically, there is a great opportunity to expand training and education around credit building for consumers and for businesses. The nature and relative importance of commercial credit varies by stage and size of businesses served, however, nonprofit lending institutions may not be able to act on this efficiently since they are not fully aware of the The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions Page 8

9 convergence and divergence of consumer and commercial credit. As technology hurdles decrease, CBA and AEO may be well-placed within the field to identify the best practices among micro lenders and where the consensus is currently regarding practices with consumer and business credit data. And as partners, CBA and AEO can also work with the commercial bureaus to disseminate understanding of how business credit information is used, and how small business owners can make the most of this opportunity. 3. Develop new technology partnerships: In addition to educational tools for practitioners and entrepreneurs, there are enhanced, affordable opportunities for nonprofit lending institutions to incorporate new reporting technology from their peers, and in some cases, to create their own credit solutions for segments of low-wealth entrepreneurs. And with CBA s unique position in the field and experience working with credit reporting, CBA is well-placed to start new conversations with the most popular loan management software vendors to make adjustments and tools that can reduce the staff time required to set up for reporting and to report on a continuous basis. Ultimately collaboration between traditional and non-traditional financial, technological, and social experts will create robust systems that facilitate impact and scale, and partners like CBA and AEO are uniquely positioned with strong relationships across the field and with a variety of stakeholders. 4. Monitor new legislation and reporting requirements: State and federal legislation and reporting requirements are evolving, and nonprofit lending institutions must be positioned to respond to them in a timely, accurate manner by investing in their compliance resources or connecting with organizations that have these existing departments in-house. Future unfunded mandates could adversely impact lending institutions due to various issues: 1) incomplete information about the reporting process and requirements; 2) incomplete information concerning client impact; 3) incomplete information concerning organizational impact; 4) additional staff training and operational budgets to accommodate new projects not already included in current workflow. With proper preparation and support for practitioners and administrators, the field could turn any new legislation into an opportunity to support credit building in new and holistic ways. The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions Page 9

10 Acknowledgements CBA and AEO gratefully acknowledge Capital One for its support of our work to enhance deeper analysis of barriers that prevent nonprofit lending institutions from reporting the loan repayments they receive, which in turn, prevent credit score improvement among low-income individuals and business owners. We also extend special thanks to all the SBA intermediaries, CDFIs, and fellow microenterprise groups that responded to our survey and interviews. Additional thanks to Joyce Klein of the Aspen Institute for her technical assistance and data expertise with MicroTracker and providing access to the incomparable census database. About Credit Builders Alliance CBA is an innovative non-profit social enterprise dedicated to building the capacity of a diverse and growing network of hundreds of nonprofits (CBA members) that help low- and moderate- income households build strong credit and other financial assets. CBA serves as a unique and vital bridge between its members and the major credit reporting agencies (CRAs), and through its core services - CBA Reporter and CBA Access - provide nonprofits with both the ability and critical technical assistance to report loan data to the CRAs and to pull low-cost client credit reports for the purposes of financial education, outcome tracking, and underwriting. In addition to these services, CBA offers a wide range of practitioners hands-on credit building trainings, innovative tools, and forums for sharing with and learning from each other. About the Association for Enterprise Opportunity AEO strives to increase capacity of the field to support underserved entrepreneurs in starting, stabilizing and establishing businesses and to foster greater understanding of the importance of strong and effective microbusiness initiatives to the U.S. economy. AEO represents the public policy interests of its members and, through its growing network of partners, facilitates interactions among small entrepreneurs and the organizations that seek to help them succeed. AEO is also a source of important industry data and reports. The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions Page 10

11 Appendix 1: Organizational Infrastructure Requirements to Initiate and Continue Reporting Credit reporting is an important undertaking that requires significant preparation and buy-in from all levels of an institution. Ensuring that all key staff and board members are able to support the program on a philosophical level, and that the organization understands the importance of the investment in the required infrastructure will determine whether or not an institution will be able to be a successful data reporter. 1) Organizational Commitment to Compliance and Long Term Reporting: Organizational commitment is key to credit reporting, setting the foundation for credit building. From the board of directors and executive staff to the front-line practitioners, the whole organization must buy in to the importance of compliance, consumer protection and accuracy to sustain a long term reporting effort. In an evolving state and federal regulatory environment, successful reporters continuously keep abreast of the requirements and changes that may affect their operations. While only one organization mentioned board-level resistance as a barrier, CBA recognizes the important of a culture of compliance for a successful reporting process. 2) Metro2 Software Purchased, Installed & Tested: Common considerations when purchasing or upgrading software for credit reporting include, but are not limited to, initial and ongoing costs; capability to report prior payment history and closed, inactive loans; capability to report commercial and/or consumer data; capability to manage lending data for grant reports; flexibility to make updates and corrections; automation; integration with other software; tech support availability; users allowed in licensing packages; and customization/module options. There are stand-alone Metro2 software options for lenders that use Excel and Access to track loan repayments, converting them into the required format for consumer and commercial bureau databases integration. Some also integrate with Salesforce, QuickBooks, and other software systems that organizations currently have, ultimately avoiding additional software purchase and training. 3) Staff Capacity to Report - Hired, Trained & Capable: The most commonly identified barrier among all the survey respondents was that the need for additional training for staff. In order to ensure timely, accurate and monthly submission of loan data as required by the major Credit Reporting Agencies (CRAs,) lenders must identify and train staff responsible for this task before they begin. CBA members get the best results when staff responsible for reporting is involved with the general operations of the loan fund, have a reasonable amount of technical savvy, and have a block of time available in each month to dedicate to reviewing data quality and to reporting duties. Good communication within the organization's lending team is also a key component of successful and accurate reporting of loan data. 4) Lending Licenses, Contracts, Policies and Procedures, Security & Loan Contracts in Place: Though not a barrier specifically outlined in the survey questions or addressed in interviews, through CBA s experience some micro lenders interested in reporting, find that this can be a reporting stumbling block. Some of these components may be related back to issues of lack of resources, but often relate more to a culture of compliance. To initiate credentialing and reporting, institutions must have an active loan program with reporting policies in place along with lending licenses or exemptions from state regulatory agencies that oversee consumer-lending activities. Security steps need to be in place to protect sensitive consumer data and ensure the integrity of the information sent to the CRAs. Additional items that ensure compliance and reporting success include, but are not limited to, borrower notifications, protocols for consumer dispute resolutions, charge-off procedures, record retention policies, and software contracts. The Evolving Credit Landscape: Capturing Reporting Barriers among Nonprofit Financial Institutions Page 11