How a Cool 0% Loan Improves Wellness and Grows New Deposits

For financial institutions that want to help consumers avoid draining their 401(k)s or taking out a payday loan when they're in a bind, a no-interest loan with a savings incentive is a novel solution. The first institution to use it has already seen benefits from partnering with local employers.

Sometimes, “Doing well by doing good,” turns out to be literally true — both financially as well as from the personal satisfaction it brings.

A unique loan-centered program that seeks to help people working paycheck to paycheck break out of being cash-strapped falls into this category. This is not your typical loan. It’s interest-free and fee-free and is funded by a charitable contribution from financial institutions or other businesses. Yet it has great potential as a differentiator for banks and credit unions.

These loans were specifically designed to help the huge swath of people — between 30% and 40% of all U.S. households by one estimate — who tend to take out payday loans, or tap their 401(k), when an unexpected expense arises. This just puts them further into the hole.

Legislators, regulators, consumer activists and many other professional advocates all urge banks and credit unions to offer low-cost small-dollar loans to people who can’t afford, or are trapped by, high-cost credit. Doing that on balance sheet, however, has always been challenging.

A Denver-based charitable organization called The Community Impact Fund, has come up with a creative, technology-enabled loan program that offers a way for financial institutions to leverage their charitable giving in a more sustainable and effective way. CIF is currently working with ten financial institutions. One of them, Chrome Federal Credit Union, has already implemented the program.

“Everybody has good rates and everybody says they’ve got great service, but with this type of program we’re moving beyond just being a good provider of a service. We are now becoming a trusted advisor and a true business partner.”

— Robert Flanyak, Chrome Federal Credit Union

Chrome, based in Washington, Pa., near Pittsburgh, offered the program initially to its own employees partly as a test. It plans to make the loans available to any of its members in time, but before that happens, the employees of several area companies will be able to participate. This connection promises to bring new members, new deposits and corporate relationships to Chrome. The credit union’s CEO, Robert Flanyak, goes so far as to call it a “game changer,” which he expands on, further down.

Read More: Financial Wellness Has Improved (And Here’s Why That’s a Problem)

How the Loan Program Works

The Community Impact Fund is a 501c3 public charity that sets up — and then manages as a fiduciary — the individual impact funds established by each partner.

Partners are both financial institutions and other businesses. Each impact fund is capitalized either by donations from the institution’s own charitable foundation or by a separate charitable contribution, according to Judah Musick, CIF Executive Director, who founded the organization in 2018.

In the case of Chrome, the credit union set up the Chrome Impact Fund to be used (at present) for making hardship loans anonymously to any Chrome employee with a need. CIF does all underwriting, however, using an advanced loan origination system called LoanWell.

Sizeable Market:

The so-called ALICE segment — Asset Limited, Income Constrained, Employed — comprises between 30% and 40% of the U.S. population.

“We underwrite for two basic criteria,” says Musick, “whether a person has a financial hardship and whether they have the ability to repay.”

The origination system uses census data and data from United Way specifically for the “ALICE” demographic. The loan system also pulls banking data through a connection with Plaid.

“At the end of the day, we’re very aware that debt is debt,” says Musick, “even if there is no interest.”

Distribution of loan proceeds goes through the ACH to the account the person applied with and repayments are also automatic, amortized over 12 months. The loans are intended for emergency expenses, not debt consolidation, and range from $500 to $3,000. Each institution creates the bylaws for its impact fund covering eligibility and the types of needs they want to meet, according to Musick.

“Obviously, financial institutions can’t make money on an interest-free loan,” Musick observes, “plus there is regulatory complexity to deal with.” Therefore, CIF, a nonprofit, handles all that, as well as providing marketing assistance, including a website, a set of videos, brochures and breakroom posters. “It’s all white labeled to them,” Musick states.

Read More: Are Banks & Credit Unions Losing Out on Savings Apps?

The Savings Reward Component

As important as the “bridge” loan is, helping people build a safety net of liquidity for future unplanned expenses is also part of CIF’s mission.

To help people build liquidity, CIF takes 10% of every loan repayment dollar and allocates it to a savings incentive reward for each person. “‘Incentive’ is the key word there,” Musick explains. “We don’t just hand out those funds and say, ‘Here it’s yours’.” Several things are required to unlock that reward, the primary one being achieving a savings goal at the recipient’s financial institution. “It’s just like a 401(k) match,” says Musick. The required goal at present is around $500, he states.

In addition, CIF — or its partners — will in some cases require evidence of budget counseling or similar financial wellness education. The charity works with GreenPath Financial Wellness, a nonprofit counseling firm. “We’re trying to tie in behavior change to earn that savings reward,” Musick states.
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Big Potential from Employer Participants

“From the very beginning, we said employers are the key to having a sustainable and scalable community impact,” Musick states. That statement carries a significant potential benefit for the financial institutions that partner with CIF.

What it means is that any company can set up an impact fund with CIF to be used to issue no-cost loans to its employees in need. But since the program requires a bank account, what CIF does is connect these companies with a nearby financial institution that is also participating.

Chrome Federal Credit Union, for example, is already working with several companies in its market. One is a trucking company with about 3,100 employees. The company has set up a $250,000 impact fund managed by CIF.

Why a Free ‘Hardship Loan’ Plan Is a Game Changer

The CIF program struck home with Chrome’s CEO, Bob Flanyak, for several reasons. As a banking executive, he appreciates that it’s built with advanced technology and has clear rules and parameters, which means it should work where similar programs have not. He also likes that it targets a particular segment of the population — people who are employed but who struggle financially. Third, he recognizes there is great potential in working with businesses that participate in the program.

Once he learned about CIF, Flanyak launched the program for his own employees nine months later to be sure everything was working properly.

He tells The Financial Brand that the response from employees was very favorable. Within about a month of the launch, at least two staffers had taken out a loan through the program. It’s completely anonymous, which is a key aspect of the program. As CIF’s Musick states, “The last thing you want to do is tell your friends, your coworkers or your manager” that you need a little extra money to cover expenses.

The charitable organization has already put four companies in touch with Chrome to be their banking partner in the program, one being the trucking company, mentioned earlier. The company has endorsed Chrome as their credit union partner and is promoting the institution to its 3,100 employees, according to Flanyak. The credit union is also partnering with Carnegie Investment Counsel, a 401(k) plan administrator, as part of its involvement with the CIF program, which has brought additional opportunities.

The CEO believes the CIF program could be a powerful differentiator.

“We’re not just the financial institution that’s coming in to a company and saying to its employees, ‘Hey, we can give you a low rate on your car loan.’ It’s much more than that. It’s financial education. It’s giving people tools to help them improve their financial lives. It puts a whole different spin on what a financial institution does.

“Honestly, I think it has the potential to be a real game changer for us. And we were very excited about it.”

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