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PROGRAM MODEL COMPONENTS
Affordable, but Real-World Credit
The WtW program model is centered on an affordable loan that allows working poor families to keep or obtain better employment or education. Loans are demand-driven and largely applied towards used car purchases, with occasional use for other expenditures such as auto repair, mortgage or child care assistance. The acquisition of an automobile increases program participants’ job security by cutting down on lateness and absenteeism, and helping them move forward in their careers by giving them access to better paying jobs. The cars also help struggling families to stabilize their lives and transport their children to child care, school, and doctor appointments. The WtW base auto loan’s eight percent interest rate makes it a much more affordable alternative to predatory and sub prime lenders who typically offer lending rates of 25 to 50 percent. Consequently, clients save $750 to more than $2,000 in interest expense over a $4,000, two-year loan.
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Program Description
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| A fundamental characteristic of the lending service is to closely simulate the real world that clients will encounter after their WtW loan, albeit in a supportive environment. Thus, WtW maintains a realistic but affordable interest rate and real world expectations for full and on-time payments. |
WtW Base Loan Attributes
- $4000 upper limit
- Eight percent interest
- Two-year term
- $181 average monthly payment plus liability insurance
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This approach better prepares WtW clients to access mainstream financial markets over time and promotes long-term self sufficiency while supporting WtW’s own financial sustainability. When necessary, program offices employ a set of collections procedures including calling clients and mailing payment reminders, renegotiating loan terms, providing incentives for repayment, and occasionally repossessing cars in the case of loan default.
High-Touch Approach
While affordable credit in itself addresses a fundamental unmet need in many communities, a high-touch approach in providing the loan is critical to client success in the context their challenging life circumstances. Although they are employed and financially able to make payments, Ways to Work clients typically live in a roller coaster-like state with a very high probability of negative occurrences, and frequently deal with job issues, health care problems, housing challenges, etc.
At any point in time, approximately 20% of clients are in a state of loan delinquency. Furthermore, nearly all clients fall into some level of delinquency at some point during their 24-month loan term. WtW’s high-touch approach helps participants to weather short-term crises, change habits, improve the ability to repay their loans successfully, and consequently build greater financial capacity throughout their lives.
On average, this service costs $2,400 to $2,500 per client, spread across the two years that they are in the program. This approach helps WtW to sustain a 24-month loan repayment rate of nearly 90 percent across the network. It also enables WtW to provide financial literacy to all those who complete loan applications (over three times the number of individuals actually receive loans). Loan counselors spend about half of their time providing client support, generally managing a portfolio of 80 to 140 client loans at any one time.
- Car-related support includes assistance with car and insurance shopping, inspection, and maintenance. Loan counselors support clients by developing relationships with, and providing referrals to, recommended auto dealers, insurance providers, and dependable mechanics within the community. This area helps to ensure that clients are able to secure affordable and reliable vehicles, and keep them running.
- Case management addresses the multiple associated needs of low-income families that often accompany the need for affordable credit. Loan counselors integrate a case management approach by assessing the individual needs of each client and making appropriate referrals to ancillary services as necessary. Services are provided by either host agencies or external organizations, and can include employment services, education, life skills, family counseling, day care, and help with access to public benefits, affordable housing and medical services. Case management may also require arranging an intermediate loan “workout” or other accommodation to help a participant get back on their payment schedule.
Financial Literacy Education
As a requirement of loan approval, loan counselors guide every loan client through financial literacy education to improve the fundamental financial management skills critical to becoming creditworthy and financially self-sufficient. Education delivery includes formal classroom sessions run by either loan counselors or local financial institution partners as well as ongoing informal education by loan counselors in one-on-one sessions throughout the application process and term of the loan.
The greatest value of WtW’s financial literacy education is the direct application of topics and practical experience gained by taking on and paying off an actual loan in a real-world environment. Key topics that are covered by both formal and informal education include:
- Completing a household budget
- Financial goal setting
- Tracking expenses
- Developing a spending plan
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- Reviewing the credit bureau report
- Emphasizing the importance of saving
- Local community financial/credit resources
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PROGRAM MARKETING
The majority of inquiries received by Ways to Work program offices come through word-of-mouth referrals. The availability of low interest car loans for low-income, credit-distressed borrowers typically spreads rapidly through a community. Often the primary marketing challenge is to communicate the eligibility requirements to help reduce the number of loan inquiries from ineligible residents.
Program offices employ a range of targeted marketing techniques to reach potential clients, focusing on outreach and referral partnerships with local government and private social service agencies including welfare offices, workforce development programs, and the program office’s own host agency. Occasionally, agencies must resort to mass media outlets to better communicate the availability and requirements of the program. The combination of these methods allows program offices to maintain a high level of inquiries with a minimum of marketing expenses.
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LOAN APPROVAL PROCESS
Upon receiving an initial inquiry, a loan counselor begins a rigorous, one to two month loan approval process in order to assess a potential client’s eligibility and optimal fit for the program. The nature of the Ways to Work program requires a larger upfront time investment than is typical for mainstream lenders. Given a client target population that is defined by poor credit scores, Ways to Work can make only limited use of an applicant’s credit score as a metric to assess risk.
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Client Eligibility Criteria
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Program offices, therefore, employ a character-based lending approach that maintains program efficacy and a low default rate by ensuring that, before the loan is approved, clients have the commitment and potential to be successful. Overall, six percent of inquiries and 31 percent of applications result in funded loans.
Loan counselors spend half of their time on loan production, working with six to seven applicants for every loan that is funded. Applicants work with the loan counselor to build and refine a family budget, review and plan repairs to their credit report, and produce a personal statement of intent. Because of the integration of financial literacy training with the application process, all applicants benefit from some level of family budgeting, credit repair discussions, or other associated education. This multiplies the number of families touched by the program far beyond the number that ultimately receive loans and full access to program services and benefits. For example, in 2006, 5,485 families benefited from financial literacy training through the application process, over three times the 1,735 families who actually had loans funded.
Client Underwriting
Five to eight community volunteers meet on a regular basis to review applications. This volunteer loan committee typically includes representatives of the host agency, local financial institutions, local funders, and other community representatives. In evaluating applications, loan committees carefully weigh the recommendations of the loan counselor and the applicant’s overall financial status, character, debt history, and employment status.
The committee reviews all applications on a blind basis – that is the applicants name is replaced with a code number on all documents reviewed by the committee. If an application is declined, the applicant receives an adverse action notice from the local WtW office. If approved, they receive an approval notice. It is common for the Loan Committee to issue conditional approvals with specific issues to be addressed by the applicant prior to loan closing. It is also common for rejected applicants to be offered the opportunity to reapply when specific issues on their application are addressed.
Post-Approval
If approved for a loan, an applicant must then locate a car for purchase and arrange for insurance before the loan is finalized and loan funds are disbursed. Most agencies have identified preferred car venders to assist applicants with the car buying process. Nearly all agencies require a pre-purchase inspection prior to closing.
Case Management during Loan Term
A key differentiation between WtW and most other car acquisition programs is that WtW’s case management method and high-touch approach help to ensure that clients themselves have the motivation and capacity to pay back their loans. Individualized troubleshooting, ongoing education, and referral to complementary services all help clients to navigate the very circumstances that make them eligible candidates. This is a key success factor for the WtW program model - by paying back their loans in full and on time, clients demonstrate the potential to later access credit from mainstream financial markets. |
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This page was last reviewed on 04/08/2008. |
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