1 The Benefits of Credit Reporting How CBA Reporter Can Positively Impact Your Lending Organization Executive Summary CBA administered a short survey in winter 2016 to all of its CBA Reporters. 53% responded. Results indicate that credit reporting increases financial capacity through increased on-time payments and less charge off rates. No organization indicated that CBA Reporter is not worth the cost. Credit reporting creates positive impacts such as raising client engagement in services, increasing reputations of organizations, and improving promotional opportunities towards funders and borrowers. Introduction How do loan repayments make their way onto Americans credit reports? Thankfully, this is a question that most consumers do not have to worry about. Debt repayments to for-profit lenders and large credit unions are able to make their way onto credit reports because these large lenders have established data sharing contracts with the major credit bureaus. Lenders furnish their borrowers repayment data to the credit bureaus, which in addition to receiving and storing it, use these data to create products like credit reports for consumers and businesses. Although consumers might assume all debt repayments are reported to the credit bureaus, which can eventually affect their credit scores, this is not always the case if loans are administered by lenders who do not or cannot report their data. The latter is often the case for small, nonprofit lenders with loan portfolios that do not meet certain volume thresholds established by the credit bureaus. Smaller nonprofit lenders have only recently begun to report their borrowers repayments to the credit bureaus, and for most organizations this has only been possible through becoming CBA Reporters with Credit Builders Alliance (CBA). Before these nonprofits started to report their data, borrowers were not able to improve their credit histories even if they were being responsible with their repayments. To allow nonprofits to report borrowers loan repayments, CBA created a unique relationship with the three main credit bureaus of Equifax, Experian, and TransUnion almost ten years ago. The initial reasons for nonprofits to report loans were focused mainly on the benefits that borrowers would receive in the form of better credit histories, scores, and eventually lower interest rates on other lending products; however, many nonprofit lenders also suspected that credit reporting could bring financial benefits to their own loan programs and organizations overall. The benefits of loan reporting have been well documented from the standpoint of borrowers. Time and time again, we at CBA hear stories of credit invisible clients using reported credit builder loans to quickly achieve good to excellent credit scores, and there is much data to support this. We conducted a study with Experian in which we saw positive impacts of credit reporting through CBA such as 58% of borrowers experiencing increases to their credit scores within two years 1. What has been left out of these studies is the viewpoint of the nonprofit lender. Are there any financial and organizational incentives to nonprofit lenders that can complement the altruistic goals of helping borrowers? Academic studies show that when credit data about default rates is shared across lending institutions, this creates a disciplinary effect that incentivizes borrowers to default less on their loans 2. We at CBA have heard such 1 Experian conducts analysis with Credit Builders Alliance and confirms value of credit building to the financially vulnerable, September 16, 2014. Experian and Credit Builders Alliance. 2 "Sharing default information as a borrower discipline device," Jorge Padilla and Marco Pagano, July 1999, European Economic Review 44, no. 10
2 anecdotes from many of our CBA Reporters about this and other potential benefits of loan reporting, but we didn t have the data to back up these individual stories. This is why we decided to ask our CBA Reporters about what organizational benefits they have achieved from credit reporting. How We Asked CBA Reporters about the Benefits of Credit Reporting To see if CBA Reporters were experiencing any benefits from credit reporting through CBA, we sent out a short online survey (2-3 minutes) using the Typeform platform to 151 CBA Reporters on November 15 th, 2016. Respondents were given three weeks and two reminder emails to complete the survey. The survey collected many demographic variables about the respondents. Based on respondents employment duration at an organization, their status of being with the organization before joining CBA Reporter, and their involved positions, we were able to assure that our responses were valid and would accurately answer our research questions. In addition to collecting demographics on the types of employees, we also cross-referenced our data at CBA to understand the demographics of each respondent organization. Demographics of Employee Respondents 6 % of Total Responses 5 4 2 1 29% 45% 13% 9% 45% 1-3 Years 3-8 Years 9-15 Years 15+ Years With Org before Becoming CBA Reporter 9% Executive Director / CEO 35% 56% Loan officer Metro2 Reporter 24% Other Title Time at Org Position type Services Offered by Respondents % of Total Organizations 7 6 5 4 2 1 59% 11% 4% 4 64% 23% 8%
3 Given these characteristics, we are able to identify if loan reporting would more benefit organizations that provide certain types of loans, have more resources as measured by revenue, and more overall time as CBA Reporters to see the benefits of loan reporting. In addition to these demographics, we asked questions around the organizational benefits of loan reporting 3. Respondents were asked to indicate if 1) reporting loans through CBA had created any improvements in their loan portfolios, 2) how impactful credit reporting was to these improvements, and 3) through which ways CBA Reporter had an effect, if any, on their organization s success. After collecting the responses, the data was analyzed using statistical software to find the averages and percentages of each characteristic. Given the sample size and population, the margin of error of this study is (+/-) 7.5% meaning that this study is 95% confident that the true average of each variable is located within 7.5 percentage points above or below the listed percentage. This robust data allowed CBA to create precise and confident insights into the benefits of loan reporting for CBA Reporters. Results of Credit Reporting Does Credit Reporting Have Financial and Organizational Benefits? - Yes The first question of this research was to determine the specific financial and organizational benefits of credit reporting through CBA. To determine this, we asked respondents to indicate which improvements to their loan portfolios they have experienced through credit reporting. Below on the Loan Portfolio Improvements graph, we can see the overall positive outcomes of loan reporting for loan portfolios. Loan Portfolio Improvements 8 % of Organizations that Experienced Benefit 7 6 5 4 2 1 41% Increased on-time payments. 28% Decreased charge off rates. 73% 18% More client interest in More client interest in better credit. other services. 11% 1 No positive/measurable change. Unknown if positive/negative. Many CBA Reporters have experienced the financial benefits of increased on-time payments and decreased charge off rates, and comparatively fewer organizations have not seen any positive or measurable changes to their loan 3 The survey design can be found in the appendix.
4 portfolios from loan reporting. This demonstrates that credit reporting shows positive financial benefits across multiple segments for a nonprofit lending organization. Ultimately, these improvements can positively impact the bottom line of many nonprofits leading to reduced dependence on outside funding. To ensure these results were based fairly on employees experience with their organizations loan programs, we cut the data to show how time at an organization and position type could have influenced how respondents indicated the benefits. This is demonstrated below. % of Each Employee Group with Change 10 9 8 7 6 5 4 2 1 Loan Improvement by Employee Experience Employee Demographics With Org Before CBA 3+ Years at Org 3+ Years & With Org before CBA Metro2 Reporters & with Org before CBA Note:Metro2 Reporters send the monthly repayment data to the credit bureaus. This demonstrates that employees were equally likely to indicate loan improvements based around their amount of experience, and it strengthens the initial finding that reporting loans through CBA Reporter has an overall positive effect on improved repayments and client engagement. To understand if loan improvements could only be seen after a nonprofit lender has been reporting for a long time, we cut the data by how long an organization has been reporting loans through CBA.
5 Improvements to Loan Portfolio by Time as CBA Reporter % of Group with Change 10 9 8 7 6 5 4 2 1 Time as CBA Reporter <3 Years < 6 Years Reporting > 6 Years Reporting > 8 Years Reporting The results suggest four things. First, organizations see more benefits of reporting in the form of decreased charge off rates as they increase their time reporting through CBA. Second, organizations are more likely to say there is some positive or measurable change as they increase their time reporting through CBA Reporter. Third, organizations see more interest from clients in their engagement towards credit building as a loan program increases its time credit reporting. Fourth, the only negative impact of increased time reporting is seen by decreased client interest in other services by the organization. These findings indicate that credit reporting shows mostly positive influence on the success of loan programs as time increases. To measure how much of these impacts we can attribute to CBA Reporter, we asked respondents their opinions on how impactful credit reporting is to their organization. How Impactful is Credit Reporting on Loan Portfolios? - Highly Impactful Since organizations indicated they have seen more success with their loan programs after starting to report through CBA Reporter, we wanted to know how impactful they thought credit reporting was for their portfolios. For this, we asked respondents to gauge on a scale of one to ten with one indicating no impact and ten being extremely impactful. The results are located on the Influence of Credit Reporting on Loan Portfolios graph below.
6 Influence of Credit Reporting on Loan Portfolios 10.0 7.5 5.0 2.5 0.0 7.1 7.6 7.5 6.9 6.8 7.3 6.8 6.9 7.0 7.1 All Organizations < 3 Years < 6 years Reporting > 6 years Reporting Level of Influence None Moderate Extreme > 8 years Reporting Credit Builder Mortgage Small Business < 999,999 > 1,000,000 All Time as CBA Reporter Loans Offered Annual Revenue Most organizations indicated that credit reporting has strongly contributed to improvements in their loan programs. As time increases, it seems that the belief that credit reporting is the main improvement towards loan programs begins to decrease, yet as indicated in the previous section, this effect happens as organizations start to experience more of the delayed financial benefits of credit reporting. CBA Reporters who administer credit builder loans seem to view credit reporting as slightly more impactful on their loan program improvements, and credit reporting doesn t seem to be significantly more impactful for smaller organizations than larger ones. Is CBA Reporter Worth the Cost? - Yes One of the biggest hurdles to report loans to the credit bureaus is the initial cost and set up time. Reporting directly can be very costly and have many requirements which disqualify many loan programs of small nonprofit lenders. Although CBA Reporter greatly reduces the costs and time required to set up, we know these factors can be a significant factor in deciding whether to start credit reporting. To address the potential cost and time of starting to report loans, we wanted to see if the overall benefits of CBA Reporter outweigh the cost. To this question, we received an extremely positive response. 9 of CBA Reporters indicated that the benefits are worth the cost, and only 1 said that they didn t know. Most promising was that no organization indicated CBA Reporter as not being worth the cost. Although new CBA Reporters were significantly less likely to indicate CBA Reporter being worth the cost, the net benefits increased as they continued to report loans through CBA.
7 Is CBA Reporter Worth the Cost? % Indicated Yes 10 75% 5 25% 9 75% 84% 95% 96% 94% 10 9 86% 96% < 3 Years < 6 years Reporting > 6 years Reporting > 8 years Reporting Credit Builder Mortgage Small Business < 999,999 > 1,000,000 All Time as CBA Reporter Loans Offered Annual Revenue This makes a strong financial case for becoming a CBA Reporter. Credit reporting creates financial benefits in the form of reduced charge offs and increased on-time payments, and it appears that the dollar amount saved amongst other gained organizational benefits outweigh the money, time, and overall effort invested into credit reporting. Are There Other Reasons to Start Credit Reporting? - Yes To see through in what ways credit reporting affects CBA Reporters organizational success, we asked our respondents to tell what their organizations have experienced through credit reporting in their own words. Responses were combined into similar categories, and some common trends appeared across all organizations. How is CBA Reporter Used? % of Total Responses 2 1 24% 6% 6% 3% 6% 18% 4% 5% 5%
8 Most organizations indicated that they use credit reporting to build positive credit history for their clients and to engage clients into their organizations services; however, this is not the only reason to use CBA Reporter. CBA Reporter is also used to create more influential promotional and marketing tools, reduce borrowers fears about the organization being legitimate and credible, and leverage collection power over borrowers. In addition to increased collections and decreased charge offs, another positive financial benefit is that many organizations use CBA Reporter as a persuasive talking point to pitch grants and opportunities to funders, and this can increase the likelihood of receiving more funding sources for struggling lending programs. To add color to these points, here are some positive outcomes that respondents told us about CBA Reporter: Reporting has reduced delinquencies thus affecting funding. It has allowed our organization to become more professional and credible to the borrowers. - Anonymous Credit reporting through CBA has improved collections on loans over 90 days outstanding by 10 in the first year reporting. In addition, clients desire the fact that they can improve their credit scores by having a loan with our company. - Anonymous [CBA Reporter] gives us a leverage point with clients who care about their credit; incentivizing them to get their account current. - Anonymous [CBA Reporter] adds validity to our microloan program as a credit-building tool. - Kentucky Coalition Against Domestic Violence By reporting our loans we have helped to build a credit file for our borrowers. Over time we have seen them become bankable due in part to their loan being reported. - Rising Tide Community Loan Fund Our customers overall seem to be more conscientious about paying on time as they know if they don't it will negatively affect their credit scores. We have also been able to demonstrate to customers that their credit scores have increased as a result of our reporting through CBA. That makes for a positive customer relations experience and an increase in word of mouth recognition of our CDFI as well. - MaineStream Finance [We are] slowly building reputation as [a] credit building and loan provider. [It s] nice to speak about it to funder[s]. - Pacific Asian Consortium in Employment (Business Development Center) Conclusion We are glad to finally support the general intuition we ve held over the years along with our CBA Reporters. Credit reporting has various positive impacts on the financial and operational goals of those willing to invest the time and resources into the process. Once lenders can commit to this impactful decision, they are sure to receive a great return on investment as well as an economical way of building credit for their clients. We at CBA would love to help any nonprofit lender achieve their operational goals and build credit for their clients. To learn more about how your nonprofit organization can benefit from reporting loans through CBA Reporter, please visit our website at www.creditbuildersalliance.org/reporter.
9 Appendix:
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11 Acknowledgements Author: Nick Canfield (Graduate Intern & Stevenson Fellow at Illinois State University) Survey Design and Administration: Dara Duguay (Executive Director of CBA) & Nick Canfield