Reporting is a cost-effective opportunity to help your borrowers graduate to safe mainstream financing, lower interest rates and move toward a life of asset building and financial self-sufficiency. Reporting is a right and a responsibility. Your borrowers are entitled to a good credit rating and credit options. Reporting their repayment behavior is the best way for you to help them.
Community lenders provide safe and affordable financing to borrowers who can’t access mainstream financing, i.e. borrowers without a good credit score. By lending to underserved individuals you are meeting their current credit needs. By reporting loan repayments, you can help them access future credit.
Why are credit scores so important?
Efficiency. Efficiency. Efficiency. In the last decade there have been significant mergers in both the banking and credit industries. Local and regional banks have been bought east to west, north and south by large financial institutions. At the same time, all three major credit bureaus scooped up regional offices into national databases. The combined consolidations led banks to move towards a more cost-effective and efficient model for extending credit: AUS, or automated underwriting systems. AUS allows banks to efficiently and quickly offer credit to individuals with a score, or better put, a good score.
How does a good credit score help my borrowers?
In today’s economy, access to financial services is increasingly determined by an individual’s credit score. In fact, in many banking circles a good credit score defines whether an individual is bankable.
Improved credit scores give low-income borrowers:
- Better access to mainstream financing
- More competitive interest rates
- Safer products
- Less vulnerability to predatory lenders
People with a good credit rating will pay approximately $250,000 less in interest throughout their working lives than those without -- savings that could go towards building assets.
The impact of a credit score on financial well-being goes beyond access to credit and debt. Credit not only helps families buy a home, a business, or an education, but also impacts opportunities for rental housing, transportation, employment, and access to checking, savings, and investment accounts.
How does reporting loans help increase a score?
A recent history of on-time loan repayment reported to a credit bureau is the best way towards a good score.
If I report, will my borrowers be more vulnerable to predatory credit offers?
Reporting credit does mean that borrowers who build a good credit score will likely receive more offers for credit. For many, this will be a welcome opportunity to access safer and lower cost credit alternatives than they had before. For borrowers concerned they will misuse available credit offers, they can prevent the credit bureaus from sharing data by “Opting Out” at http://www.optoutprescreen.com/.
As a community development lender, it is your mission to not only increase financing options available to your clients but also to educate your borrowers to better understand their credit options and have the financial management skills to make good decisions.
What are the benefits to me as a lender?
Reporting credit also has several benefits to you as a community lender:
Stronger Loan Portfolio
Lenders who recently started reporting data to credit bureaus have seen an increase in on-time payments from their clients and less delinquent portfolios. Well-informed borrowers will understand there are broader implications beyond their relationship with you if they do not pay their loans back in a timely manner.
Research published by the Aspen Institute documented that for borrowers of ACCION New Mexico with good scores (higher than 650), credit rating is the most motivating factor in paying a loan back on time. But for borrowers with lower scores their relationship with ACCION was the most motivating factor. Helping borrowers increase their scores helps them feel they can be part of the financial mainstream.
Reporting data legitimizes your lending activities both to your borrowers and to other financial institutions.
Diversified Loan Portfolio
Several community lenders are adding Credit Builder Loans and other credit building services to create a more seamless customer-service delivery model for their clients.
Cost-effective Asset Building
Reporting data is an efficient and cost-effective way to help your clients on the road to a life with less expensive debt and more money to build savings and purchase assets.
Measurable Community Impact
Once you better understand how reporting loan data relates to other actions that can impact a credit score, you can effectively track credit score improvements as a bank-ability or financial self-sufficiency indicator. Researchers are already using credit scores to define individuals as: bankable, low-income, and financially self-sufficient.
Banks want more clients with good credit scores – your ability to deliver clients is a value to them.
More asset building donors are recognizing the significant role of credit building in asset building and the importance of the credit score as an impact indicator of community financial health.
You are probably already responding to requests for credit information on your clients as lenders have to call you directly for credit information. It does not take many calls before you will be spending more time than it would take to do the credit reporting and not have to respond to these calls. There is a legal risk that something may be said that is inappropriate. Reporting in Metro 2 format ensures compliance with federal and state laws and therefore reduces the legal risk of providing this information.
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