One of the recommendations of last year’s housing report commissioned by ECoNA was that a local entity should consider creating a Community Development Financial Institution (CDFI) that could ultimately help with home loans and products, such as down payment assistance programs, that are provided on behalf of employers. This would give employers an objective source to assist them in qualifying and administering such programs without the managerial burden on the employer.
The idea behind CDFI’s is that they provide lending opportunities to underserved markets and populations. Allowed under the federal Department of the Treasury, they have more flexibility in the terms they offer than more traditional lending sources.
“The process of applying for CDFI designation can be costly and time-consuming,” the report warned, “but the benefits to the community are certainly worth the investment.”
Fortunately for Flagstaff, Housing Solutions of Northern Arizona has already been working toward this goal for more than two years.
In fact, the process has required the nonprofit to create a wholly-owned subsidiary, Lending Solutions, to provide the service, said Housing Solutions Executive Director Devonna McLaughlin. It is now in the process of capitalizing the fund and getting ready to make its first loans in order to qualify as a CDFI. (One of the wrinkles in the Department of Treasurer’s rules about CDFI’s is that you have to lend as one before you can actually get your certification.)
Lending Solutions will start with smaller loans as opposed to down payment assistance or mortgages and would serve as emergency funds when an unexpected expense comes up.
The idea came to McLaughlin when one of Housing Solutions residents came in to say she was $200 short of her rent for that month because of unexpected school expenses for her son. Would Housing Solutions allow her to pay the difference in two weeks when she got her next paycheck?
“It got me thinking – how often are people struggling to make ends meet because of an unexpected expense and what are their options?” McLaughlin said. “Not everyone has savings or credit cards.”
Because pay-day loans are illegal in Arizona, some pursue short-term title loans on their vehicles, which can come with hefty interest rates, particularly if borrowers renew the loan (some borrowers renew a two-week loan up to eight times before they pay it off).
Lending Solutions plans to work with employers to start its lower cost lending program. Employers would sign up if they thought the loan service would be of interest to their employees. Their employees can then apply for a one-year loan of up to $1,000 at 18 percent interest, plus a $20 administrative fee. The employer verifies employment and allows repayment through payroll deductions.
“That makes it convenient for the borrower, eliminates late fees, and reduces the default rate for the lender,” McLaughlin noted.
There are no penalties for pre-payment and all borrowers are given the opportunity to take advantage of Housing Solution’s credit and budget counseling services at no cost.
McLaughlin hopes that this loan program can be a starting point for further capitalization that would allow Lending Solutions to be a CDFI fund that can ultimately provide down payment assistance and become a tool in meeting Flagstaff’s housing challenges.
If you want more information about Lending Solutions or would like to sign up your business to provide access to these loans for your employees, please contact McLaughlin at email@example.com, or by calling 928.214.7456.