CFSI Issues Compass Guide for Small-Dollar Credit (March 3, 2014)
Millions of Americans use small-dollar credit products each year to deal with unexpected expenses, smooth income fluctuations or build credit history. But such credit can come at a high cost, and many borrowers don’t have access to high-quality small-dollar loan products. The Center for Financial Services Innovation (CFSI) is aiming to help change that, with the release of its new Compass Guide to Small-Dollar Credit. The guide is “intended to help lenders improve the design and delivery of their small-dollar credit products,” and is based on the CFSI’s overarching Compass Principles: embracing inclusion; building trust; promoting success; and creating opportunity for underserved consumers. The guide offers recommended practices to help lenders apply these principles to their small-dollar offerings.
The Compass Guide emphasizes responsible underwriting, noting that access to small-dollar credit is not the answer for every consumer, including those who face a chronic income shortfall or who already have debts they can’t manage. For such consumers, access to small-dollar credit may only worsen their situation, putting them in a dangerous cycle of debt. Instead, the Compass Guide lists seven key characteristics of a “high-quality” small-dollar loan. According to CFSI, a quality loan is one that:
- Is made with a high confidence in the borrower’s ability to repay
- Is structured to support repayment
- Is priced to align profitability for the providers with success for the borrower
- Creates opportunities for upward mobility and greater financial health
- Has transparent marketing, communications and disclosures
- Is accessible and convenient
- Provides support and rights for borrowers
The Compass Guide was developed by CFSI with the support of the Ford Foundation and the Omidyar Network, and in consultation with a wide range of advisors from industry, consumer advocacy organizations, nonprofits and academia.