Employer-Sponsored Small-Dollar Loans Gain Traction as CRA Opportunity

Credit unions and banks are increasingly adopting employer-sponsored small-dollar lending (ESSDL) as a strategy to attract recent retail and commercial customers. For banks, these loans also present a potential avenue for earning Community Reinvestment Act (CRA) credit.

The Rise of Small-Dollar Lending

Short-term liquidity products, including earned wage access, have become increasingly popular among consumers. ESSDL is emerging as a distinct alternative, particularly for larger or unexpected expenses. Sara Wasserteil, program director at the Corporate Coalition of Chicago, explained this distinction: “Earned wage access is really good when you need a spot… Employer-sponsored small-dollar loans are better when you have either a larger emergency or larger expense.”

How Employer-Sponsored Small-Dollar Lending Works

ESSDL programs involve partnerships between companies and financial institutions – typically credit unions or banks – to provide employees with access to cash, often on the same or next day. Unlike traditional loans, these programs generally do not require credit checks. Instead, employers vouch for their employees, paying a setup fee and additional fees based on loan utilization and performance.

“The premise of the program is that the employer is creating a relationship with a local lending institution and vouching for the employee and saying, ‘This is someone that works for me, that’s in good standing. If you extend them as credit, I will facilitate to facilitate the repayment,’” explained Christina Blunt, executive director of the Rhino Foods Foundation, which helps lenders and businesses establish ESSDL programs.

Loan Terms and Benefits

Loans typically range from $1,500 to $2,000, with repayment terms of six to twelve installments of $50 to $60, deducted directly from the employee’s payroll. Annual percentage rates are capped at 20%. A unique feature of these loans is that, upon repayment, payments automatically continue into a newly created emergency savings account, unless the consumer opts out.

Repayment data is reported to credit bureaus, potentially improving borrowers’ credit scores and opening doors to future lending opportunities. North Country Federal Credit Union, with $1.1 billion in assets, has originated 12,000 small-dollar loans totaling approximately $15 million, working with over 50 companies within its field of membership.

Delinquency and Profitability

While the average delinquency rate for these loans is slightly higher than North Country’s overall portfolio, at around 4%, the financial impact remains minimal. “All of those loans don’t equate to more than $550,000 on our balance sheet,” said Jeff Smith, Senior Vice President of Lending at North Country. “Within our loan portfolio of $83 million, a half-million dollars is nothing.”

Why Now? The Growing Appeal of ESSDL

Historically, small-dollar loans were less attractive due to lower profitability. However, proponents now emphasize their potential as a customer acquisition channel for both retail and commercial clients. For banks, these loans can also qualify for CRA credit.

“If we do our job right, what we’re then doing is we’re bringing in a new member and at that point, we have the ability to talk to members about other products and services, and we can then make them a full fledged member,” Smith noted, adding that the same applies to commercial clients. The customer base is also demonstrably “sticky,” with borrowers tending to maintain their accounts and remain loyal customers.

Employers also benefit from offering ESSDL, experiencing improved employee retention and attracting stronger talent. Jane Doyle, senior regulatory policy associate at the Woodstock Institute, highlighted this: “The view on this was when employees are financially doing better and have access to safe and affordable resources, then that also means less work interruptions, lower turnover for employers, those types of things.”

Expansion and Key Players

Originating in Vermont over a decade ago, the program is expanding into New England, New York, and Chicago, driven by interest from community and consumer advocacy groups. The Rhino Foods Foundation has partnered with approximately 12 lenders to facilitate this growth, with Southern California emerging as a new hub.

Key organizations driving adoption include Dr. Bronner’s in Southern California, and the Woodstock Institute and the Corporate Coalition of Chicago. The Woodstock Institute identified a gap in the market for individuals with low or no credit facing unexpected expenses, believing a market-based solution was needed.

ESSDL vs. Earned Wage Access

While ESSDL complements other financial products like earned wage access, it is positioned as a more suitable option for larger, unexpected expenses. Some credit unions, like Genesee Coop Federal Credit Union in Rochester, New York, are actively advocating for earned wage access to be classified as credit and subject to usury laws.

Looking Ahead

North Country and Rhino Foods are encouraging more lenders to adopt ESSDL, emphasizing the potential for long-term client acquisition and community impact. Blunt stated, “We don’t want our lending partners to design this to be a charitable endeavor, because then it will surely be a loss leader. What we want is for them to be really deliberate about this as being a way to steward new clients or new members and to grow their financial capacity along with that right client relationship.” Smith added, “When people are struggling more now than ever, having affordable access to small-dollar credit is vital.”