EVALUATION STUDY OF ALTERNATIVE FINANCING PROGRAMS By Geoff Smith and Jennifer Newon February 2008 Woodstock Institute 29 E. Madison Street, Suite 1710 Chicago, IL 60602 (312) 427-8070 www.woodstockinst.org Table of Contents Executive Summary 1 Background Information on Alternative Financing Program Evaluation Study 1 Focus of Study 1 Structure of Alternative Financing Program Evaluation Study 1 Key Research and Summary Data – Alternative Financing Program Study 2 Case Studies: Best Practices and Performance Factors 2 Recommendations for Sustainability of Programs 3 1. Plan for Sustainability 4 2. Chose Effective and Efficient Lending Models 4 3. Develop Favorable Relationships between Alternative Financing Programs and Banking Partners 5 4. Balance Improved Efficiencies with High Cost of Serving Market 5 Evaluation Study of Alternative Financing Programs 7 Background and History of the Alternative Financing Program 7 Overview of Woodstock Evaluation of Alternative Financing Programs 7 Operation of Alternative Financing Programs 10 Background Information on Alternative Financing Programs 10 Identifying Case Study Alternative Financing Programs 16 Case Studies 19 Illinois Alternative Financing Program 19 Kansas Alternative Financing Program 22 Oklahoma Alternative Financing Program 26 Pennsylvania Alternative Financing Program 30 Wisconsin Alternative Financing Program 33 Washington Alternative Financing Program 37 Conclusions and Recommendations 41 Components of Success 41 Recommendations for Sustainability 41 Glossary 45 EXECUTIVE SUMMARY Background Information on Alternative Financing Program Evaluation Study The Woodstock Institute of Chicago, Ill., conducted an evaluation of state Alternative Financing Programs (AFPs) during a 12-month period, beginning in November 2006. The AFP is a federal-state program that provides affordable financing mechanisms for individuals with disabilities and their families or representatives for the purchase of assistive technology (AT). AT includes devices such as wheelchairs, specialized computers, hearing aids, adapted vehicles, and home accessibility modifications. The evaluation study was funded by a grant from the Rehabilitation Services Administration (RSA) to the National Assistive Technology Technical Assistance Partnership (NATTAP), which selected the study contractor and administered the contract. NATTAP is directed by the Rehabilitation Engineering and Assistive Technology Society of North America (RESNA). NATTAP provides technical assistance and training to state AFPs under a grant from RSA, which is located in the Office of Special Education and Rehabilitative Services, the U.S. Department of Education. AFPs were authorized under Title III of the Assistive Technology Act of 1998. Federal funding for AFPs began in federal fiscal year (FY) 2000. Focus of Study The Woodstock Institute study of 33 existing state AFPs examines the structure, financial characteristics, and performance level of AFPs. The study focuses on factors that have led to the success and sustainability of AFPs. AFPs provide low cost loans to individuals with disabilities and their family members (or official representatives) for the purchase of AT devices and services. AFPs are state-operated loan programs supported by federal and non-federal dollars (that have included state funding, grants, and private donations). Previous AFP research has examined many characteristics of state loan fund portfolios, including the types of borrowers who access AFP loans and the impact and implications of the financial assistance. However, limited work has been done to examine the characteristics of successful AFPs. One goal of the Woodstock study, therefore, was to determine best practices for AFPs by highlighting the costs and benefits of particular AFP programs and their structures. Recommendations from this report are intended to promote sustainability by suggesting changes to existing program models, new relationships with lending partners, and alternative funding and revenue sources for existing and future AFP funds. Structure of Alternative Financing Program Evaluation Study The study is comprised of two elements. The first part is an analysis of the AFP, with a detailed look at the AFP from FY 2004 to FY 2006. The AFP analysis provides key research and summary data on AFP portfolio characteristics, loan characteristics, and financial self-sufficiency. The second part of the study employs case studies to examine factors that affected the performance of six successful state AFP programs. Key Research and Summary Data—Alternative Financing Program Study The Woodstock analysis of AFPs provides research and summary data that show: * Between FY 2004 and FY 2006, total AFP loan portfolios increased in size from 1,919 to 2,725 loans and from $16.2 million to $22 million dollars outstanding. These were increases of 42 percent and 35.5 percent, respectively. * From FY 2004 to FY 2006, the default and net loss rates of AFP loan portfolios more than doubled. The default rate increased from 1.4 percent to 3.6 percent and the net loss rate increased from 1.2 percent to 3.0 percent. * Although the default and loss levels for AFPs increased, the rates remain on par with or below the rates for other institutions that served higher risk borrowers. For example, community development financial institutions (CDFIs) that specialized in microlending had a 7.6 percent default rate and a 4.2 percent net loss rate in 2005.1 * Personnel costs were the largest single source of AFP expense. In FY 2006, all AFP personnel expenses totaled slightly more than $2 million, which was 46 percent of the $4.4 million in total AFP expenses. From FY 2004 to FY 2006, personnel costs made up a declining share of total expenses. Losses on loans accounted for 6 percent of AFP expenses in FY 2004, but this number grew to nearly 15 percent in FY 2006. * The largest source of AFP income was interest from unused funds. In FY 2006, more than $1.8 million in income was generated from interest earned on unused funds. This represents nearly 73 percent of total income, but more than 93 percent of earned income or revenue that was generated through program operations or the investment of program resources. * Grants and donations (not including federal grants and state matching grants) accounted for more than 22 percent of total AFP income in FY 2006. Although this is a substantial amount, the share of overall income generated by grants and donations declined from 33 percent to 22 percent from FY 2004 to FY 2006. * The share of total AFP income categorized as earned income increased from 67 percent to 78 percent between FY 2004 and FY 2006. * The earned income to expense ratio is a measure of program self-sufficiency. In FY 2006, the earned income to expense ratio for the AFP program was 0.45. While below the typical goal of 1.0, this is a substantial increase from the 0.18 ratio in FY 2004. * The AFP earned income to expense ratio of 0.45 is not out of line with self-sufficiency levels reported for other types of loan funds that serve higher risk markets. For example, between FY 2001 and FY 2004, the highest level of self-sufficiency achieved by CDFI microlenders was 0.34.2 Case Studies: Best Practices and Performance Factors The second element of the Woodstock AFP analysis utilized case studies to examine factors that affected the performance of six successful AFP programs. The case studies provide an understanding of the practices of successful AFPs. The studies highlight each AFP’s progress in achieving the overall goals of an AFP: fulfilling the mission of the AFP and achieving some level of sustainability. The six AFP funds chosen for the case studies are Illinois, Kansas, Oklahoma, Pennsylvania, Washington, and Wisconsin. These AFP case studies show that many successful programs: * Effectively leverage relationships with statewide networks of centers for independent living. This helps in marketing the AFPs and reaching individuals with disabilities throughout these states. * Develop relationships with partner financial institutions that allow increased flexibility in the investment of unused funds or funds used to guarantee loans. Some AFPs make it a priority to seek out high yield investments for these unused funds. * Assemble diverse boards that are active in key aspects of AFP operations. In most cases, AFP boards are very active in reviewing and approving loan applications and in developing policies for minimizing costs and maximizing revenues. In almost all cases, AFP boards are comprised of AT consumers, representatives of non-profit agencies, and financial services professionals. This mix allows the AFPs to represent the interests and needs of AT consumers while also developing sound underwriting policies. * Serve borrowers with lower credit scores and high expense-to-income ratios that likely would not be served by mainstream banks. These AFPs achieve low default rates and loss levels relative to similar types of loan funds that serve higher risk markets. The low default and loss rates for some AFPs partially can be attributed to the substantial time that AFP staff spend working with applicants prior to loan approval and also with borrowers who are having difficulty making loan payments. Although application intake and work with borrowers in default could account for large amounts of staff time and labor costs, these activities are viewed as ones that help achieve successful portfolio performance. Recommendations for Sustainability of Programs A key challenge faced by AFPs is developing more sustainable business models. The ultimate goal of these business models is to allow AFPs to deliver services without a heavy reliance on subsidies, and to cover costs through program-related revenue. Given the uncertainty of future federal funding and the limited availability of other grants and charitable donations, it is important that AFP programs develop plans that focus on increasing operational self-sufficiency. These plans should seek to maximize program revenues or find new sources of income while minimizing program costs through increased efficiency. For AFPs, the most significant area of expense is personnel and losses on loans, while the largest area of earned revenue is interest earned on unused funds. The following recommendations are offered to improve financial stability for state AFPs as they go forward. 1. Plan for Sustainability It is critical that AFPs evaluate the prospects for sustainability and self-sufficiency. CDFI research on sustainability offers guidance to AFPs on framing the issues of increasing scale and sustainability while maintaining a focus on serving underserved people and communities. AFPs may want to follow the lead of practitioners in the microenterprise field by focusing on increasing their rate of self-sufficiency, or cost recovery, through increased operational efficiency, improved revenue generation, and exploration of fund diversification. 2. Chose Effective and Efficient Lending Models An AFP’s lending model has a clear connection to the program’s ability to minimize costs related to personnel and losses, to maximize revenue related to the investment of unused funds, and to reach the target AFP markets. In developing a sustainability plan for an AFP, it is critical to review a program’s lending model to see if there is another model that might be more effective and efficient at reaching program goals. Of the four primary AFP program types, each offer possibilities for improving sustainability. * Interest Buy Down and Non-Guaranteed Loans—The interest buy down and the low interest rate, non-guaranteed loan models offer opportunities to reduce operating expenses by shifting the responsibilities of underwriting and servicing loans to the lending partner. Buy down loans are direct payments to financial institutions and offer no potential return to the AFP, as opposed to unused loan funds, which can be invested and will generate interest income. Non-guaranteed loans are loans directly from the lender made to individuals usually at or below market rate loans in exchange for the AFP depositing money with the bank or credit union. On their own merits, these two models offer few opportunities for generating revenue, but are effective at keeping program costs low. These models also offer the most limited opportunities to reach underserved markets because loans probably will rely on the financial institution’s more restrictive underwriting criteria. * Loan Guarantee—The loan guarantee model offers opportunities for generating earned revenue through the investment of unused funds. Loan guarantee programs do not have the direct cost of the buy down. The model allows AFPs to reach higher risk borrowers. Loan guarantee programs do not incur direct costs unless loans go into default. Of the six case study AFPs, the two with the highest levels of self-sufficiency are Kansas and Wisconsin. Both offer only loan guarantees. The loan guarantee model offers more opportunities for generating revenue. AFPs have the ability to earn interest on deposits held by banks as security for the guaranteed loans that were outstanding. In many states, bank partners require AFPs to put aside, in deposit accounts, an amount equal to 100 percent of outstanding loans. However, some AFPs that have a history of low loss levels negotiate agreements with banks to allow a far lower amount in the deposit accounts (which are lower yield reserve accounts.) Low deposit requirements have the advantage of making more funds available for the AFP to loan while also allowing the AFP to invest a greater amount of funds in higher yield opportunities. The loan guarantee model typically requires more overhead for staff time, as AFP staff assist new applicants and manage delinquent loans. However, this increased staff time can be useful in helping lower the default and loss levels. * Direct Lending – The direct lending model offers the greatest opportunity for generating income, but it also has the highest costs. This model requires higher start-up and direct costs than other models because it necessitates raising a substantial amount of capital for the revolving loan pool. Additionally, it requires hiring or training staff familiar with lending and fund management. However, unlike other financing models, the direct lending model offers significant opportunity for earning revenue through interest payments and fees. It also offers the highest level of control over the lending process. 3. Develop Favorable Relationships Between Alternative Financing Programs and Banking Partners Another key to sustainability for an AFP is creating and maintaining a favorable relationship with a partner lending institution. In all models except the direct lending model, AFP costs and revenues are closely tied to the relationship with the AFP banking partner(s). As evidenced by five of the six case studies, the nature of the banking relationship in some way affected an AFP’s ability to keep costs low in underwriting and servicing loans, to make funds available for higher yield investment opportunities, to market the program, and to offer a low-cost loan product. It is important for AFPs to negotiate more favorable relationships with lending partners that allow for increased leverage in the investing of funds traditionally held to guarantee AFP loans. For programs operating the loan guarantee model, such arrangements can greatly enhance the revenue generated from these investments and free up additional resources for making a larger number of loans. AFPs also may want to develop models that allow for greater leveraging of AFP resources. Several individual state AFPs have substantial potential deposits and, in the case of guarantees, a high volume of lower risk loans. AFPs should consider pooling the resources of multiple programs to greater maximize this leverage. If AFPs are able to develop a more standardized loan guarantee program that involves more efficient underwriting, it may reduce AFP costs for application intake while also creating a more favorable relationship with banking partners that would free up resources for the investing of unused funds. 4. Balance Improved Efficiencies with High Cost of Serving Market With the variability among state AFPs in terms of size and lending model, it is difficult to say what level of funding would be sufficient going forward to sustain the program. Although self-sufficiency may not be attainable for all AFPs, it seems clear that larger programs have a better opportunity to leverage their scale to negotiate favorable agreements with financial institutions. Because of their scale and loan volume, these programs also have the best opportunity to develop a standardized lending model that improves efficiency and reduces costs. These programs will have an increased potential for self-sufficiency and be less reliant on outside funding. However, one of the key components of AFP funds is the high level of support provided to individuals with disabilities. This “inefficiency” is one of the program’s strengths. Going forward, AFPs will continue to face the challenge of balancing issues of reaching the scale necessary to achieve long term sustainability with the continuing costs of lending to a difficult to serve market. EVALUATION STUDY OF ALTERNATIVE FINANCING PROGRAMS Background and History of the Alternative Financing Program Assistive technology (AT), such as wheelchairs, specialized computers, hearing aids, adapted vehicles, and home accessibility modifications, have helped individuals with disabilities increase their participation in essential activities of daily life. Although AT can enhance an individual’s participation in home, work, school, and community activities, the costs for acquiring such technology can be high. To address this need, Congress created Alternative Financing Programs (AFPs), which are federal-state loan programs that provide individuals with disabilities and their family members, or official representatives, affordable loans to finance the purchase of AT. AFP funding mechanisms act as an alternative to conventional bank loans, which are typically higher cost and have more restrictive underwriting standards. AFPs help qualified borrowers surmount difficulties in accessing financing due a person’s income, fund availability, credit history, and eligibility restrictions for conventional loans. Congress first authorized grants specifically for AFPs in 1994 under Title III of the Technology Related Assistance Act of 1988, as amended. However, no AFP funds were appropriated at that time. The Technology Related Assistance Act was reauthorized as the Assistive Technology Act of 1998 (AT Act), with Title III of the AT Act authorizing AFPs. Federal funding for AFPs was first appropriated in federal fiscal year (FY) 2000. Overview of Woodstock Evaluation of Alternative Financing Programs An evaluation of state Alternative Financing Programs (AFPs) was conducted by the Woodstock Institute of Chicago, Ill., during a 12-month period, beginning in November 2006. The evaluation study was funded by a grant from the Rehabilitation Services Administration (RSA) to the National Assistive Technology Technical Assistance Partnership (NATTAP), which selected the study contractor and administered the contract. NATTAP is operated by the Rehabilitation Engineering and Assistive Technology Society of North America (RESNA). NATTAP provides technical assistance and training to state AFPs under a contract with RSA, which is in the Office of Special Education and Rehabilitative Services, the U.S. Department of Education. Although past research on AFPs has described the characteristics of state loan fund portfolios, the types of borrowers who access AFP loans, and the impact and implications of the loans themselves, limited work has been done on examining the characteristics of successful AFPs. This study’s goal was to determine best practices by highlighting costs and benefits of particular AFP programs and their respective structures. The recommendations from this report are intended to promote sustainability by suggesting additional program models, new relationships with lending partners, and alternative funding and revenue sources for existing and future AFP funds. This study of the 33 existing AFPs examined the structure, financial characteristics, and performance level of AFP funds with a focus on factors that have led to fund success and sustainability. Data for this evaluation study were drawn from data already collected from AFPs as part of their federal grant reporting requirements. Individual applicant data were collected by a Web based system that was developed and maintained by a NATTAP subcontractor, the University of Illinois at Chicago. This system provided data on the number and types of loans and the monthly income and expenses of individual borrowers. Program data on AFPs were collected by RESNA. These data included information on outstanding loans, defaulted loans, and net losses. Data also included annual program income and expense figures, as well as details about additional funding sources. The first part of this study summarized key research on AFPs and examined summary data on AFP portfolio characteristics, loan characteristics, and financial self-sufficiency. The data analysis focused on lending activity and aggregate portfolio characteristics of all AFPs during fiscal years 2004, 2005 and 2006. Portfolio characteristics that were examined included the number of loans outstanding, dollar amount of outstanding loans, and changes in annual lending activity. This summary analysis considered portfolio performance in terms of write-offs and defaults. It examined borrower expense-to-income ratios. The analysis looked at fund expenses and income, and at income and expense ratios to evaluate financial self-sufficiency. The second part of this study examined the factors that affected the performance of six successful AFP programs. Key indicators from the data analysis (described in the previous paragraph) were used to help select funds that performed well on various measures. These measures included portfolio size and growth, default rates, provision of loans to high risk borrowers, and financial self-sufficiency. Other factors in the case study selection process included the types of financing vehicles and the types of relationship with banking partners. The case studies were used to gain an understanding of the practices of successful AFPs, and to highlight the AFPs’ achievements in balancing the dual goals of serving the mission of the AFP and achieving some level of sustainability. The case study AFPs were asked to complete a survey authored by Woodstock Institute. Specific areas of interest in the survey were the importance of the board, the role of the banking partner, sources of AFP costs and revenues, characteristics of the AFP lending portfolio, and AFP underwriting practices. In addition to completing the survey, these AFPs were asked to submit documents that could enhance understanding about the structure and business conduct of their AFPs. These materials included mission statements, bylaws and investment policies. The Web site of each case study AFP also was reviewed in detail. Each case study AFP also participated in an interview in which Woodstock Institute staff spoke with AFP staff, board members, and banking partners. The focus of these interviews was to understand the structure of the AFP lending program, methods of maximizing income and minimizing costs, methods of making loans to high risk borrowers, procedures for dealing with and minimizing defaults, and the costs of specific lending activities. These costs included providing application assistance, reviewing applications and monitoring loans as well as the cost of non-lending activities such as marketing, advocacy, and providing other services to applicants and borrowers. The six AFP funds chosen for the case studies were Illinois, Kansas, Oklahoma, Pennsylvania, Washington and Wisconsin. Each AFP case study summarized key information on the background of the fund, the lending process, the role of the banking partner and board, key areas for minimizing cost and maximizing revenues, areas of highest labor costs and challenges for the AFP going forward. Each case study concluded with a summary of key lessons learned from the AFP. The conclusion of the report provides a set of recommendations based on an analysis of best practices found in the case study AFPs. These recommendations focus on loan fund models and program practices that maximize the effectiveness and sustainability of the AFPs. Major recommendations include ways in which different loan programs can most effectively leverage federal AFP grants to reach target markets. For example, which loan products and lending models are the most financially sustainable? Which practices allow loan funds to minimize operating expenses and maximize revenues? How does the partner financial institution affect loan fund outreach and sustainability? Operation of Alternative Financing Programs Background Information on Alternative Financing Programs Since the first programs began making loans in FY 2001, AFPs have leveraged federal and state resources effectively to help individuals with disabilities acquire assistive technology. As of FY 2006, 33 states or territories had established title III AFP programs. Between FY 2000 and FY 2006, AFP funds made 4,933 loans totaling nearly $52 million. More than 90 percent of loans made between FY 2002 and FY 2005 were used for hearing aids, adapted transportation, mobility equipment, and home accessibility modifications. Among the top four functional areas for persons with disabilities affected by AFP loans were mobility, social interaction, hearing, and talking and communication. In FYs 2004 and 2005, loan recipients surveyed about the impact of AFP loans on their lives said the AFP loans were instrumental in acquiring needed AT; improved the individual’s quality of life; and allowed the borrower to participate in community, social, recreation, leisure, and spiritual activities. The majority of loan recipients during these years reported that they were highly satisfied with the services of AFPs.3 Requirements for Alternative Financing Program Funds Federal funds for AFPs were awarded to state agencies. Under the grants, state agencies must contract with a community based organization (CBO) to administer the AFPs. CBOs are required to involve individuals with disabilities in the decision making process at all levels. A CBO also must contract with a lending institution or a state financing agency to facilitate administration of the lending program. The CBO must establish a lending program that can involve one or more types of AT loans. These can include loan guarantees, interest-rate buy downs, direct loans or non-guaranteed loans. CBOs that administer these loan programs must provide annual data including number of applicants and borrowers, portfolio characteristics, state and private fund matching grants, and other sources of funding. AFP loans only can be made for the purchase of AT devices or services. Loans must be made to individuals with disabilities, family members, guardians, advocates, or authorized representatives. There is no requirement that an AFP must target lower income individuals or communities for their loans. Applications cannot be approved or denied on the basis or type of disability, age, income level, location in the state, or type of AT needed. To access the federal AFP grant award, state programs matched the federal funding. The state program’s funds came from state or private sources. In FY 2000, state programs were required to match federal funds with a ratio of 1 to 1. Therefore, to qualify for a $100,000 federal grant the state AFP had to provide $100,000 in funding. In subsequent years when federal AFP grants were offered to states, the ratios became more favorable to states at a 3 to 1 ratio. In order to qualify for a $300,000 federal grant, state funds had to provide $100,000 in funds. States could not match federal funds with in-kind or non-monetary contributions. In FY 2002 and FY 2004, there were no appropriations for AFP grants. AFPs can invest unused funds as a means of generating income for operation of their loan programs. Interest and investment gains on unused funds are designated as federal funds, but are the property of the CBO. CBOs are required to invest in low risk securities in which a regulated insurance company may invest under the law of the state. These investments could include certificates of deposit (CDs), Certificate of Deposit Account Registry Services (CDARS), bonds, government treasuries, and collateralized agreements.4 States are permitted to hire professionals to help manage investments.5 Alternative Financing Program Lending Models State AFP funds may implement a lending program that utilizes one or more of the following types of loans: * Guaranteed Loans are those made through traditional financial institutions that are guaranteed up to 100 percent by the AFP if the borrower were to default. Guaranteed loans are the type of loan most often offered by state AFP funds to consumers. Guaranteed loans accounted for nearly 56 percent of all AFP loans made from FYs 2004 to 2006. When working with a loan guarantee, AFPs typically were required to hold some portion of the outstanding guaranteed loan balances in a reserve fund at the financial institution to cover potential defaulted loans by consumers. * Interest Rate Buy Downs make traditional bank loans more affordable by using AFP funds to “buy down” the interest rate to levels below the rates that otherwise would be offered by financial institutions. AFPs negotiated agreements with financial institutions to buy down interest rates to a level often near or below the prime rate. Interest buy downs often were used in conjunction with loan guarantees. Buy downs accounted for roughly 25 percent of AFP loans made from FYs 2004 to 2006. * Direct or Revolving Loans are those in which the AFP acted as its own lender by making loans directly to consumers. AFPs that offered direct lending to consumers accrued all interest and fees charged to borrowers, but also assumed most of the costs of marketing, underwriting and servicing loans. Direct loans typically were issued for small amounts—often below $3,000—because loans of this size are unprofitable for mainstream lenders to originate. Direct loans accounted for nearly 3.4 percent of AFP loans made from FYs 2004 to 2006, and represented a growing segment of AFP lending activities. * Non-Guaranteed Low Interest Loans are traditional loans made to borrowers who have sufficient income and the credit history necessary to qualify for consumer loans at a standard interest rate. For these loans, AFPs would deposit money with a lending institution in exchange for the possibility of having the AFP consumers receive a lower, preferred interest rate from the bank. Interest rates were not directly bought down with AFP funds, however. These loans accounted for 11 percent of AFP loans from FYs 2004 to 2006. AFP funds could offer one or a combination of the financing vehicles described in the previous paragraphs. Although the majority of AFPs had offered one type of loan product, 11 of 29 AFPs that reported data had offered multiple types of financing. Figure 1 summarizes the types of financing sought by AFP applicants who received loans in FYs 2004 to 2006. Figure 1. Types of Financing Sought by AFP Program Borrowers, FYs 2004 to 2006 (Description of Figure one.) A pie chart depicts the types of funding sought by borrowers. Loan Guarantees account for 55.7% of the loans. Interest Buy-downs account for 25.3% of the loans. Non-Guaranteed Low-Interest loans account for 11.3% of the loans. Revolving Loans account for 3.4% of the loans There are 4.3% of “Other” types of loans. (End of description) Source: University of Illinois at Chicago AFP applicant data that was collected and compiled for RESNA. Analysis of the aggregate of AFP lending portfolios showed that, in recent years, loan funds experienced tremendous growth in portfolio size, but also encountered increases in levels of defaults and write-offs. Table 1 shows that between FY 2004 and FY 2006, the overall size of AFP loan portfolios, or loans outstanding, increased from 1,919 loans to 2,725 loans and from $16.2 million to $22 million dollars outstanding. These were increases of 42 and 35.5 percent respectively. In FY 2006, the median AFP loan portfolio had 54 loans. The largest AFP portfolio held 348 loans, and the smallest held one loan.6 The median dollar size of AFP loan portfolios was $503,604. The largest loan portfolio held $4.3 million in loans while the smallest held $5,373. In terms of portfolio growth between FY 2004 and FY 2006, the median number of loans in state AFP portfolios grew by 44.4 percent and dollar amounts increased by 22.7 percent. The largest increase in loans for an individual AFP during the 3-year period was 193 loans while the largest decrease was a decline of 60 loans. In terms of dollars loaned, the largest increase for an AFP was $2.2 million and the biggest decline was $1.5 million. Table 1. Portfolio Characteristics of Aggregate AFPs, FY 2004 to FY 2006 Number of Outstanding Loans: FY 2004 - 1,919 FY 2005 – 1,764 FY 2006 – 2,725 Change FY04 – FY06 –42% Total Dollar Amount of Outstanding Loans: FY 2004 - $16,232,616 FY 2005 – $13,422,952 FY 2006 – $21,987,484 Change FY04 – FY06 – 35.5% Number of Defaulted Loans: FY 2004 - 80 FY 2005 – 51 FY 2006 – 143 Change FY04 – FY06 – 78.8% Dollar Amount of Defaulted Loans: FY 2004 - $229,754 FY 2005 – $249,595 FY 2006 – $801,682 Change FY04 – FY06 – 248.9% Default Rate: FY 2004 – 1.4% FY 2005 – 1.9% FY 2006 – 3.6% Change FY04 – FY06 – 2.2% Dollar Amount of Net Losses: FY 2004 - $197,481 FY 2005 – $254,279 FY 2006 – $658,117 Change FY04 – FY06 – 233.3% Net Loss Rate: FY 2004 – 1.2% FY 2005 – 1.9% FY 2006 – 3.0% Change FY04 – FY06 – 1.8% Source: RESNA data on program characteristics FY 2004 to FY 2006. Between FY 2004 and FY 2006, the default and net loss rates of AFP loan portfolios changed substantially as well. Table 1 shows that in aggregate both rates more than doubled over this period. The default rate increased from 1.4 percent to 3.6 percent and the net loss rate increased from 1.2 percent to 3.0 percent. The median default rate for state AFPs was 2.1 percent in FY 2006. The largest default rate for an AFP was 23 percent while the smallest AFP default rate was zero. The median change in the default rate for an all AFPs between FY 2004 and FY 2006 was 2.4 percentage points. The largest change in default rate for an individual AFP was an increase of 22.6 percentage points while the largest decline for an individual AFP was 4.9 percentage points. Although the increased default and net loss rates were undesirable, the numbers remained on par with, or below, the default and net loss rates for other institutions that served higher risk borrowers. For example, community development financial institutions (CDFIs) that specialized in microlending had a 7.6 percent default rate and a 4.2 percent net loss rate in 2005.7 Understanding Key Factors for Fund Sustainability Sustainability and financial self-sufficiency have become critical issues for organizations that target individuals and communities not conventionally served by mainstream financial institutions. Moreover, AFP sustainability is required by the Assistive Technology Act. Experiences of the CDFI industry have been instructive. The CDFI industry recently has struggled with developing strategies for increasing scale and sustainability while maintaining a focus on impacting the most underserved people and communities. The goal for CDFIs is delivering services without a heavy reliance on subsidy and covering costs through program related revenue. Researchers and practitioners in the industry have attempted to develop sustainability models that focus on achieving a level of scale that allows for expanded reach and increased volume of CDFI products and services while improving levels of efficiency in delivering these products and services. However, researchers conceded such plans may not be possible, or even appropriate, for all organizations.8 Practitioners in the microenterprise field have focused on increasing levels of cost recovery, or self-sufficiency, through increasing operational efficiency, improving revenue generation, and exploring funding diversification.9 Sources of Income and Expenses. Understanding the sources of AFP expenses and income is critical to evaluating opportunities for sustainability and self-sufficiency for AFP loan funds. Prior research on AFPs has discussed the need to assess loan programs for efficiency, and sustainability has been a major recent emphasis for the AFP program. The purpose of such evaluations is to assess overall financial well-being of loan funds and to identify costs associated with specific fund activities and compare these costs with levels of fund activity and output. Examples of typical AFP expenses include operating costs such as personnel, rent, and technology; losses from default loans; and costs from contracted services. Revenues generated by AFPs include interest payments and fees on direct loans, interest and gains from investments used to guarantee loans, and interest earned on invested unused funds. These are considered sources of “earned revenue.” AFPs also generate revenue from public or private grants and other resource development activities. While critical to an AFP’s bottom line, these sources are excluded from calculations of fund self-sufficiency. Table 2 breaks out basic sources of aggregate AFP expenses and income. From FY 2004 to FY 2006, the largest single source of AFP expense was personnel. In FY 2006, AFP personnel expenses totaled just over $2 million, or 46 percent, of the total $4.4 million in overall AFP expenses. However, between FY 2004 and FY 2006, personnel costs made up a declining share of total expenses. Other expenses, which included direct program costs such as rent, utilities, marketing and consultants, and loan fund losses, made up a growing share of total AFP expenses during that period. Losses accounted for 6 percent of AFP expenses in FY 2004, but this number grew to nearly 15 percent in FY 2006. In terms of income in FY 2006, the largest source of AFP income was interest from unused funds. In FY 2006, more than $1.8 million in income was generated from interest earned on unused funds. This represented almost 73 percent of total income, but more than 93 percent of earned income. The second largest source of AFP income in FY 2006 was grants and donations. Grants and donations accounted for more than 22 percent of total AFP income in FY 2006. Although this is a substantial amount, the share of overall income generated by grants and donations has declined from 33 percent in FY 2004 to 22 percent in FY 2006. The portion of total AFP income that is considered “earned income” increased from 67 percent to 78 percent between FY 2004 and FY 2006. Table 2. AFP Sources of Expenses and Income, FYs 2004 to 2006 Expenses – Personnel: FY 2004 - $1,412,068 FY 2005 - $1,997,004 FY 2006 - $2,025,345 Expenses – Other: FY 2004 - $856,731 FY 2005 - $1,833,571 FY 2006 - $1,720,428 Expenses – Losses: FY 2004 - $145,571 FY 2005 - $442,832 FY 2006 - $657,897 Total Expenses: FY 2004 - $2,414,371 FY 2005 - $4,273,407 FY 2006 - $4,403,670 Income – Unused Funds: FY 2004 - $390,684 FY 2005 - $1,015,121 FY 2006 - $1,846,025 Income – Direct Loans FY 2004 - $46,214 FY 2005 - $9,343 FY 2006 - $128,832 Income – Fees FY 2004 - $552 FY 2005 - $150 FY 2006 - $1,951 Income – Other – Grants and Donations FY 2004 - $209,210 FY 2005 - $728,810 FY 2006 - $566,083 Total Income: FY 2004 - $646,541 FY 2005 - $1,753,424 FY 2006 - $2,542,891 Ratios- Total Income to Expense: FY 2004 – 0.27 FY 2005 – 0.41 FY 2006 – 0.58 Ratios- Earned Income to Expense: FY 2004 – 0.18 FY 2005 – 0.24 FY 2006 – 0.45 Source: RESNA data on program characteristics. Note: “Other income” does not include AFP federal grant funds and state match funds. For FY 2004, no federal appropriations were made. For FY 2005, AFP federal grant funds totaled roughly $3.9 million, and the state or non-federal matching funds totaled approximately $1.3 million. For FY 2006, the AFP federal grant funds totaled $2.6 million, and the state and non-federal match funds totaled about $870,000. These funds are not included in Table 2. Self-sufficiency Measure. When considering the long-term financial outlook of a loan fund, one measure to consider is a ratio of earned income to expenses. This is a measure of operational self-sufficiency and is often considered a key indicator of sustainability. A ratio of 1.0 or greater indicates that a fund can cover program expenses using earned revenue and is not reliant on grant revenue or charitable donations to stay in operation. While 1.0 is ideal, it may not be realistic with many program models. Table 2 shows that in FY 2006 the earned income to expense ratio for the AFP program was 0.45. Although this is well below 1.0, it is a substantial increase from the 0.18 ratio in FY 2004, and is not out of line with industry standards for other types of loan funds serving high risk markets. For example between FY 2001 and FY 2004, the highest level of self-sufficiency achieved by CDFI microlenders was 0.34.10 Identifying Case Study Alternative Financing Programs To gain a more complete understanding of the factors that drive AFP fund success, several high performing AFPs were chosen for case studies. The goal of these case studies was to shed light on aspects of AFP operations that may lead to increased levels of sustainability. Key areas of interest included the lending process, the role of the AFP board, the AFP’s relationship with its banking partner, methods for minimizing costs and maximizing revenues, sources of highest labor costs, and challenges for the AFP in the future. Case study AFPs were chosen based on an analysis of key indicators of loan fund performance and sustainability. These indicators included: * Portfolio Size—Funds with larger loan portfolios were likely to have more experience underwriting loans and working with partner institutions to effectively leverage federal and state grant money. These programs also had more funds under their management and should understand variables affecting fund efficiency and loan performance. AFPs with more than 50 loans outstanding in FY 2006 were given preference for inclusion in the case studies. * Growth of Portfolio—Funds that have been able to increase levels of lending and portfolio size helped shed light on strategies for increasing loan volume and the effects of partnerships, outreach, marketing efforts, and other strategies on annual loan volume. Only AFPs with positive portfolio growth between FYs 2004 and 2006 were considered. * Applicant Risk Profile—This variable was chosen because it identified AFP funds that served higher risk clients. These AFPs can shed light on several important issues including outreach to these markets, the costs associated with lending to high risk borrowers, and risk mitigation strategies. Funds with higher median borrower expense to income ratios were given preference. * Portfolio at Risk—Funds with a recent history of low or declining default rates were given preference because they demonstrated an ability to manage risk. * Fund Self-sufficiency—This measure identified funds that had high or improving levels of self-sufficiency. The variable was calculated by taking the ratio of the fund’s earned income to its expenses. Income included only earned revenue from interest and fees and omitted income from grants and charitable donations. Funds with higher levels of self-sufficiency were given preference. * Financing Types—Identification of AFPs that utilized diverse financing vehicles was important in understanding how different financing types affected fund costs and revenues. It was important to identify at least one direct lending AFP. * Banking Partnership—AFPs that had developed innovative relationships with partner lending institutions were given preference for inclusion in the case studies because of the importance and impact of the quality of banking partnerships on fund costs and revenues. After taking into consideration these factors, six AFP funds were chosen for the case studies. They were Illinois, Kansas, Oklahoma, Pennsylvania, Washington and Wisconsin. Table 3 breaks out some of the measures used in the selection process for each AFP program. Analyzing Case Study Alternative Financing Programs AFPs chosen for the case studies were asked to complete a survey authored by Woodstock Institute and submit supporting documents describing the operations of their AFP funds. Additionally, Woodstock Institute staff interviewed the executive directors of all the AFPs, as well as key board members and the staff of banking partner agencies. The goal of the survey and interviews was to gather detailed information on the: * Role played by the AFP board. * Importance of banking partner in minimizing costs or maximizing revenues. * Efforts to build AFP fund sustainability. * Time allocation and staff expenses associated with various AFP activities. * Characteristics of AFP lending portfolio and underwriting guidelines. * Detailed breakout of AFP costs and expenses. * History of the program, especially around relationships with lending partners. * The process of getting a loan with the program. * Challenges to be faced in the future. The results of the case study analyses are summarized in the next section of this report. Each profile was structured to highlight key aspects of AFP operations. Profiles include a detailed discussion of the lending process that focused on AFP outreach efforts, the application process, and the work the AFP staff did with applicants to prepare them for the loan or the staff’s work with borrowers who were having difficulty making payments. The AFP’s relationship with its banking partner also is summarized. Additionally, the role of the AFP board and any AFP investment policies are discussed. Profiles include a summary of portfolio characteristics. They also include a table that specifies the monthly costs per loan for specific activities related to the lending process. This table was designed to illustrate specific activities for which AFPs had higher costs relative to other lending activities. Each summary ends with a discussion of challenges for the future, which had been identified by AFP staff, and program highlights that illustrate best practices or challenges for the AFP. Table 3. Selected Measures for State AFP Funds State- Alabama: # Loans Outstanding – Total Y06 – 1 Change in Portfolio Size by # to Y06 – 1 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 – 0.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.64 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 1.13 Overall Federal and State Funding - $2,000,000.00 State- Arizona: # Loans Outstanding – Total Y06 – 14 Change in Portfolio Size by # to Y06 – -1 Change in Portfolio Size by Percent Y04-Y06 – -6.7% Portfolio Risk – Default Rate Y06 – 6.2% Portfolio Risk – Change in Default Rate Y04 to Y06 – 6.20% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.42 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.58 Overall Federal and State Funding - $200,000.00 State- Arkansas: # Loans Outstanding – Total Y06 – 13 Change in Portfolio Size by # to Y06 – 8 Change in Portfolio Size by Percent Y04-Y06 – 160.0% Portfolio Risk – Default Rate Y06 – 16.1% Portfolio Risk – Change in Default Rate Y04 to Y06 – 16.10% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.41 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense - 25.33 Overall Federal and State Funding - $1,600,000.00 State- Delaware: # Loans Outstanding – Total Y06 – 0 Change in Portfolio Size by # to Y06 – 0 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 - NA Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – NA Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 1.73 Overall Federal and State Funding - $1,207,674.00 State- Florida: # Loans Outstanding – Total Y06 – 69 Change in Portfolio Size by # to Y06 – -17 Change in Portfolio Size by Percent Y04-Y06 – -19.8% Portfolio Risk – Default Rate Y06 – 23.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – 22.60% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.45 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.49 Overall Federal and State Funding - $2,534,641.00 State- Georgia: # Loans Outstanding – Total Y06 – 39 Change in Portfolio Size by # to Y06 – 39 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 – 0.5% Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.59 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.25 Overall Federal and State Funding - $2,084,410.00 State- Guam: # Loans Outstanding – Total Y06 – 3 Change in Portfolio Size by # to Y06 – 3 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 – 0.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.49 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense - NA Overall Federal and State Funding - $508,392.00 State- Illinois: # Loans Outstanding – Total Y06 – 272 Change in Portfolio Size by # to Y06 – 131 Change in Portfolio Size by Percent Y04-Y06 – 92.9% Portfolio Risk – Default Rate Y06 – 2.1% Portfolio Risk – Change in Default Rate Y04 to Y06 – 1.40% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.68 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.32 Overall Federal and State Funding - $8,104,390.00 State- Iowa: # Loans Outstanding – Total Y06 – 36 Change in Portfolio Size by # to Y06 – 30 Change in Portfolio Size by Percent Y04-Y06 – 500.0% Portfolio Risk – Default Rate Y06 – 0.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – 0.00% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.79 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.07 Overall Federal and State Funding - $643,964.00 State- Kansas: # Loans Outstanding – Total Y06 – 339 Change in Portfolio Size by # to Y06 – 193 Change in Portfolio Size by Percent Y04-Y06 – 132.2% Portfolio Risk – Default Rate Y06 – 3.3% Portfolio Risk – Change in Default Rate Y04 to Y06 – 0.40% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.65 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.89 Overall Federal and State Funding - $11,276,418.00 State- Kentucky: # Loans Outstanding – Total Y06 – 162 Change in Portfolio Size by # to Y06 – 39 Change in Portfolio Size by Percent Y04-Y06 – 31.7% Portfolio Risk – Default Rate Y06 – 5.8% Portfolio Risk – Change in Default Rate Y04 to Y06 – 5.00% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.31 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.22 Overall Federal and State Funding - $1,589,800.00 State- Louisiana: # Loans Outstanding – Total Y06 – 54 Change in Portfolio Size by # to Y06 – -27 Change in Portfolio Size by Percent Y04-Y06 – -33.3% Portfolio Risk – Default Rate Y06 – 8.9% Portfolio Risk – Change in Default Rate Y04 to Y06 – 8.90% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.67 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.40 Overall Federal and State Funding - $2,000,000.00 State- Maine: # Loans Outstanding – Total Y06 – 0 Change in Portfolio Size by # to Y06 – 0 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 - NA Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – NA Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.00 Overall Federal and State Funding - $1,000,000.00 State- Maryland: # Loans Outstanding – Total Y06 – 176 Change in Portfolio Size by # to Y06 – -6 Change in Portfolio Size by Percent Y04-Y06 – -3.3% Portfolio Risk – Default Rate Y06 – 4.3% Portfolio Risk – Change in Default Rate Y04 to Y06 – 2.10% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.34 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.76 Overall Federal and State Funding - $4,167,940.00 State- Massachusetts: # Loans Outstanding – Total Y06 – 94 Change in Portfolio Size by # to Y06 – 94 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 – 0.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.46 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.45 Overall Federal and State Funding - $2,759,521.00 State- Michigan: # Loans Outstanding – Total Y06 – 97 Change in Portfolio Size by # to Y06 – 10 Change in Portfolio Size by Percent Y04-Y06 – 11.5% Portfolio Risk – Default Rate Y06 – 11.6% Portfolio Risk – Change in Default Rate Y04 to Y06 – 9.10% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.62 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.07 Overall Federal and State Funding - $2,022,921.00 State- Minnesota: # Loans Outstanding – Total Y06 – 9 Change in Portfolio Size by # to Y06 – 9 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 – 0.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.54 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.49 Overall Federal and State Funding - $1,694,641.00 State- Missouri: # Loans Outstanding – Total Y06 – 78 Change in Portfolio Size by # to Y06 – 40 Change in Portfolio Size by Percent Y04-Y06 – 105.3% Portfolio Risk – Default Rate Y06 – 1.1% Portfolio Risk – Change in Default Rate Y04 to Y06 – 0.30% Applicant Risk Characteristics – Monthly Expense: Monthly Income – NA Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 1.48 Overall Federal and State Funding - $1,100,000.00 State- Nebraska: # Loans Outstanding – Total Y06 – 49 Change in Portfolio Size by # to Y06 – 49 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 – 0.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.66 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.27 Overall Federal and State Funding - $847,320.00 State- Nevada: # Loans Outstanding – Total Y06 – 73 Change in Portfolio Size by # to Y06 – -18 Change in Portfolio Size by Percent Y04-Y06 – -19.8% Portfolio Risk – Default Rate Y06 – 4.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – 3.60% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.26 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.48 Overall Federal and State Funding - $1,295,929.00 State- New Mexico: # Loans Outstanding – Total Y06 – 9 Change in Portfolio Size by # to Y06 – 9 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 – 0.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.24 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.60 Overall Federal and State Funding - $1,828,641.00 State- North Dakota: # Loans Outstanding – Total Y06 – 8 Change in Portfolio Size by # to Y06 – 8 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 – 0.5% Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.50 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.19 Overall Federal and State Funding - $3,058,583.00 State- Northern Marianas: # Loans Outstanding – Total Y06 – 25 Change in Portfolio Size by # to Y06 – 25 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 – 0.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.48 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense - NA Overall Federal and State Funding - $508,392.00 State- Oklahoma: # Loans Outstanding – Total Y06 – 55 Change in Portfolio Size by # to Y06 – 20 Change in Portfolio Size by Percent Y04-Y06 – 57.1% Portfolio Risk – Default Rate Y06 – 2.1% Portfolio Risk – Change in Default Rate Y04 to Y06 – -4.90% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.45 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.32 Overall Federal and State Funding - $1,743,373.00 State- Pennsylvania: # Loans Outstanding – Total Y06 – 148 Change in Portfolio Size by # to Y06 – 70 Change in Portfolio Size by Percent Y04-Y06 – 89.7% Portfolio Risk – Default Rate Y06 – 3.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – 2.80% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.32 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.13 Overall Federal and State Funding - $3,894,641.00 State- South Carolina: # Loans Outstanding – Total Y06 – 27 Change in Portfolio Size by # to Y06 – 26 Change in Portfolio Size by Percent Y04-Y06 – 2600% Portfolio Risk – Default Rate Y06 – 2.4% Portfolio Risk – Change in Default Rate Y04 to Y06 – 2.40% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.75 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 2.63 Overall Federal and State Funding - $542,285.00 State- Utah: # Loans Outstanding – Total Y06 – 348 Change in Portfolio Size by # to Y06 – -60 Change in Portfolio Size by Percent Y04-Y06 – -14.7% Portfolio Risk – Default Rate Y06 – 0.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.54 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.26 Overall Federal and State Funding - $2,158,928.00 State- Vermont: # Loans Outstanding – Total Y06 – 0 Change in Portfolio Size by # to Y06 – 0 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 - NA Portfolio Risk – Change in Default Rate Y04 to Y06 – -0.60% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.37 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.92 Overall Federal and State Funding - $847,320.00 State- Virgin Islands: # Loans Outstanding – Total Y06 – 9 Change in Portfolio Size by # to Y06 – 9 Change in Portfolio Size by Percent Y04-Y06 – NA Portfolio Risk – Default Rate Y06 – 0.0% Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – NA Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 27.73 Overall Federal and State Funding - $647,320.00 State- Virginia: # Loans Outstanding – Total Y06 – 257 Change in Portfolio Size by # to Y06 – 1 Change in Portfolio Size by Percent Y04-Y06 – 0.4% Portfolio Risk – Default Rate Y06 – 5.7% Portfolio Risk – Change in Default Rate Y04 to Y06 – 3.10% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.24 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.56 Overall Federal and State Funding - $11,874,101.00 State- Washington: # Loans Outstanding – Total Y06 – 37 Change in Portfolio Size by # to Y06 – 32 Change in Portfolio Size by Percent Y04-Y06 – 640.0% Portfolio Risk – Default Rate Y06 – 1.2% Portfolio Risk – Change in Default Rate Y04 to Y06 – 1.20% Applicant Risk Characteristics – Monthly Expense: Monthly Income – NA Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.24 Overall Federal and State Funding - $847,321.00 State- Wisconsin: # Loans Outstanding – Total Y06 – 225 Change in Portfolio Size by # to Y06 – 92 Change in Portfolio Size by Percent Y04-Y06 – 69.2% Portfolio Risk – Default Rate Y06 – 2.3% Portfolio Risk – Change in Default Rate Y04 to Y06 – 0.70% Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.35 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.66 Overall Federal and State Funding - $5,050,355.00 State- Wyoming: # Loans Outstanding – Total Y06 – 0 Change in Portfolio Size by # to Y06 – -2 Change in Portfolio Size by Percent Y04-Y06 – -100% Portfolio Risk – Default Rate Y06 - NA Portfolio Risk – Change in Default Rate Y04 to Y06 – NA Applicant Risk Characteristics – Monthly Expense: Monthly Income – 0.51 Fund Financial Self- Sufficiency 2006 Income [w/o other]: 2006 Expense – 0.93 Overall Federal and State Funding - $223,693.00 Note: Sources include RESNA data on program characteristics and UIC applicant data. See Appendix for formulas and definitions. Case Studies Illinois AFP: Illinois Assistive Technology Program The Illinois Assistive Technology Program (IATP) is the CBO administering the AFP program for the state of Illinois. IATP applied for the AFP grant through the Illinois Department of Human Services, Division of Rehabilitation Services in 2001 and made its first loans in the spring of 2002. During the assessment period IATP’s banking partner was Security Bank of Springfield, Ill. In the past, Illinois has received grants for FYs 2001, 2003, 2005, and 2006. Federal funds totaled $6,078,292 and the state has matched this with $2,026,098. Lending Process IATP offered an interest rate buy down and loan guarantee product. The Illinois AFP marketed the loan program through a number of different organizations including Centers for Independent Living, the Coalition of Citizens with Disabilities in Illinois, and the Statewide Independent Living Council. IATP also marketed its program through a variety of approved vendors and specialists. The loan is marketed as a low-interest loan. In 2006, IATP generated more than 150 loan applications. The first contact with potential borrowers usually was made through one of the entities mentioned in the previous paragraph. Potential borrowers were referred to the IATP office for an application packet. This consisted of a Security Bank consumer or equity loan application and a separate disclosure form for the IATP loan program. The program coordinator reviewed the completed applications for possible missing information and gathered necessary information including credit reports and other supporting documents. If an applicant had an adequate credit score, the program coordinator could approve the person’s loan without submitting the person’s information to a review team. However, most borrowers were approved by the review team. After approval, the program coordinator sent an email to the bank letting them know the applicant had been approved for a loan. Prior to June 2006, the bank would review the application for financial eligibility. Those applicants deemed financially eligible became certified borrowers and immediately were contacted with the terms and conditions of the loan. These loans would have their interest rates bought down. Those who were deemed “Non-Qualified” received a denial letter from the bank that included instructions to contact the AFP program coordinator to pursue a guaranteed loan. After the applicant contacted the program coordinator, a Review Team at IATP would look at the application and decide whether to approve and guarantee a loan based on the applicant’s history of paying bills and the impact of disability on the lack of creditworthiness. The bank would close all loans, service the loans, and generate a delinquent list every month. In June 2006, the AFP staff began to implement a credit screening process before turning applications over to the bank. This became necessary because Security Bank determined that the employee costs associated with reviewing AFP loans were too high. Of all applications received, roughly 5 percent were creditworthy by the bank’s traditional underwriting standards. However, about 53 percent of applications that were sent back to the AFP were approved for a guaranteed loan. Having IATP screen applications ahead of time reduced costs for staff time for the bank. In addition, to compensate for the higher costs of originating AFP loans, the annual percentage rate (APR) on the loans was increased from 3.5 percent to 5.5 percent. Due to the strong performance of AFP loans, the bank also reduced the amount of collateral needed on deposit from 100 percent of all guaranteed funds to 50 percent of all guaranteed funds. Both the bank and IATP charged processing fees for applications. IATP charged $50 per application. The bank charged $100 on applications for loans more than $5,000, $70 on applications for loans below $5,000, and $200 on applications for all home modification loans. Collateral was taken by the bank only at the request of the program coordinator. Borrowers were required to agree to automatic loan payment deductions from checking or savings accounts. Banking Relationship Security Bank is a $180 million mutual holding company with four branches in Springfield, Ill. It is a 100-year-old community bank that started as a savings and loan and has specialized in mortgages and CDs. The bank believed that the loan program could be modeled on a CD loan—a loan with a CD used as collateral—since loans would be guaranteed by IATP deposits. The bank’s relationship with IATP was characterized as solely a business relationship, and Security Bank required that the program was profitable for the bank. The bank did not receive Community Reinvestment Act (CRA) credit for participation in the program. Board The IATP Advisory Committee was comprised of 15 representatives: three from AT consumer-based organizations and 12 from various centers for independent living. The advisory committee was responsible for policy decisions and for approving loan guarantees in one of three review teams. Review teams were comprised of five people, three of whom had to vote on any loan guarantee. During the assessment period, FYs 2004 to 2006, the committee contributed to several efforts including developing new partnerships, outreach and marketing; minimizing operational costs; and underwriting and approving loans. Investing IATP invested its funds in three places. Funds used as collateral for guaranteed loans were placed in money market accounts that paid interest of 1.0 to 2.25 percent. Unused funds were placed in short term (4 to 6 weeks) Certificate of Deposit Account Registry Services (CDARs) that paid a 4.8 percent APR. IATP also invested its money in mutual funds. Portfolio Characteristics In FY 2006, IATP had 272 loans in its portfolio making it one of the largest AFP programs. Between FY 2004 and FY 2006, IATP increased the number of loans in its portfolio by almost 93 percent. The loan fund’s default rate was 2.1 percent. IATP reported serving borrowers with high expense to income ratios. The median monthly expense to income ratio for IATP borrowers was 0.68 in 2006. The IATP fund self-sufficiency ratio was 0.32 in FY 2006. Costs IATP was staffed by two full-time employees and one part-time employee. The following table represented the labor cost estimate per loan of specific activities. It indicates that IATP had a very high cost associated with providing assistance during the application process and working out problem loans and defaults. Table - On Lending Activity and Monthly Costs Per Loan for Illinois Lending Activity – Monthly Costs Per Loan Developing and Processing Applications - $45.80 Providing Assistance in the Application Process - $110.41 Reviewing Applications - $45.00 Closing Loans - $0.00 Monitoring Loans - $0.00 Workouts of Problem Loans - $112.50 Dealing with Defaults and Possible Defaults - $112.50 Challenges IATP staff identified several challenges for the AFP. It received referrals through 23 Centers for Independent Living, the Department for Rehabilitation Services, and various mobility vendors. The program took off more quickly than expected and the demand and volume have been taxing on the program’s budget. Additionally, the program was looking to develop a more favorable relationship with its banking partner. Specifically, IATP has been disappointed with the interest rate the bank was extending to borrowers. IATP also wanted to explore options that would let them hold a lower percentage of the funds in a loan guarantee account. Additionally, the AFP had high costs associated with certain lending activities. Program Highlights * Worked with independent living centers to market program. * Developed business-oriented relationship with bank partner. * Challenges: developing more favorable banking partnership. Kansas AFP: Kansas Assistive Technology Cooperative Kansas Assistive Technology Cooperative (KATCO) is the CBO administering the AFP for the state of Kansas. The Assistive Technology for Kansans Program within the University of Kansas applied for the AFP grant in 2000, and KATCO made its first loans in 2001. During the assessment period KATCO’s banking partners were Alliance Bank and Labette Bank. Kansas received the Title III AFP grant in FY 2000 and FY 2003. Kansas received total federal funding of $8,086,026 and the state matched this with $3,190,392. Lending Process KATCO implemented a loan guarantee program. Applications for loans were available through KATCO’s Web site, by phone, at KATCO’s office, at access sites for Assistive Technology Kansas, and through a statewide network of 13 centers for independent living. Loan applications included a standard application for a consumer loan and various release forms, and required a description of the AT and a state ID. Completed applications typically were faxed or mailed to KATCO’s staff for review. The staff returned about 80 percent of received applications to applicants for further completion or more documentation. Staff also could refer some applicants to other services that may provide the desired AT. Applicants were called the same day that KATCO received a completed application. Fully completed applications included a detailed monthly expense sheet, monthly income statement, and statement of disposable income left over once monthly expenses were met. These applications were uploaded on an intranet portal that allowed a loan committee to review loans using an online review sheet. At this point, the staff “weeded out” loan applications for express approval or denial based on income, debt, proportion of disposable income left after AFP loan, and credit scores. Applications were subject to “fast track” review by three in-house staff members when applicants had debt to income ratios of less than 50 percent, credit scores of more than 650, and an availability of revolving credit greater than 35 percent. When applications were viewed as emergency requests, KATCO staff could arrange for emergency loan committee meetings or look for emergency community-based funding. The loan committee was comprised of three paid members, two of whom had disabilities and one worked in the disability field. The loan committee met once a week to fill out review sheets, reviewing anywhere between one and nine applications per week. Online review sheets were forwarded to the AFP manager who drafted a letter stating loan approval, conditional approval, or denial. The lending committee approved loans on the basis of personal income, a determination of the borrower’s ability to repay a loan based on debt to income ratio, time needed to repay the loan, and whether the person had filed for bankruptcy in the last 12 months. The applicant’s reported monthly income, disposable income after expenses, and debts were examined for reliability, stability, regularity, and ability to liquidate into cash assets. Loans would not be approved if monthly payments exceeded 50 percent of disposable monthly income. Once a week, KATCO received a delinquency report from their banking partners. When poor money management was suspected, the person was referred to a credit counselor. When a borrower was unable to pay back the loan, KATCO could restructure the loan, make rescue payments, or repossess the AT equipment. When a borrower defaulted on a loan, KATCO offered a rescue payment option if the borrower contacted them directly or if the individual had an otherwise reliable record of paying the loan. The rescue payment was regarded as an in-house direct loan. Borrowers who used this option were directed to credit counseling. KATCO reserved the right to view all materials submitted during these sessions. If it appeared that the borrower could no longer pay the loan the AT equipment was repossessed. Banking Relationship KATCO’s banking partners during FYs 2004 to 2006 were Alliance Bank and Labette Bank. Both were small community banks based in different parts of the state. Loans were assigned to the bank closest to a borrower’s home. KATCO guaranteed 100 percent of most loans that it made. Although KATCO was responsible for all underwriting, the banks would draw up all loan documents, pay vendors, process monthly payments, and notify KATCO when borrowers were late with payments. Currently, KATCO has signed a participation agreement whereby it owns the loans, and monies remain on deposit at both banks to guarantee the loans until they are paid in full. The bank’s role in the process involved creating the loan papers, loan processing, collecting payments, and depositing payments. KATCO kept a revolving fund with the bank. Money in this fund was withdrawn into a guarantee account when loans were made and payments went back into the revolving account. One of the two banking partners ensured that KATCO earned all the interest on loans, but charged a 3 percent administrative fee against the end of the month outstanding balance. This same bank handled automatic payments, issued coupon books, and generated past due notices. The other bank produced all loan documents, provided payment statements, but did not generate past due notices. KATCO was moving toward a new model that guaranteed loans against pledged investment accounts rather than by deposit. In this arrangement, KATCO defined the terms of the loan and paid off the loan should the borrower default. This arrangement would free up funds and allow for greater capital investment. Most of KATCO’s money was allocated to an investment portfolio rather than held in guarantee accounts. Some money still was held in deposit accounts while older loans were being paid off under prior arrangements. KATCO’s partner banks did not gain CRA credit. Bank staff stated that they participated in the program to better serve a community need. Some senior bank staff also had experienced disabilities or had family members with disabilities. Board The Kansas board had 12 members and was comprised of AT consumers and people involved in advocacy and community based non-profits. The board was active in securing funding, maximizing revenues, and minimizing operational costs. The board was somewhat active in developing partnerships and outreach. Unlike many other AFP boards, Kansas board members were not involved in underwriting and approving loans. The board’s principal responsibilities included amending bylaws, hiring employees, acting as general managers, determining the principal office, borrowing money for the corporation, and appointing committees and task forces. Board members served for a period of 1 year. According to bylaws, board members must be geographically distributed across access sites and the majority of them must be persons with disabilities. Any board member who failed to attend three consecutive meetings forfeited his or her position. At minimum, they met quarterly in addition to their annual meeting in April. Investing The fund hired a financial consultant to invest more than $6 million in unused funds. Seventy percent of this money was allotted to fixed income mutual funds, and 30 percent was allotted to equities. The goal was to earn a 6 percent return per year so as to grow the size of the fund and cover all operating costs. In FY 2003, interest on CDs and other deposit accounts was minimal, but KATCO was able to secure many competitive bids from brokers and advisors to improve the performance of their investment portfolio. All new money went into these investments. Portfolio Characteristics In FY 2006, KATCO had 339 loans in its portfolio making it the second largest AFP. Between FY 2004 and FY 2006, KATCO increased the number of loans in its portfolio by more than 132 percent. The loan fund’s default rate was 3.3 percent. KATCO reported serving borrowers with high expense to income ratios. The median monthly expense to income ratio for KATCO borrowers was 0.65 in FY 2006. In FY 2006, 22 percent of KATCO borrowers had no credit scores and 36 percent had credit scores below 600. KATCO’s fund self-sufficiency ratio was 0.89 in FY 2006. Costs KATCO employed three people full time and three people part time. This table illustrates their labor cost per loan of specific lending activities. It showed that KATCO’s highest labor cost was associated with dealing with possible defaults and providing application assistance. Table - On Lending Activity and Monthly Costs Per Loan for Kansas Lending Activity – Monthly Costs Per Loan Developing and Processing Applications - $30.24 Providing Assistance in the Application Process - $52.50 Reviewing Applications - $34.72 Closing Loans - $9.00 Monitoring Loans - $0.95 Workouts of Problem Loans - $13.75 Dealing with Defaults and Possible Defaults - $61.89 Challenges KATCO has made loans between $250 and $65,000 at the current rate of 0.25 percent above prime. The AFP was looking into direct lending, especially for loans under $2,000. KATCO also wanted to increase its visibility in additional markets for persons who could use AT, including individuals with psychiatric disabilities and families of children with disabilities. KATCO’s long-term goals included becoming an economic development resource for people with disabilities in Kansas. For this reason, the AFP would like to become a CDFI and provide financing for accessible homes. KATCO has succeeded at creating an Individual Development Account program to help consumers afford AT and it has attained fee-for-service contracts with the state. Regarding the AFP, KATCO wants to diversify into new markets, but also wants to maintain the current size of the portfolio, increase cash flow, and decrease delinquencies. The fund’s overall goal was to become fully sustainable. Even though KATCO is officially a non-profit, it views itself as a mission-based business. Program Highlights * Developed innovative relationship with banking partner. * Developed high yield investment strategy. * Generated large loan volume. * Provided significant technical assistance to borrowers. Oklahoma AFP: Oklahoma Assistive Technology Foundation (OkAT) The Oklahoma Assistive Technology Foundation (OkAT) is the CBO administering the AFP for the state of Oklahoma. The Oklahoma ABLE Tech Program at the Oklahoma State University Seretean Wellness Center in Stillwater applied for the AFP grant in 2001 and OkAT made its first loans in 2001. BancFirst of Stillwater was its banking partner during the assessment period. Oklahoma received Title III funds in FYs 2001, 2003, and 2005. Federal funds totaled $1,307,530 and the state matched that amount with $435,843. Lending Process The Oklahoma AFP offered interest rate buy down loans and guaranteed loans. Applications were processed through BancFirst and were treated as consumer loans. Applicants who qualified for conventional financing and met BancFirst’s underwriting criteria for a consumer loan were provided loans with an interest rate buy down. However, when a prospective borrower did not meet BancFirst’s criteria for a traditional consumer loan, their application was turned over to OkAT. OkAT reviewed these applications and approached these applicants for guaranteed loans with an interest rate buy-down. Between FY 2004 and FY 2006, BancFirst received 277 completed applications. Of these applicants, 178 did not meet BancFirst loan criteria, so information was distributed from OkAT to those individuals. Of these 178 applications, 94 applicants did not complete required documentation from OkAT and were placed in a status called, “Did not pursue.” OkAT staff spent a large amount of time with individuals that did not pursue loans. These individuals received information on other funding options, were referred to credit counseling, etc., but they were not counted in the system as “applicants” because they did not complete all required documentation. Of the 178 applications turned down from BancFirst, the OkAT board reviewed 84 applications for a loan guarantee. The board dealt with applications that were not approved under the bank’s normal underwriting criteria for consumer loans. Those not approved had to be submitted to an application process that included physician recommendation, credit reporting, and income verification. This information was compiled in a way that allowed the board to review the information and meet a quorum for approval or denial of a loan guarantee within 5 business days. Although decisions on all loans needed to be made within the designated period, the board could choose to approve a loan with contingencies or to recommend the applicant to another service. Loans were made to individuals who demonstrated that they were able to repay the loan. Applicants who filed for bankruptcy in the past were considered if they could show that they made an effort to pay current bills. There were four criteria used in determining whether to guarantee a loan: * Debt: Income Ratio (It must be less than 50 percent after taking the monthly OkAT loan payment into consideration). * Credit Score (It must be greater than 500). * Completeness of application materials and supporting information. * Efforts to pay down non-medically related debt. Most loans were not secured through collateral because most loans were for hearing aids. Loans for vehicle and home modifications often were secured but these loans were few because regulations on AFP loans stated that they could not be longer than 5 years. Banking Relationship OkAT partnered with BancFirst of Stillwater, a branch bank of BancFirst. BancFirst’s main role was underwriting and approving loans, but it also helped with outreach and marketing. BancFirst is a large commercial bank with over 80 branches scattered through the state of Oklahoma. While the Stillwater branch near OkAT collected all data related to AFP loans, AT consumers could complete all necessary paperwork for these loans at any BancFirst location throughout the state. All loans were closed and administered through the Stillwater branch. BancFirst of Stillwater partnered with OkAT beginning in October 2001 when the non-profit received the initial Title III funds to guarantee loans. The bank often had the first contact with AT customers. The bank’s positive relationship with hearing aid vendors often yielded a number of referrals, and many applications and inquiries were faxed to the bank, driven by the bank’s community reputation for providing fair financing of hearing aids. For BancFirst, the primary benefit in partnering with OkAT was the receipt of CRA credit. The bank did not generate significant income from fees or increased leverage since loans tended to be small. The bank also was not able to use the lending program as a significant “cross selling” device as the primary consumers of AT loans tended to be older individuals who often were unwilling to switch banks. The average loan tended to be for a few thousand dollars and was not secured; however, any vehicle loan was secured by a vehicle title lien. The bank reported that compliance costs for these loans were minimal. Consumer loans normally were 2 to 3 percentage points over the prime rate. OkAT bought down interest rates so that they were a standard 5 percent. The AFP had a $1.4 million dollar deposit at Stillwater BancFirst in government money market funds. Board The board was comprised of nine individuals, including individuals with disabilities, family members of individuals with disabilities, attorneys, a banker, and an accountant. Approximately 25 board meetings were held each year, 4 times a year in person and the remainder via conference calls each month to decide on loan guarantees. During FYs 2004 to 2006, the board was very active in underwriting and approving loans and making expenditure and investment decisions. However, the board did not actively participate in developing fund policy during this time period. The board also was somewhat active in outreach and marketing based on their personal affiliation with other disability-related organizations. Investing The OkAT invests in Money Market Government Obligations Trust accounts utilizing a “sweep account” in which funds can be transferred into an account to be used to pay any incurred debt such as a loan pay off or rescue payment. Interest is generally slightly higher than long-term CD rates. Portfolio Characteristics In FY 2006, OkAT had 55 loans in its portfolio making it a modest-sized AFP. Between FY 2004 and FY 2006, OkAT increased the number of loans in its portfolio by more than 57 percent. The loan fund’s default rate was 2.1 percent. OkAT’s methods for keeping defaults at a minimum involved efficient underwriting standards and the provision of possible alternative methods for acquiring AT to individuals who would not be able to qualify for loans. More than a quarter of loan guarantee applicants found other sources for acquiring AT. OkAT reported serving borrowers with modest expense to income ratios. The median monthly expense to income ratio for OkAT borrowers was 0.45 in 2006. The Oklahoma AFP said that both credit scores and debt to income ratio were somewhat important in deciding whether they will loan to prospective borrowers. Between FY 2004 and FY 2006, 77 percent of borrowers had credit scores above 600, however over this same period 13 percent of OkAT borrowers had at some point declared bankruptcy. OkAT’s fund self-sufficiency ratio was 0.32 in FY 2006 Costs OkAT has no paid staff but has nine Board Members who volunteer their time. ABLE Tech provides three part-time employees. The following table represents the estimated labor cost per loan for specific lending activities. It showed that OkAT’s highest labor cost was associated with working out problem loans, dealing with defaults, and providing assistance in the application process. Table - On Lending Activity and Monthly Costs Per Loan for Oklahoma Lending Activity – Monthly Costs Per Loan Developing and Processing Applications - $35.58 Providing Assistance in the Application Process - $84.45 Reviewing Applications - $71.17 Closing Loans - $0.00 Monitoring Loans - $4.58 Workouts of Problem Loans - $106.75 Dealing with Defaults and Possible Defaults - $85.40 Challenges OkAT staff said that reaching new markets was a key challenge for the AFP in the future. Staff members were concerned that their lending model may limit their ability to reach lower-income individuals with disabilities. Staff also hoped to reach consumers that need low vision products. Another challenge was maintaining the sustainability of OkAT’s business model. This resulted in constant analysis of the ratio of the expense of buy-downs to interest income. If the buy-down expense is substantially higher than the interest income, the AFP will study different buy-down schemas as an alternative to a standard 5 percent buy down. Program Highlights * Provided low-cost program model. * Used lender to market program. * Had low AFP staff overhead. * Achieved a low default rate over 3-year assessment period. * Challenges: A continuing reliance on bank outreach made it more difficult to reach higher risk borrowers. Pennsylvania AFP: Pennsylvania Assistive Technology Foundation The Pennsylvania Assistive Technology Foundation (PATF) is the CBO administering the AFP for the state of Pennsylvania. The state lead agency is the Department of Community and Economic Development. The banking partner during the assessment period was Sovereign Bank. Pennsylvania received Title III funds in FYs 2000, 2001, 2003 and 2005. Federal funds totaled $2,670,961 and the state matched this with $1,223,660. Lending Process The Pennsylvania AFP offered interest rate buy downs and guaranteed loans. PATF contracted with statewide Centers for Independent Living and the United Cerebral Palsy Organization to conduct outreach activities. PATF also did its own outreach through a variety of outreach methods including poster displays, vendors, radio commercials, audiologists, aging associations and a funding assistance center. PATF ran a statewide hotline and had contracts with nine funding assistance centers throughout the state to answer questions about the loans. PATF staff considered the overall mission of the program to be one that was more than simply making loans. The program’s goal was to help applicants make the best possible decisions in acquiring AT, repaying the loan, and building credit. To this end, alternative sources of AT funding and credit counseling were recommended when needed. PATF maintained a contract with Consumer Credit Counseling of Southwestern Pennsylvania. The credit counseling service offered applicants three 60-minute credit counseling sessions, free of charge, to help individuals keep track of bills and create a workable budget. Initial contact involved needs assessment and advice concerning AT acquisition. Application packets were sent along with information on other funding sources, consumer information, and information on getting waivers for AT. Packets consisted of the Sovereign Bank’s consumer loan application or an equity loan application and a separate disclosure form to allow the AFP to access credit scores and other relevant information. The application process could take place via standard mail or electronically. All applications for loans over $100 were checked for completeness, subjected to an initial review, and scanned to the bank along with a written certification that the applicant was eligible for an interest buy-down. During the initial application review the applications were reviewed anonymously with a linked ID number assigned to all applicants. The application then was sent to the banking partner who would, within 48 hours, either approve or deny the loan in writing based on the credit score and debt to income ratio. All denied applications were reviewed for a guarantee by the Foundation Board or the application committee, which is a subcommittee of the board of directors. Where loan approvals were routed for approval depended upon the loan amount. Loans under $1,000 were approved by PATF staff. These were direct loans. Loans between $1,000 and $3,000 were reviewed for the guarantee by the application committee. For loan amounts greater than $3,000, the application committee reviewed and forwarded their comments to the full board for a vote. A loan was approved with the guarantee if a simple majority of the Board supported the request. The most important criteria for determining whether a loan would be guaranteed were credit history, debt to income ratio, and capacity to repay. The board also looked at type of residence, length of time at residence, length of time at current job, and patterns of responsibility with respect to problems with credit history. Applicants could receive conditional approval based on willingness to undergo consumer credit counseling, reduce debts, demonstrate that AT will directly improve credit score or income, or find additional cosigners. Applications were sent to board members via the Internet, and board members had up to three days to vote. If board members did not have access to the Internet, PATF staff members would call and review the applications with the board members. The board met weekly to guarantee loans, and the application committee met every two or three days. Creditworthy applicants could borrow the full amount requested, while guaranteed loans had a $25,000 maximum and a $100 minimum. Loans were made for the useful life of the AT. Applicants had to close their loans in 30 days or reapply. All loans received an interest rate buy-down so that the interest on all loans over $1,000 was 4 percent. To accomplish this, the board negotiated with its partner, Sovereign Bank, to buy down the interest rate every six months. The new interest rate was applied to all approved AFP loans. There was no interest charged on loans under $1,000. Applicants could not use funds to pay off existing loans, to rent items, to pay for an item the individual already had, or to purchase homes. As of November 22, 2007, the interest rate for loan amounts greater than $1,000 was 6 percent. Banking Relationship Sovereign Bank is a $56 billion institution. It is the lending partner for the AFPs in both Pennsylvania and Massachusetts. The current contract between PATF and the bank allowed PATF to guarantee loans with a 50 percent deposit. However, the bank wanted to change this policy to require deposits equal to 100 percent of outstanding AFP guaranteed loans. This would bring the bank’s relationship with PATF in line with its relationship with the Massachusetts AFP. For this reason, PATF was seeking a more favorable relationship with its banking partner. PATF also needs a partner that will do loan servicing and provide the AFP with a stable point of contact, flexible closing, and greater flexibility with buy downs. Although Sovereign bank required PATF to guarantee loans with a 50 percent “callable” deposit, the PATF board required all loans to be matched 100 percent in a trust account. The board required 100 percent of loaned dollars to be set aside. The bank has agreed to place only 50 percent “on call” because defaults were low and the AFP ensured that loan applicants received a large amount of personalized assistance. Other incentives for banking partners included a $13 million portfolio, the opportunity to help individuals with disabilities improve their independence and build credit, and participation in low-risk loan products. Disincentives included less CRA credit, no application fees, and reduced ability to collect late fees. Board PATF reported that its board had been very active. Board members individually have donated money to the AFP, have written letters to legislators, and made presentations to the community. The board was somewhat active in helping PATF develop additional partnerships, improve outreach, minimize operational costs, maximize revenues and secure funding. Board members were very involved in underwriting and approving loans. The board was comprised of AT consumers, bankers, non-profit professionals, advocates, AT vendors, medical service providers, university officials, and family members of consumers. The board was very diverse in terms of disabilities represented. The PATF board was very representative of the state’s regions and different age groups. Investing No information was provided on PATF’s investments. Portfolio Characteristics In FY 2006, PATF had 148 loans in its portfolio, which is considered to be a large AFP. Between FY 2004 and FY 2006, PATF increased the number of loans in its portfolio by nearly 90 percent. The loan fund’s default rate was 3.0 percent. PATF reported serving borrowers with low expense to income ratios. The median monthly expense to income ratio for PATF borrowers was 0.32 in 2006. PATF’s fund self-sufficiency ratio was 0.13 in FY 2006. Costs No information was provided on PATF’s allocation of time to various lending activities or on how many employees worked for the AFP. Challenges The key challenge identified by PATF staff was sustainability. Interest on unloaned funds only covered 20 percent of operating costs, and the fund was seeking additional sources for grant revenues. To this end the AFP had created a resource development committee. PATF had received grants from numerous sources including the Heinz Foundation, the Sovereign Foundation, Independence Blue Cross Foundation, and PNC Bank. PATF receives additional funding from the Pennsylvania Housing Finance Agency, the state’s Department of Community and Economic Development and the state Department of Labor and Industry/Office of Vocational Rehabilitation. In the past two years, the General Assembly has appropriated a total of $800,000 to PATF. The AFP also kept a two-year reserve from repaid guaranteed loans to cover at least two years of operating costs should federal funds be terminated. This was done at the request of the board. Program Highlights * Emphasized importance of relationship with banking partner. * Worked with regional independent living centers. * Provided services beyond lending. * Searched for additional funding sources. Wisconsin AFP: WisLoan WisLoan is the Wisconsin AFP program. It was overseen by, and received funding, through IndependenceFirst, a non-profit organization based in Milwaukee. IndependenceFirst is one of the largest independent living centers in the state. In 2001, IndependenceFirst applied with the Wisconsin Assistive Technology Program in the Wisconsin Division of Disability and Elder Services to be the Community Based Organization administering the AFP. WisLoan provided its first loan in 2002. The banking partner for the AFP program was Marshall and Ilsley (M&I) Bank. Wisconsin received grant funding in FYs 2001, 2003, and 2006. Total federal funding equaled $3,787,766 and IndependenceFirst matched this with $1,262,589. Lending Process WisLoan operated a loan guarantee program. IndependenceFirst contracted with the seven other independent living centers in the state to market the WisLoan program and provide potential borrowers with assistance during the application process. IndependenceFirst was instrumental in securing funds for the WisLoan program. While a state agency had to apply for loan funds, IndependenceFirst alerted the Wisconsin Department of Family services to the need for an AFP program in the state and provided the initial $250,000 in matching funds. Almost all AFP loan applications were taken in person by staff of the independent living centers. WisLoan did make an exception when borrowers were prevented from meeting due to distance, disability, or some other overwhelming circumstance. The WisLoan representative could take up to 3 or 4 hours helping one borrower complete an application. After the application was completed, a WisLoan staff member pulled the applicant’s credit history and called the customer to inquire about any discrepancies. The staff member’s goal was to get the complete story concerning the applicant’s financial situation, disability, assistive technology to be purchased, and history regarding payment of debt. All these aspects were determining factors in loan approval. The phone conversation also gave staff members a chance to provide consumer education to the potential borrower and helped applicants better understand their credit. The staff member wrote a narrative review and presented this to the AFP board. The staff only screened out potential applicants at the beginning of the application process if the purpose of the proposed loan was not for purchase of AT. After being presented with the applicant’s narrative and underwriting information, the board made a decision on whether to guarantee the loan. If the board approved the loan and the invoice for the AT was at hand, loan acceptance forms were forwarded to the bank. For home equity loans the approval was sent to the bank but the loan guarantee was contingent on a number of factors that only the bank would have access to as they started the loan process, for example, no liens on the home, equity in the home and flood insurance. WisLoan did the underwriting; the bank generated all loan documents and did the loan servicing. The bank generated late payment notices, but left it to WisLoan staff to contact the borrowers. Repossessions were done by the bank with the guidance of the WisLoan staff. When appropriate, the property was turned over to IndependenceFirst for resale. Banking Relationship The Wisconsin AFP partnered with Marshall and Ilsley (M&I) Bank, which closed and serviced the loans. M&I staff filed the paperwork and contacted the borrower to let them know to close the loan at a nearby bank branch. M&I Bank had 250 branches throughout the state although it did not have a strong presence in northwest Wisconsin. Loan documents were forwarded to the branch closest to the borrower’s home or, in rare cases, to the nearest independent living center when a borrower could not travel to a branch. Representatives of the independent living centers could take documents to the borrower’s home. Loans were 100 percent guaranteed. M&I allowed IndependenceFirst to leverage the funds at a 5 to 1 ratio which allowed for approximately $18 million in loanable dollars vs. an actual $3.7 million in collateral. This is the direct result of the long relationship between M&I, IndependenceFirst and WisLoan. M&I believed that WisLoan is a highly credible program, that there is a sense of mutual trust, and that the size of WisLoan’s portfolio and its low default rate lessened the risk of high losses. IndependenceFirst invested its unused WisLoan funds with the bank, but this was not stipulated in its contract. The 20 percent held on reserve was free to be invested in any manner, but there was a tie on the money, which allowed M&I to call the money should a default occur. As of September 2006, AFP loans had an interest rate of 6.5 percent and previous to that time the interest rate varied from a high of 8.5 to a low of 5 percent. The bank kept all the interest on guaranteed loans. Default rates were between 2.5 and 3 percent. M&I’s motivation to participate was community involvement, CRA credit and the gratitude of clients. Opportunities to “cross sell” were minimal as more than 90 percent of borrowers did not qualify for an M&I account because of poor credit histories. IndependenceFirst did retain approximately $12 million in reserve at M&I, which surely generated good will and partnership. Board The board was comprised of eight members; a majority of the members were persons with disabilities. The Board’s members included AT consumers, banking and finance experts, non-profit organization members, and professionals involved in vocational rehabilitation. The members lived in different geographic areas throughout the state, thus representing all areas of Wisconsin that WisLoan served. The WisLoan Board was very active in underwriting and approving loans as well as in developing partnerships and marketing. The board’s overarching goal was to make the most appropriate loans while helping individuals with disabilities rebuild credit histories that may have been damaged by complications due to disability. To evaluate the scope of their lending market, the board also kept statistics detailing the demographics of applicants. Investing The AFP money identified as collateral was invested per the terms of the State of Wisconsin Insurance Commission. The portfolio had no more than 25 percent in equities and the rest in fixed income securities (such as treasury notes, bonds, and money market funds). Portfolio Characteristics In FY 2006, WisLoan had 225 loans in its portfolio, which made it one of the nation’s largest AFP programs. Between FY 2004 and FY 2006, WisLoan increased the number of loans in its portfolio by more than 69 percent. The loan fund’s default rate was 2.3 percent. Credit scores were deemed somewhat important and debt to income ratios were deemed very important in determining whether to loan money to potential borrowers. WisLoan reported serving borrowers with low expense to income ratios. The median monthly expense to income ratio for WisLoan borrowers was 0.35 in 2006. More than one-half of borrowers (53 percent) had credit scores above 600 and 47 percent either had no credit or credit scores under 600. Seventy-eight WisLoan borrowers had filed for bankruptcy in the past. WisLoan’s fund self-sufficiency ratio was 0.66 in FY 2006. Costs The WisLoan program employed two people full time and its eight board members served as unpaid volunteers. The following table represented a cost estimate per loan of specific activities. This table illustrates the labor cost per loan for specific lending activities. It showed that WisLoan’s highest labor cost was associated with providing assistance in the application process, developing and processing applications, and dealing with defaults. Table - On Lending Activity and Monthly Costs Per Loan for Wisconsin Lending Activity – Monthly Costs Per Loan Developing and Processing Applications - $29.33 Providing Assistance in the Application Process - $30.00 Reviewing Applications - $6.51 Closing Loans - $19.55 Monitoring Loans - $4.89 Workouts of Problem Loans - $11.00 Dealing with Defaults and Possible Defaults - $22.00 Challenges For the future, WisLoan staff identified sustainability as a key challenge. The AFP was looking for banking partners willing to take more risk and a lesser proportion of money for guarantee. They also were looking into methods that would allow them to earn some interest on their loans. Additionally, the program would like to expand into new markets and increase awareness of the WisLoan in lower-income and minority markets that the fund has found difficult to reach. Program Highlights * Placed emphasis on consumer choice. * Developed partnership with independent living centers. * Developed favorable banking relationship. * Maintained active board. Washington AFP: Washington Assistive Technology Foundation The Washington Assistive Technology Foundation (WATF) is the CBO administering the AFP in the state of Washington. WATF and its lead agency, the Department of Community Trade & Economic Development (CTED), were awarded an AFP grant in September 2003. Washington received $635,400 and WATF raised $211,830 in matching funds. WATF is a direct lending AFP program and a certified community development financial institution (CDFI).11 It had a mentoring relationship with Cascadia Revolving Fund, a CDFI serving low-income entrepreneurs and at-risk communities in Oregon and Washington. Lending Process WATF chose a direct lending model because it believed this model would provide more control over the program than a loan guarantee model. WATF also wanted the flexibility to provide very small loans and to lend to very low-income individuals. Based upon its discussions with other AFPs and banks in Washington, WATF believed that banks would not be interested in this type of loan product. During the time when Washington’s AFP was being established, some AT loan programs were having problems with their bank partners due to mergers, personnel turnover, differences in “mission” and challenges with respect to communication and reporting. As a direct lender, WATF underwrites, closes, and services all loans. Clients typically made contact with WATF through referrals from AT vendors, state agencies and other disability-related non-profits, or because of WATF’s direct marketing efforts. After contacting the office, the consumer was mailed an application or directed to the online application form. Also, consumers often are given information about various other funding sources and consumer education materials about the AT to be purchased. Once the completed application was received, WATF staff verified the application for program eligibility, requested a credit check, and prepared a credit memo for the final application review. This process involved extensive interaction between staff and applicant in terms of clarifying the applicant’s budget, examining his or her financial history, and providing information about the AT. WATF offered AFP microloans for $250 to $1,200 and larger AFP loans up to $10,000. Terms ranged from one to five years depending on the useful life of the AT, the length of the warranty, and the financial circumstances of the borrower. Interest rates were set between 4.75 and 6.0 percent and were not linked to the prime rate.12 There were no loan fees. The AT was used as collateral, and the borrower was expected to insure it. Insurance costs could be part of the loan costs. WATF provided loans for AT related services such as repairs and training. WATF loans could be used to refinance recent AT purchases to achieve a lower interest rate. They also could be used to purchase used equipment in good condition. The maximum any borrower could take out at one time was $10,000. WATF also provided “gap” financing for the purchase of more costly AT.13 The executive director and the staff made decisions on loans under $1,200. A loan review committee, made up of board and community members, reviewed an application if the loan was over $1,200. WATF made a special effort to serve individuals whose income, net worth, or credit history made it difficult for them to obtain a traditional loan. WATF stated that a credit score was noted but not important in determining whether to lend; and debt to income ratio was not calculated. Lending decisions were made on a case-by-case review of the individual’s financial circumstances. Factors that were considered included applicant cash flow, assets and liabilities, outstanding collections, and need for the loan.14 Applicants were eliminated if expenses exceeded income, if the amount of money left over at the end of the month was insufficient to pay the loan, or if they had a high amount in collections. If a loan was denied, WATF sent out a letter describing the exact reasons for the denial and the steps an applicant could take to qualify for a loan. WATF also sent information about other financial and AT resources. If the loan was approved, staff prepared and sent closing documents including a promissory note and a truth in lending disclosure. When the closing documents were returned, WATF made payment directly to the AT vendor. It also filed a security interest on the AT through the Department of Licensing. Most loan payments were made electronically and WATF had the capability through its bank to schedule and make these electronic payments directly. WATF staff maintained regular communication with borrowers and prepared monthly reports on its loan portfolio for the Board and LRC. Social impact measures were taken at the time of application and annually through a borrower survey. If payments were late, borrowers were contacted immediately. WATF worked with clients facing unanticipated financial circumstances. Loan payments temporarily could be rescheduled for compelling reasons. Banking Relationship Cascadia Revolving Fund was a CDFI that had a mentoring relationship with WATF since 2002. When WATF applied for AFP funding in 2003, WATF was renting space from Cascadia and was working with Cascadia on program design. In recent years, the relationship has been less active. A new banking partner will have to be sought as Cascadia recently completed a merger with Shorebank. Board The board was actively involved in loan fund activities between FY 2004 and FY 2006. The board met monthly, with four in person meetings and eight telephone meetings a year. The board was split into three subcommittees: the loan review committee, the development committee and the marketing committee. The loan review committee met twice a month to establish policies and procedures and to review all applications for loans over $1,200. The other two committees met once a month. The development committee assisted with resource development and the marketing committee provided input of marketing activities and the borrower survey. The board was made up of AT consumers, banking professionals, representatives from non-profits and community based organizations, and university professors. Investing WATF also owned CDs and money market accounts at HomeStreet Bank. HomeStreet is a small, family owned statewide bank that had assisted with marketing and fundraising. A branch manager has sat on WATF’s Board for 6 years. Portfolio Characteristics In FY 2006, WATF had 37 loans in its portfolio that were funded by the AFP grant, making it a smaller AFP. Between FY 2004 and FY 2006, WATF increased the number of loans in its portfolio sixfold. The loan fund’s default rate was 1.0 percent. From 2004 to 2006, 66 percent of WATF borrowers had credit scores above 600. During this period, no WATF borrower had an expense to income ratio less than 0.30, while 59 percent of borrowers had expense to income ratios above 0.70. Nine borrowers had declared bankruptcy in the past. The fund self-sufficiency ratio for WATF was 0.24 in FY 2006. Costs WATF employed a full-time program director, a part-time executive director, and an Americorps VISTA volunteer. The following table represents a cost estimate per loan of specific activities. It showed that WATF’s highest labor cost was associated with reviewing applications and providing assistance during the application process and closing loans. Table - On Lending Activity and Monthly Costs Per Loan for Washington Lending Activity – Monthly Costs Per Loan Developing and Processing Applications - $25.00 Providing Assistance in the Application Process - $50.00 Reviewing Applications - $100.00 Closing Loans - $50.00 Monitoring Loans - $5.55 Workouts of Problem Loans - $33.33 Dealing with Defaults and Possible Defaults - $16.67 Challenges WATF stated that its primary challenges have been staffing and resource development. WATF hoped to expand its loan portfolio by 10 to 20 percent per year through increased marketing, outreach, and consumer technical assistance to facilitate more lending among low-income applicants. WATF also hoped to strengthen relationships with the Department of Community Trade & Economic Development (lead agency), the state Independent Living Centers, the state AT Act program (WATAP), the state Asset Building Coalition, and other key disability-related organizations and AT vendors and service providers. WATF also wanted to establish a new “banking” partner. This may provide an opportunity to explore and adopt a loan guarantee component within the direct lending model. WATF will seek foundation funding for both loan capital and operating expenses and intended to explore “traditional” sources of funding for “microfinance” organizations and state funding options. Program Highlights * Assessed social impact of AT loans. * Provided direct loans. * Professionalized staff with previous training in loan fund management * Provided technical assistance to borrowers. Conclusions and Recommendations Components of Success The previous case studies illustrated many key components of successful AFP programs and also many of the challenges that AFP programs will face in the future. Many of these successful AFPs have: * Effectively leveraged relationships with statewide networks of centers for independent living to market their program and reach individuals with disabilities across their respective states. * Developed relationships with partner financial institutions that allowed for increased flexibility in the investment of unused funds or funds used to guarantee loans. Some AFPs made it a priority to seek out high yield investments for unused funds. * Assembled diverse boards that were active in key aspects of AFP operations. In most cases, AFP boards were very active in reviewing and approving loan applications and in developing policies for minimizing costs and maximizing revenues. In almost all cases, AFP boards were comprised of a mix of AT consumers, representatives of non-profit agencies, and financial services professionals. This mix has allowed the AFPs to represent the interests and needs of AT consumers while also developing sound underwriting policy. * Served borrowers with lower credit scores and high expense-to-income ratios that would not likely be served by mainstream banks. These AFPs all have managed to achieve low default and loss levels relative to similar types of loan funds that served higher risk markets. The low default and loss rates for some AFPs could be attributed partially to the substantial time that AFP staff spent working with applicants prior to the loan and with borrowers who were having difficulty making payments. Although application intake and working with borrowers in default accounted for a large amount of staff time and labor costs, it was believed that these activities helped portfolio performance. Recommendations for Sustainability One key challenge faced by AFPs is developing more sustainable business models. The ultimate goal of such a model would be to allow AFPs to deliver services without a heavy reliance on subsidies and to cover costs through program related revenue. Given the uncertainty of future federal funding and the limited availability of other grants and charitable donations, it is important for AFPs to develop plans that focus on increasing operational self-sufficiency. Such plans would seek to maximize program revenues or find new sources of income while minimizing program costs through increased efficiency. For AFPs, the most significant areas of expense were personnel and losses on loans, and the largest area of earned revenue was interest earned on unused funds. The following recommendations are offered to improve the financial sustainability of state AFPs. 1. Plan for Sustainability It is critical that AFPs evaluate the prospects for sustainability and self-sufficiency. CDFI research on sustainability offers guidance to AFPs on framing the issues of increasing scale and sustainability while maintaining a focus on serving underserved people and communities. AFPs may want to follow the lead of the practitioners in the microenterprise field by focusing on increasing their rate of self-sufficiency, or cost recovery, through increased operational efficiency, improved revenue generation and exploration of fund diversification. 2. Chose Efficient and Effective Lending Models An AFP’s lending model has a clear connection to a program’s ability to minimize costs related to personnel and losses, maximize revenue related to the investment of unused funds, and reach the target AFP markets. In the development of any sustainability plan, it is critical to review the program’s lending model to see if there is another model that might be more effective and efficient at reaching program goals. Of the four primary AFP program types, each offers possibilities for improving sustainability. * Interest Buy Down and Non-Guaranteed Loans – The interest buy down and low interest rate, non-guaranteed loan models offer opportunities to reduce operating expenses by shifting the responsibilities of underwriting and servicing loans to the lending partner; but, on their own, these models offer few opportunities for generating revenue. These models also offer the most limited opportunities to reach underserved markets because loans likely will rely on the financial institution’s more restrictive underwriting criteria. Although unused funds can be invested and can generate interest income, buy downs are direct payments to financial institutions and offer no potential return to the AFP. * Loan Guarantee – The loan guarantee model offers greater opportunities for generating earned revenue through the investment of unused funds, and loan guarantee programs do not have the direct cost of the buy down. The model also allows AFPs to reach higher risk borrowers. Loan guarantee programs do not incur direct costs unless loans go into default. Of the six case study AFPs, the two with the highest levels of self-sufficiency were Kansas and Wisconsin. Both offered only loan guarantees. In addition, AFPs have the ability to earn interest on deposits held as security for guaranteed loans outstanding. In many cases, AFPs are required to put an amount equal to 100 percent of loans outstanding in such accounts. However, some AFPs with low loss levels in their portfolios have been able to negotiate agreements with bank partners that allow them to tie up a far lower amount in the lower yield reserve accounts. This has the advantage of making more funds available for the AFP to loan while also allowing the AFP to invest a greater amount of funds in higher yield opportunities. The loan guarantee model typically required more overhead allotted for staff time to assist new applicants and to work with individuals with delinquent loans, but this increased staff time may lead to lower levels of defaults and losses. * Direct Lending – The direct lending model offers the greatest opportunity for generating income, but also has the highest costs. This model has higher start-up and direct costs associated with it than other models because it requires raising a substantial amount of capital for the revolving loan pool. Additionally, it requires hiring or training staff familiar with lending and fund management. However, unlike other financing models, the direct lending model offers significant opportunity for earning revenue through interest payments and fees. It also offers the highest level of control over the lending process. 3. Develop Favorable Relationships between Alternative Financing Programs and Banking Partners Another key to sustainability is creating and maintaining a favorable relationship with the AFP banking partner. In all but the direct lending model, AFP costs and revenues are closely tied to the relationship with a partner lending institution. As evidenced by five of the six case studies, the nature of the banking relationship in some way affected an AFP’s ability to keep costs low in underwriting and servicing loans, making funds available for higher yield investment opportunities, marketing the program, and offering a low-cost loan product. Factors cited in developing favorable AFP partner relationships included: * The ability for banks to earn Community Reinvestment Act (CRA) credit. Some banks may be able to earn CRA credit for participating in a loan program that impacts lower-income individuals with disabilities. However this only applies for the CRA examinations of larger banks. Additionally, the nature of the lending relationship (i.e., who makes lending decision, supplies capital, takes risk) may affect how bank regulators consider bank participation in AFP programs. * The presence of an advocate within the bank to promote the program. Many AFPs cited individuals working at banks that had family members with disabilities, or that were passionate about the program, as being key reasons why the program was successful. * The desire of bank staff to give back to the community. Many banks, particularly smaller community banks, cited a desire to give back to the community as a key reason for participating in the AFP program. * The attractiveness of the AFP’s deposit. Many AFPs have substantial funds available to put on deposit making them attractive to banks seeking to increase their deposit base. There are a number of possible strategies for negotiating favorable lending relationships with partner institutions. In cases such as Kansas and Wisconsin, the state AFPs have been able to leverage scale, loan performance, and relationships to negotiate favorable terms in their agreements with their banking partners. In these cases, these agreements allow for the Kansas and Wisconsin AFPs to have a smaller share of funds tied up in accounts securing guaranteed loans. This gives AFPs the opportunity to have additional funds available to lend and an opportunity to invest these funds in higher yield opportunities. Although not all AFPs have the scale of the Kansas or Wisconsin programs, AFPs seeking a more favorable banking relationship may consider pooling the resources of multiple AFPs to better work with larger, multi-state banks that may offer more favorable terms than local community banks. Although smaller community banks may offer certain advantages in terms of stability, greater knowledge of certain local markets, and more local decision making, working with larger banks may offer better opportunities for developing more favorable loan products and maximizing economies of scale. This might require leveraging existing relationships with national banks and developing a standardized lending program that shifts application review and working with delinquent borrowers to the AFPs. However, the efficiency of a standardized relationship and an increased scale, in terms of deposits and loan volume, might be an incentive for participation by a national bank. 4. Balance Improved Efficiencies with High Cost of Serving Market With the variability among state AFPs in terms of size and lending model, it is difficult to say what level of funding would be sufficient going forward to sustain the program. Although self-sufficiency may not be attainable for all AFPs, it seems clear that larger programs have a better opportunity to leverage their scale to negotiate favorable agreements with financial institutions. Because of their scale and loan volume, these programs also have the best opportunity to develop a standardized lending model that improves efficiency and reduces costs. These programs will have an increased potential for self-sufficiency and be less reliant on additional funding. However, one of the key components of AFP funds is the high level of support provided to individuals with disabilities. This “inefficiency” is one of the program’s strengths. Going forward, AFPs will continue to face the challenge of balancing issues of reaching the scale necessary to achieve long term sustainability with the continuing costs of lending to a difficult to serve market. Glossary AFP - Alternative Financing Program is a government-funded mechanism to extend affordable lending to a target audience for a specific purpose. Applicant Risk - Ratio of monthly expenses to monthly income, from the UIC Survey. Expenses/Income=Applicant Risk APR - Annual Percentage Rate. The effective interest rate a borrower will pay on a loan taking into account one-time fees. AT - Assistive Technology. Mechanisms which make day-to-day functioning easier for people with disabilities. CBO - Community based organization. CDFI - Community development financial institution. CD - Certificate of Deposit. A timed deposit with a fixed rate of interest. CDARS - Certificate of Deposit Account Registry Service. A bank service that allows investors to deposit up to $50 million at a fixed rate of interest through networking with other banks and pulling together FDIC insurance limits. Change in Portfolio - Difference in outstanding loans between 2004 and 2006. % Change in Portfolio - Difference in outstanding loans between 2004 and 2006 expressed as a percentage of outstanding loans in 2006. Cost Per Loan - (#hours on specific task*average salary)/# of loans typically dealt with Defaulted Loans - Outstanding loans that borrowers have stopped paying back. Default Rate - Dollar amount of loans if default at end of period / Outstanding loans in portfolio at end of period. Earned Income - Revenue generated through program operations or the investment of program resources. Earned Income to Expense Ratio -(Non-grant revenue)/Expenses. Economies of scale - Reduction in cost per unit resulting from increased production, realized through increased levels of operational efficiencies. Financial Self-sufficiency - The ability to deliver services without a reliance on subsidy and to cover program costs through earned revenue. Federal and State Funding - Sum of all funding received from state and federal grants FY - Fiscal Year: October 1st-September 30th . Income to Expense Ratio - (All income)/Expense. Net Loss Rate - (Total $Default)/(Total $ in Funds). Outstanding Loans - Number of active loans in the portfolio. Portfolio Risk -Change in default rate between 2004 and 2006. Promissory Note- A written promise or obligation to repay a loan or debt under specific terms.  Truth in Lending Disclosure- Federally mandated disclosure that lenders are require lenders are required to provide to borrowers that includes a full disclosure of a loan amount, finance charges and APR. Footnotes 1 CDFI Data Project. Providing Capital, Building Communities, Creating Impact, FY 2005 Data, Fifth Edition, 2007. 2 CDFI Data Project. Providing Capital, Building Communities, Creating Impact, FY 2005 Data, Fifth Edition, 2007. 3 See AFP data in RESNA publications Addressing the Assistive Technology Needs of Individuals with Disabilities Through Financial Loans (October 2006) and Expanding the Reach of People with Disabilities (March 2005). 4 Stan Provus, “Investing Alternative Finance Program Grant Awards,” Rehabilitation Engineering and Assistive Technology Society of North America, http://www.resnaprojects.org/AFTAP / library/ operations/ investingawards.rtf. 5 Edward Anthony, “Dear Colleague Letter" March 8, 2007. U.S. Department of Education, Office of Special Education and Rehabilitative Services, Rehabilitation Services Administration. 6 AFPs with zero loans in their portfolios were not considered. 7 CDFI Data Project. Providing Capital, Building Communities, Creating Impact, FY 2005 Data, Fifth Edition, 2007. 8 Gregory Ratliff and Kirsten S. Moy “New Pathways to Scale for Community Development Finance.” Profitwise News and Views. Federal Reserve Bank of Chicago, December 2004. 9 Elaine L. Edgcomb and Joyce A. Klein. Opening Opportunities, Building Ownership: Fulfilling the Promise of Microenterprise in the United States. The Aspen Institute: Washington, D.C., February 2005. 10 CDFI Data Project. Providing Capital, Building Communities, Creating Impact, FY 2005 Data, Fifth Edition, 2007. 11 This meant that WATF was “certified” by the Department of Treasury as a lender primarily serving low income and “unbankable” individuals. 12 Interest on loans varied between 4.75 and 6 percent based on the borrower’s credit score, net worth, willingness to make payments electronically, and willingness to participate in financial planning or credit repair programs. 13 Gap financing meant that there were several funders participating in an AT acquisition. This often was the case for higher cost AT such as vehicle loans, which made up about 17 percent of WATF’s loan portfolio. 14 An example of a relevant “need” would be a loan that would be used to obtain or maintain employment, thus increasing income.