Prepare Your Microloan Program for Competitive Funding and Greater Impact in 2010!

1. Prepare Your Microloan Program for Competitive Funding and Greater Impact in 2010! • Presented by Amelia Lobo, Associate • Friedman Associates • With Special Guests • Galen Gondolfi, Senior Loan Counselor, Justine Petersen • Jill Stephens, Vice President of Lending and Marketing, ACCION Chicago • Jason Friedman, Principal, Friedman Associates

2. As a community-based organization that helps low-wealth individuals and communities build wealth, create jobs and small businesses, your work is essential to the nation’s economic recovery Our mission is help you achieve your vision for a sustainable and economically vibrant community – and demonstrate the results that lead to increased funding and long-term success Our philosophy on consulting for nonprofit organizations is based on helping you answer the following questions: Introductions & Webinar Instructions

3. Friedman Associates • What strategies do we use to build strong businesses and create jobs? • How do we influence our community to support our mission and programs? • How do we measure success? • How do we take care of ourselves?

4. Presenter: Amelia Lobo • One of the nation's premier microfinance specialists • Former Senior Underwriter for ACCION NY (now ACCION USA). Underwrote over 2,000 microloans • Experience in complex professional liability coverage for large financial institutions • Obtained a BA in Economics from Grinnell College and an MBA with concentration in Economics of the Firm from INCAE, Latin America's leading business school   • Currently conducting portfolio reviews of microlenders and CDFIs; revising policies and procedures; developing new products; conducting staff training

5. Guest Panelist – Galen Gondolfi, Senior Loan Counselor, Justine Petersen • Justine Petersen gives people opportunities to create new futures for themselves and their families by helping them become and stay homeowners, start and run successful businesses, access education, begin and manage personal savings programs. • Galen came to JP for assistance purchasing his home in 2001 and shortly after, joined the staff. Galen has worked for community development organizations in Chicago, Boston and Washington, DC. He has a Master of Urban and Regional Planning from the University of Illinois, Urbana, IL. Outside of Justine Petersen, Galen collects toasters, electric fans and dogs.

6. Guest Panelist: Jill Stephens, VP of Lending and Marketing, ACCION Chicago • ACCION Chicago is a non-profit microlending organization dedicated to providing credit and other business services to small business owners who do not have access to traditional sources of financing.  • Jill directs the organization's marketing and community outreach program, supervising the day-to-day activities of the lending team, and establishing and maintaining effective long-term community partnerships.  • Previously, Jill was with ACCION NY and oversaw lending, intake and customer service branches in New York and New Jersey. • Prior to ACCION NY, Jill worked for a rural microfinance loan fund while serving in the Peace Corps in the Dominican Republic. She holds a BSBA in Marketing, International Business and Economics from Washington University in St. Louis and is fluent in Spanish.

7. What’s Going On? • Microlenders and CDFIs are front page news today as banks continue to say “no” to small business borrowers • Demand for capital from the SBA Microloan Program and CDFI Fund is at an all-time high, and USDA is poised to announce a new program for rural microlender

8. What’s Going On? • However, one consequence of the recession has been to tighten underwriting standards and focus on portfolio management • Now, we see new demands at both ends of the spectrum – increasing numbers of unbanked and underbanked individuals, as well as small businesses that could previously access conventional financing and which may not fit our traditional client profile

9. Our Task Today • Share ideas about how microfinance organizations can • Gather and organize information that can help the you improve portfolio management and decision-making • Make better loan decisions • Improve portfolio management • Improve work-flow to decrease time per loan

10. How Effectively Are You Using Information to Drive Decisions?

11. Do You Have A Clear Strategy For The Use Of Data/Information? • Basic information strategy • Account information • Repayment, Late Fees, Balances, Terms • Measuring impact by analyzing the demographic composition of the portfolio

12. Broaden Your Information Criteria • An expanded information strategy uses data to: • Identify risk derived from the composition of the portfolio • Link loan characteristics to repayment • Track the reasons for loan delinquency • Provide insight into how to decrease risk • An effective information strategy is more than number-crunching, it leverages relationships.

13. Goal: Use Information To Make Decisions • Try to pinpoint the source of risk • Is your portfolio skewing to start-up loans? Loans for working capital? • Are you overexposed to a particular industry? How are your “big” industries performing? Do they have specific risks? • Should guidelines be tightened in order to restrict loans to businesses with a higher probability of success? • Do recent news reports lead you to believe that a particular industry will suffer? • Should you limit your new loans in that industry? Or modify the terms for new and existing loans?

14. Moving Beyond Basics: Understanding The Risks In Your Portfolio • Monitor Percent of dollars and loans • What percentage was made to Start-up businesses? Existing? Credit Builders? • What percentage was made to borrowers with poor/good/excellent credit? • What percentage has a car/property as collateral? • What percentage has a cosigner? • What percentage was made to Childcare Facilities/Retail/Restaurants…? • Compare where possible to industry • Is your portfolio concentrating risk?

15. Overall Repayment • Monitor loan repayment vs. • Credit quality: score or category • Product: Start-up vs. Existing vs. Credit builder • Industry • Type of Outside Security • When data suggests that certain types of loans have poor repayment: • Is there (really) a correlation? • Can risk can be addressed by changing guidelines or processes?

16. Delinquent Accounts • Determine why the account first went into collections • Identify trends • Shortcomings in loan analysis or due diligence? • Examples: Poor understanding of capital needs or incorrect addresses • External shock? • Example: General business downturn has affected borrowers who rely on business credit to navigate cash cycle • Address trends • Additional staff training or specialized underwriting staff • Improved Quality Control Processes • Make changes to guidelines

17. How Can We Generate This Information? • Determine what data points should be tracked • Type of loan: “Start-Up”; “Continuing Concern”; “Credit-Builder” • Impact studies: Demographic information, geographic information, number of jobs created/maintained, etc. • Portfolio studies: Industry, Credit Quality, Years in business/industry, Auto as collateral, Property as collateral, Reason for delinquency/ write-off, etc. • Some categories are subjective • Develop definitions so every staff member uses them the same way

18. How Can We Generate This Information? • Third, create a way to collect and extract the data • CRM (Customer Relationship Management) software • Simple Database (OK for small portfolios) • Fourth, have all departments participate • Collections

19. Leverage Relationships Within The Organization • Use the knowledge obtained by team members in the business training and collections groups to improve the underwriting guidelines and processes Listen, I rarely recover business assets • We need better security on large loans. • Let’s see if our data says the same thing. • Should we change the guidelines? • How about cosigners?

20. How Can We Improve The Lending Process To Decrease Costs, Make Better Loan Decisions And Improve Service?

21. First: Reconsider The Product Guidelines • Loan product guidelines must be prescriptive, not descriptive • A person- loan analyst, loan decision committee member, marketing specialist - must understand the organization’s ideal borrower profile • Applicants must be compared to that profile • Guidelines and lending process must “fit” together • Every step in the lending process must call for a “Stop/Continue” decision based on comparing the information gathered so far to the guidelines

22. The Best Product Guidelines…. • Distinguish between start-up and existing businesses • Are very specific as to: • Minimum credit quality • Maximum debt • Minimum cash flow • Required outside security • Required documentation

23. The Best Product Guidelines…. • Require stronger credit/financials/security for larger or riskier loans • Avoid putting up unnecessary barriers • Requiring too much documentation • Example: Requiring a formal business plan from a very informal borrower or a business long in operations • Example

24. Picture The Loan Process Applicants whose loans are approved Applicants whose loans are presented Applicants whose loans are analyzed Applicants who have provided necessary documents Applicants assigned to Loan Officers All Applicants Avoid expending effort on loan applicants who can’t make it to the top!

25. Decision Maker: Intake Specialist Step 1: Meeting The Minimum Requirements • Demographics • Size & nature of business • Is the borrower far enough along in business plan? • Can your loan fully fund the business’s capital needs? • What kind of loan can the borrower expect? (amount, interest rate, term) • This should be communicated to the borrower

26. Decision Maker: Loan Officer Step 2:information Gathering • Credit Bureau Report • Detailed and proven capital needs • Compared to credit-worthiness (Credit Bureau Report/Debt level) • Required financial documents • Proof of investment, savings, income, business ownership • Business Plan consistent with the business needs

27. Decision Maker: Loan Officer and/or Underwriter Step 3:Analysis • FIRST- Due diligence on outside income, debt, and collateral • SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats) • Analysis and (re)creation of financial statements • Site Visit • THROUGHOUT- Comparison to product guidelines • LAST- Completion of Loan Review Package

28. Decision Maker: Loan Decision Committee Step 4:Presentation To Loan Committee • Review of the analyst’s work (Loan Review Package) • Review of primary financial data (if applicable) • Final decision based on organization’s appetite for risk- in other words, how closely the recommendation hews to the guidelines • Approval or declination • Final terms set • Avoid going back and forth or allowing appeals

29. Decision Maker: Quality Control Agent Step 5:Document Preparation and Disbursement • Uses a standard checklist for all loans • Compares the information on the approval sheet to the primary source documentation • Incorrect information on the promissory note is a significant reason for loan loss- and it is preventable! • Disbursement • Reviews the promissory note with borrower and ensures that borrower’s ID matches the information • Obtains borrower signature/original vehicle titles, etc.

30. Good Documentation Is Key • Collect and organize the important information! • For Collections, Loan modification, Refinance, Audit • All files must be organized in the same way • Keep only the important documents • Keep separate from original promissory notes and other legal documents • The way that files are physically organized and kept is not trivial!

31. Collecting Information Up-front Also Helps • Manage Portfolio • Collect on a late/bad loan • Negotiate a payment agreement with a past-due debtor • Examples: • Personal references as contact points if you lose touch with borrower • What the borrower’s earning potential may be if not self-employed • Cosigner’s source and amount of income • Information must be easily accessible to collections staff • They need to understand the make-up of the file and credit memo/analysis tools • Ideally, files will be electronically accessible

32. Do We Have The Right Tools To Analyze Loans And To Store Important Information About The Borrower And Business?

33. What Is An Analytical Tool? • A spreadsheet that is used to enter the business’s and borrower’s information, focusing on the decision making factors of the loan • Must be completed for every loan; larger or more complex loans require more information entered • The spreadsheet should be used by the loan officer during the entire application process- the end result should be used to present the loan proposal to the loan decision committee • The spreadsheet contains the loan officer’s understanding of the business, its strengths and weaknesses as well as her/his impression of the borrower’s skills

34. Tool Format • Excel is best • Contains all the important information • Borrower and cosigner name & address • Business name • Business story • Borrower credit • Debt story • Financials (Income and Expense Statement, Cash Flow, Bank Statement Info.) • Strengths, Weaknesses • Loan Terms

35. A Good Tool… • Encourages the loan officer to determine the loan’s strengths and weaknesses • By calculating cash flow, ratios, etc. • By guiding the financial review • Relates the information and analytical review to the guidelines and flags missing or disqualifying information • Records due diligence information to be used for promissory note and lien filings • Records the terms of the loan • Records the names of approving officers

36. On An Organization-wide Scale, A Good Loan Analysis Spreadsheet…. • Ensures that ALL decisions are based on the same factors • Speeds adoption of guideline changes • Speeds loan committee review by • Providing information in a standard format • Stressing deviations from the guidelines • Acts as the collecting officer’s primary resource

37. What’s Your Approach to Restructuring Loans?

38. Considering a Restructure • Any request for a restructure prior to maturity should be justified by a change in circumstances. • Requests for restructures should be treated formally, the business should be reexamined with an emphasis on comparing the financials year to year or actual vs. projected. • The cosigner must be made aware of the issues and proposed solution. • Cosigner should commit to following the proposed modified payment structure as well

39. Considering a Restructure • There must be a reasonable expectation that loan will be repaid • If delinquency indicates an unwillingness to pay or if fraud is reasonably suspected, start collection proceedings immediately • If loan officers see that business is closed or moving, even if current, borrower should be contacted and loan may have to be “called” immediately • Cash flow should be compared to projections and deviations explained • Overall debt position must be examined

40. Restructuring a Loan • Payments should be as high as borrower can handle. • At a minimum, interest payments should be required • Report the loan as being on-time if the borrower meets the modified payment requirements • A restructured loan can either be a new loan or you can amend the previous note with all previous signers. • Report original loan as Paid in Full • Late fees should not accrue unless borrower misses the modified payment

41. How Can We Improve The Collections Process?

42. Start With The Lending Team • All members are responsible for delinquency • Track delinquency in each loan officer’s portfolio • Loan officers should follow up with • Riskier loans on a regular basis- before they are delinquent • Delinquent borrowers early on • Participate in initial meetings with delinquent clients • Leverage the personal relationship • Help collections identify possible strategies

43. Collections Also Needs Policies And Procedures • Create policies and procedures for each level of delinquency (0-5, 5-30, 30-60, etc.) • Write off bad accounts (usually after 90 or 120 days) • Contact cosigners early on • Avoid waiving late NSF fees • Can negotiate this if client brings balance WAY down • Document all conversations • Restructures should be RARE • Do full financial analysis and determine whether this is short-term problem or loan needs to be completely restructured • Keep all (and ADD!) outside security as a condition for restructure

44. Delinquency Issues Have Led Many Organizations To Make Significant Changes

45. Your Peers Are… • Capping loan amounts • Requiring collateral on all loans • Reviewing loan terms for loans that appear to be in trouble • Increasing requirements for proof of cash flow or other financials • Automatically declining borrowers with very (very) low credit scores • Using scorecards • Diversifying portfolio to include borrowers with excellent credit or larger businesses

46. Your Homework: Self- Assessment • Data driven • What are the key trends that will affect our volume and portfolio quality? • How does our performance compare to that of our peers? • Does our loan performance indicate that our guidelines must be more stringent or that we are not following them properly? • How can we use actual loan performance to inform our decision making? • What information can we organize in order to help collect on bad loans and improve our decision making?

47. Your Homework Self- Assessment • Qualitative • Do the loan officers, loan decision committee members, and other stakeholders understand the guidelines? • Do our guidelines reflect our appetite for risk? Do our guidelines require ways to mitigate risk? • Do we have separate guidelines for start-ups vs. existing businesses? For large vs. small loans? • Are we focusing on the correct decision making factors in the loan decision? • Are we meeting due diligence requirements? • What simple tools can we develop to aid us in the decision-making process?

48. Questions?

49. For Next Week: New Products to Respond to a Changing Market • Credit Education and Builder Loans • Green Loans • Larger Small Business Loans What are the implications to our mission and case for support? Guest Panelists • Sandy Headley, Vice President of Lending, Appalachian Community Enterprises & Georgia Green Loans • Galen Gondolfi, Senior Loan Counselor, Justine Petersen • Vikki Frank, Executive Director, Credit Builder’s Alliance