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July 14, 2020

CFPB releases study on credit builder loans

CFPBThe CFPB Monday released findings from a study in which it partnered with a credit union to better understand the impact credit builder loans (CBLs) have on consumers, particularly those who are "credit invisible." The study found that CBLs helped increase credit scores among consumers with no existing debt and increased average savings balances among participants.

"CBLs are designed to help consumers new to credit establish a credit score and those with lower scores improve their repayment histories," the CFPB's report states. As the defining feature of a CBL is that borrowers make payments before receiving loan funds, the process includes:

  • lenders move their own funds into a locked savings account;
  • borrowers make installment payments typically over a period of six to 24 months;
  • lenders report these payments to credit reporting agencies; and
  • lenders deposit principal payments into the borrowers' savings accounts, after each payment or in entirety once the borrower completes the program.

Previous research by the bureau has determined that roughly 26 million U.S. adults – about 10 percent – lack a credit record and are "credit invisible," and another 19 million have a credit record but no credit score because their history is to thin or out-of-date.

The bureau partnered with a Midwestern credit union that already offered a standalone CBL for the study. Key findings include:

  • for participants without an existing loan, opening a CBL increased their likelihood of having a credit score by 24 percent;
  • participants without existing debt saw their credit scores increase 60 points more than participants with existing debt; and
  • the CBL was associated with an average increase in participants' savings balances of $253.

For participants that had existing debt, taking out a CBL seemed to cause a decrease in their credit scores, suggesting that they had difficulty incorporating CBL payments into existing payment obligations. The report indicates providing additional financial counseling to these borrowers could be beneficial.

The report includes key implications to consider for lenders, practitioners, and consumers. Read the full report here. The bureau also released a practitioner guide for financial educators and financial institutions.

The CFPB has several resources available for consumers, financial institutions, and practitioners available online. The bureau today launches its week-long Consumer Financial Protection event, and other resources cover elder financial abuse, financial literacy, and more.

NAFCU consistently shares with Congress and regulators how credit unions can increase access to financial services for Americans who need them most. The association has doubled down on its advocacy to allow all credit unions to add underserved areas to their fields of membership amid the coronavirus pandemic.