Xizi (Daisy) Yuan ’17 Discusses Information in Credit Reports, Pay Stubs and Bank Statements Used in Standard Loan Applications

Two years ago, the students of the Haverford Microfinance Consulting club (HMFC) pivoted toward a focus on financial access issues here in the US and began considering the possibility of providing financial services to the local Philadelphia community. The development of this strategic direction has been facilitated by their engagement with Lend For America, an organization devoted to support campus microfinance organizations.

In November 2014, MI3 supported 5 students from HMFC to travel to San Fransisco for the annual Lend for America Summit to help the group in its efforts to provide funding for local entrepreneurs as a Trustee with Kiva Zip.

Summit participants included student microfinance groups from campuses across the US. The 5 students attending were Exec Dir Kayoung Lee (’16), Com Dir Jenna Kowalski (’17), Xizi (Daisy) Yuan (’17), Sitao Guo (’18) and Siyan Wang (’17).

Below Xizi (Daisy) Yuan ’17 discusses what information can be gleaned from credit reports and bank statements to better assess clients ability and willingness to pay back a loan.

****************************************************************

In our work with Kiva Zip to underwrite a small loan, we will need to evaluate a client’s current financial status. Besides application and dialogues with the client, three official documents, credit report, pay stubs and bank statements are usually taken into consideration as an objective and quantitative measurement of the business income.

(Kiva Zip’s focus is on character loans and Trustees are not required or expected to access potential client’s credit reports. However, it is important to understand standard practices in the field, their advantages and disadvantages – Prof Mudd)

Credit Reports:

Credit reports give MFIs a general idea of the client’s past borrowing behavior. A credit report consists of 4 components,

• personal information;
• tradelines which is categorized into revolving, mortgage and installment accounts;
• public records in terms of civil judgment, bankruptcy, tax lien, collections and inquiries;
• and FICO scores.

All 4 components are provided to assess the client’s credit history in a more comprehensive manner. The most commonly used websites to pull credit reports from are Credit Karma, Credit Builders Alliance and Annual Credit Report. Potential online resources such as sample dispute letters and Bankitis can be utilized to help clients remove errors.

Things to keep in mind when reading a credit report:
– The credit report gives you the numbers; the client gives you the context. Use the credit report as a framework for questions for the potential client.
– Make sure you can find each account in the Credit Summary within the credit report.

Pay Stubs:

Pay stubs are one of the most critical documents to calculate net monthly income using two methods: YTD Average and Pay Period Gross-Up.

YTD Average: Considered to be the most accurate method. It is how much a client has taken home on average over the course of the year.

Pay Period Gross-Up: Extrapolates how much would be earned if the same paycheck was earned every pay period. Of course, it is important to check whether the pay period is weekly, bi-weekly, monthly or bi-monthly. Pay period is not explicitly stated on pay stubs but clues can be found from the method of payment (hourly or salary) and by using www.paycheckcity.com.

Bank Statement:

Is used for to get information on business sales or global household cash flow, but is not as helpful for tracking expenses. When looking at a bank statement, focus on beginning balance, ending balance and average balance. Average balance is the most important. However, most major banks only show average balances for business accounts while most of our potential clients own personal accounts only and this will need to be calculated.

– Daisy Yuan ’17

Jennifer Kowalski ’17 Discusses Data Collection  to Ensure HMFC’s Work With Clients Is Having Positive Impact

Two years ago, the students of the Haverford Microfinance Consulting club (HMFC) pivoted toward a focus on financial access issues here in the US and began considering the possibility of providing financial services to the local Philadelphia community. The development of this strategic direction has been facilitated by their engagement with Lend For America, an organization devoted to support campus microfinance organizations.

In November 2014, MI3 supported 5 students from HMFC to travel to San Fransisco for the annual Lend for America Summit to help the group in its efforts to provide funding for local entrepreneurs as a Trustee with Kiva Zip.

Summit participants included student microfinance groups from campuses across the US. The 5 students attending were Exec Dir Kayoung Lee (’16), Com Dir Jenna Kowalski (’17), Xizi (Daisy) Yuan (’17), Sitao Guo (’18) and Siyan Wang (’17).

Below Jennifer Kowalski ’17 discusses two takeaways from the summit.

****************************************************************

Five club members were fortunate enough to attend the 2014 Lend for America Summit that was held in November UC Berkley. This was my first time attending and I was pleasantly surprised to find that they had sessions for campus Microfinance Institutions (MFIs) at all different stages. For HMFC, the Proving Impact: Using Data to Measure Effectiveness session could not have been more appropriate as it focused on the importance of collecting data at every step of the way. Below I will share the key aspects of this topic, especially those that are applicable to an MFI beginning the loaning/consulting process.

We are actively looking for our first clients and this puts us at a vital time in the data collection process. The importance of gathering information from clients before offering services was stressed as it allows the setting of a baseline to measure changes in the future. can be established.  (We want to validate that our efforts are making a positive impact on our clients’ lives and business! – Prof Mudd) The session leaders provided a model  of data collection at the 5 major stages of our business process:

1. Inputs – Need to track resources invested before services are provided to our clients
2. Process – Need to document the planned activities that utilize the above inputs in conjunction with delivery
3. Outputs – Need to evaluate the amount of products/services delivered upon delivery
4. Outcomes – Need to evaluate ways in which clients benefit 1 – 2 years post delivery
5. Impact – Need to evaluate changes in communities 2+ years post delivery

The session leaders also recommended that initial data collection consist of a (true/false) Financial Literacy Test, an Entrepreneurial Spirit Index (measured on a scale of 1 – 10) and a (yes/no) Financial Index. The repetition of this collection varies widely from MFI to MFI. Some ask for responses every month, others only ask for it immediately after the client has had an interaction with the MFI, and still some only collect entry and exit information. HMFC should come to consensus about our preferred method rather immediately so that our process will remain consistent with substantial data for all clients.

 In addition to what is listed above, it was noted that one of the most important aspects of data collection post-delivery consists of measuring client satisfaction. The most important aspect of this is client referral, which can be measured by a Net Promoter Score. It should be asked how likely the client is (from a scale of 1 to 10 so that changes are able to be closely tracked over time) to recommend HMFC to his/her colleagues or friends. Responses can be categorized as follows:

9 – 10 : Promoter
7 – 8 : Passive
< 6 : Detractor

Based on this information, it is now possible to target incentives at the promoters (as client referral is one the crucial ways for our clientele to grow), as well as to gather vital information from the detractors that could help in our company’s improvement.

 Overall, I believe that HMFC should implement a data collection methodology in order to accurately track our impact. Although qualitative responses are also helpful, quantitative data is necessary to concretely show what impact we have had. I look forward to taking what I learned at this conference and implementing it back at Haverford!

See the Aspen Institute’s FIELD publication Data That Works for more information on this topic.

-Jennifer Kowalski ’17

The San Fransisco trip  was my second time attending the annual Lend for America Summit, so while the sessions were informative and helpful, discussions with leaders in between the sessions provided insightful advice more specific to where our club is at the moment. The opportunity to network and share information in person with leaders who have faced and overcome similar challenges in operating their campus MFI, on top of the informative workshops, was what made the long travel for a short conference worthwhile. I have condensed a couple of the conversations that I had outside of the workshops into two quick take-aways.

Take-away #1: Establish steps in the vetting process that will move us out of gray areas into black or white areas. Establishing clear criteria that would provide a decisive “yes” or “no” even at the first meeting with a potential borrower will become useful and more necessary as we hear from more interested borrowers – we will probably have a better sense of what these decisive factors are as we interact with more business-owners. Ultimately, the interested borrowers’ time is also valuable, so we should identify and eliminate any “artificial hurdles” if there are other indicators that this loan will not work out. One or two documents and meetings would be ideal. The most important factors for evaluating clients initially seems to be their credit score and how they have been repaying others over the past 12 months, as well as the loan payment-to-income ratio (see Credit Karma).

Take-away #2: Some tips to keep in mind as a Kiva Zip trustee. The borrowers most successful on Kiva Zip are typically the ones who sell products because they present something tangible to potential lenders online. Several indicators of a good potential borrower include e-mail responsiveness, a cooperative attitude, and operation of a Facebook page or list-serve that they use to reach out to a network of contacts. It is also important for the loan to be time sensitive – there should be a good reason that they need it right now. Good photos are crucial, so we want a great photographer working with our clients. Having someone in charge of managing a partnership with a small government organization can be useful because they come across small businesses very frequently. It is very important to establish a good vetting process early on, so we should not be in a rush to endorse the first couple clients. A Kiva Zip trustee that I spoke with at the conference said that it typically takes them up to three months to endorse a borrower.

All in all, while this has been a crazy weekend for the five of us (which required more modes of transportation and hours of traveling than should be necessary within a span of three days), I think we come back enriched through the informative sessions and interactions with leaders in other campuses.

-Kayoung Lee ’16