Small Loans Keep Families Going During Lean Periods

January 01, 2004

Life's unforeseen challenges, such as car or home repairs, can plunge a family that is living from paycheck to paycheck into crisis. When these families encounter unexpected expenses, a job or housing can be lost, or a person can be forced to drop out of school.

Provident Counseling, a nonprofit agency serving lower-income families in St. Louis, helps its clients weather the tough times by offering them small loans through the Ways to Work program. Working parents who have exhausted other sources of cash or who do not qualify for conventional loans can obtain short-term loans ranging from $500 to $4,000. The money may be used for child care, car repairs, a mortgage payment or toward the purchase of a used car.

The Ways to Work program is an outgrowth of a family loan program created in 1984 by the McKnight Foundation in Minnesota. That program assisted more than 19,000 lower-income families with more than $25 million in short-term loans.

To replicate the successful loan program nationwide, the McKnight Foundation and the Alliance for Children & Families, consisting of more than 300 nonprofit organizations, established Ways to Work Inc. As a federally certified community development financial institution (CDFI), the corporation provides start-up and ongoing capital, as well as technical assistance, to help organizations establish the Ways to Work loan program in their hometowns. The CDFI currently works with 65 organizations through the Alliance's nationwide network.

The Community Affairs Office at the Federal Reserve Bank of St. Louis recently hosted a meeting to introduce Provident Counseling and the Ways to Work financing model (see graphic below) to lending institutions in St. Louis. The model explains who pays the operational costs, who provides the loans to the borrowers and how a guarantee pool is funded.

Typically, it costs $90,000 annually to operate the program (A on graphic). Common sources of local financing for operations include public welfare-to-work funds and grants and investments from foundations and banks.

Actual loans to borrowers are provided by a local bank partner, which services the loans (B). A community-based volunteer loan committee, which includes bank partners, reviews and approves the loans (C). Borrowers then receive loans with a modest interest rate and a two-year term (D). In this manner, the bank partner helps to meet the credit needs of the community it serves while fulfilling Community Reinvestment Act (CRA) obligations.

To make the Ways to Work program attractive to banks, the local organization raises $30,000 toward a loan guarantee pool that backs the bank's commitment (E). Banks may also invest in the pool, and the investment would qualify under the CRA investment test. These funds are enough to cover annual defaults. In addition, the national Ways to Work CDFI makes a low-interest loan of up to $310,000 to the local organization to help fund the pool.

For more information on the Ways to Work program or Provident Counseling, visit or

How 'Ways to Work' Works

Click to enlarge

Bridges is a regular review of regional community and economic development issues. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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