Gary Olson was the only banker in the room.
Olson, the CEO of ESSA Bank & Trust in Stroudsburg, Pa., was recently on a panel addressing 250 people — a crowd made up of prosecutors, federal judges and defenders — at a Philadelphia summit on prisoners’ re-entry into society.
Yet it was a topic he knows well. His $1.7 billion-asset bank makes consumer loans of as much as $15,000 each to recently released prisoners in the U.S. District Court system’s Middle District of Pennsylvania. As a result of his speaking at the conference, ESSA will now be working with the Eastern District of Pennsylvania — which includes the Philadelphia market — to provide similar services.
Other financial institutions have worked on providing bank accounts to former prisoners, but extending credit raises bigger challenges: What about the risk of taking on a borrower with a criminal record who might not have a credit score or be accustomed to using a bank?
ESSA over two years has provided six loans worth a combined $45,000 to participants in the federal court system’s Court-Assisted Re-Entry program in Scranton and surrounding areas, Olson said. The outstanding balance on those loans is $32,000, he said.
“You would think they would be riskier, and we were certainly anticipating that that could be a possibility,” Olson told American Banker. But the borrowers “have really stepped up and done what they said they were going to do.”
ESSA has by and large had no problems, aside from one customer who’s been hard to work with but ultimately makes payments, Olson said.
The bank has caps on the credit it will extend to former prisoners in programs like CARE — $250,000 in total, and a max of $15,000 each. Even with the expansion into the Philadelphia market, ESSA has no immediate plans to raise those limits, Olson said.
“We’re a nearly $2 billion bank,” Olson said. “In the sense of the total, it’s a mere drop in the bucket. … We just pegged it at a number that we thought was a good risk.”
Olson also said the bank’s risk is “managed to a point where even if the whole $250,000 was gone, it wouldn’t be damaging to the company.”
To qualify to get a loan through the CARE program, potential customers have to undergo financial literacy training and attend the group’s monthly meetings to provide updates on their progress. They also must be employed.
ESSA works with CARE to determine how potential borrowers might spend the money, Olson said. One woman who obtained credit through the program was a mother of three children who needed a loan to get a car to get to her job, he said. Another used his loan to get a barber’s license.
“We’re trying to underwrite these loans so that we’re not setting people up to fail,” Olson said, noting that most customers have taken out loans below the $15,000 maximum.
Because of the nature of the customer base, the vetting process might be a bit different. Sometimes CARE participants may lack credit scores, and program officials need to vouch for them, Olson said. The 6.5% interest rates on the loans are slightly higher than normal to compensate for the risks involved.
“A lot of it is standard underwriting, but sometimes they might need a little bit of help with a credit score or something like that,” Olson said. “As long as they stay in the CARE program, we’re good.”
In the Eastern District of Pennsylvania, the Supervision to Aid Reentry program — also known as STAR — is larger. Tim Rice, a U.S. magistrate judge who approached Olson about working with STAR’s members, said it has been in operation since 2007 and that 30 or 40 people attend the group’s check-in meetings every two weeks.
Rice said he hopes to have STAR’s partnership with the bank in place within 30 to 60 days.
“There’s already a lot of interest,” he said.
Like the CARE program, STAR plans to require its members to take financial literacy training.
Olson said he has talked about the bank’s loans to former prisoners with others in the banking industry but has been unsuccessful in getting any of them to join in.
Banks can earn Community Reinvestment Act credit for such activities. But the level of risk associated with community involvement is not something that gives a bank extra points, said Ken Thomas, president of Community Development Fund Advisors. It is about determining whether the bank is responding to credit needs in its community, he said.
For ESSA, the loans turn a profit, Olson said, but he does not focus solely on the monetary returns.
“It’s part of what we do in our communities to make them better places to live,” he said.