Social change work is hard and frustrating and wonderful and terrible; it is also, at times, funny, quirky and just plain fascinating. With this blog we hope to capture all that goes into what we do at Capital Good Fund, and we invite you to join the conversation!

Monday, January 19, 2015

On Balancing Risk & Rewards In Lending to the Poor

Photo Credit: David Yu

Mission Versus Business
Here's a fundamental challenge in our business: the greater the alignment between our lending and our mission, the greater the strain on our loan portfolio performance.  Phrased another way, the highest impact loans--those to ex-offenders, domestic violence survivors, and the temporarily homeless-- are also the riskiest.  This is through no fault of their own; rather, it's simply a result of the tremendous strain that personal and financial instability places on a person.

As a nonprofit, it is incumbent on us that we adhere to our mission, which is to use financial services to create pathways out of poverty.  Yet as a business, especially as one that debt finances its lending operations, we must also ensure that we are fiscally sound.  To address this tension, we've taken several approaches.  First and foremost, the interest rates we charge are designed to compensate for higher losses.  In fact, whenever someone questions why we charge 30% on Emergency Loans, our answer is simple: losses are around 15% and servicing costs are very high.  That said, we don't really care who pays the interest; funders are welcome to subsidize the loans so that the borrower pays a lower rate!

A Balancing Act
Second, we try to balance our portfolio by making larger, lower-risk loans, such as our DoubleGreen Loans (which go up to $10,000), the profits from which offset high-impact loans that are also riskier.  Still, it's a tight rope act.  We've found that those with no bank account and poor credit, for instance, consistently fall behind on their payments.*  It of course doesn't do any good to make a bad loan--either for us or for the borrower--but the end result is that a lot of applications are denied.

All this is to say that we have been searching for a better tactic and that we have may have hit on one!  A little background: several months ago our friends at the Catholic Diocese told us that we just had to talk to Father Ruggieri of St. Patrick's Church in Providence.  Father Ruggieri spoke to us of the large number of parishioners who were approaching him for financial assistance for everything from catching up on rent or utilities, funeral expenses, and vehicle repairs.  He quickly realized that, though he had some funds set aside to help his congregations, the demand far exceeded the supply...

A Promising Pilot
Father Ruggieri was therefore very interested in partnering with us to make loans to families in need.  Together, we have launched a pilot wherein St. Patrick's has put up $5,000 as loan loss reserve funds.  Each congregant interested in a loan must first meet with the Father or one of his assistants to discuss their need.  After this vetting process, applicants are sent to us for final underwriting.  Most germane to this post, because we are depending on the Father's guidance and able to leverage the loan loss reserve, we will be able to base our decisions purely on ability-to-pay and meeting our basic prerequisites.

We are thrilled by this partnership because it means that we can make loans to the truly vulnerable and poor without unduly burdening our loan portfolio.  We are confident that these loans will perform well, but even if they don't, the loan reserve will offset losses.  And if the pilot goes well, it is our goal to duplicate this model in places of worship throughout Rhode Island and, eventually, the country.

Lastly, it seems like we are on to something, as evidenced by a recent Washington Post article titled Churches step in with alternative to high-interest, small-dollar lending industry.  The article talks about similar programs, such as ones where the church offers "...funds as collateral so that [applicants can] qualify for a loan through..." partner credit unions.  It is a similar concept to ours, and shows that we aren't the only ones seeking to put predatory lenders out of business and to replace them with more equitable options.

We'll be sure to keep you updated as our pilot progresses.  We're certainly off to a great start: we had over 60 attendees at our first presentation at St. Patrick's last Sunday!

* In contrast, those with a bank account that haven't had an overdraft in the past two months perform well, irrespective of credit score.

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