When I started Capital Good Fund in 2009, I was inspired by
Dr. Muhammad Yunus’ model for using micro-business loans to tackle poverty.
The idea immediately struck a chord with me: by tapping into the
entrepreneurial spirit of impoverished families, we could enable them to become
self-sufficient. With this in mind, we started off by offering loans of
up to $3,000 for income-generating activities, such as home repair or catering.
It didn’t take long, however, for me to see that impoverished
families had other, perhaps greater, needs. As we spoke with our low-income
clients and conducted our own research, we realized that there is a $100
billion predatory financial services industry—payday lenders, check cashers,
rent-to-own stores, auto title lenders and others—that takes advantage of the
reluctance of mainstream firms to serve the low-income consumer. In addition, we
discovered in our meetings with community partners that many immigrants
couldn’t afford the $680 cost of applying for US Citizenship. As a result, they
either deferred their dream or sought out predatory lenders to finance the
process.
For several years we clung to this model: micro business
loans and Citizenship Loans. Every once in a while, we got applications
for other consumer needs—vehicle repairs, security deposits, computer
purchases—but rejected them out-of-hand. But in late 2012, awe learned
about the issue of payday lending in Rhode Island (where lenders are allowed to
charge rates of up to 260% APR and generate roughly $70 million in revenue
every year), and we could no longer ignore those loan applications.
With reluctance, we decided to accept applications for
security deposits. We told ourselves that this was okay because we felt these
loans would have meaningful impact. Several months, later, however, we
were underwriting a strong application for the purchase of a couch. The
gentleman, who had recently been homeless, indicated on his application that he
had just moved into a safe apartment, yet found himself sitting on the floor,
unable to afford furniture. Absent our loan, he would be forced to go to
a rent to own store, where a $500 couch might end up costing over $1,500.
“A couch loan?” we gasped. “Why would a nonprofit make
loans for couches?” And then one of our employees asked the question that
changed everything: “Well, don’t the poor need to sit somewhere too?”
Today, we offer personal loans of up to $2,000 for almost
anything. We did get a lot of pushback about the decision from funders,
staff members, and other stakeholders. But when we looked at our
mission—to provide equitable financial services that create pathways out of
poverty—it became clear that so long as our clients were weighed down by a
crushing burden of debt, upward mobility would be out of reach. What’s
more, we saw an opportunity; after all, we can’t serve the poor unless, well,
we serve them. Small personal loans are a phenomenal way to get folks in
the door, yes, but that’s just the beginning. Our borrowers save hundreds of
dollars in interest, build their credit (thanks to the Credit Builders
Alliance, we report to the credit bureaus), and gain access to our one-on-one
Financial and Health Coaching.
It is unfortunate that very few CDFIs focus on the
small-dollar personal loan market. Funders may not find them “sexy,” and
others may question their impact, but if the goal of our industry is to meet
the needs of underserved communities, we simply cannot ignore the personal loan
market. More and more policymakers, funders, and journalists are waking
up to the damage sub-prime lenders are imposing on the poor. A good
example is a
recent NY Times article, which exposed the practice of auto-title lenders
who use starter interrupt devices to remotely disable the vehicles of borrowers
who miss a payment. According to the article, “The devices, which have
been installed in about two million vehicles, are helping to feed the subprime
boom by enabling more high-risk borrowers to get loans.” The catch?
“By simply clicking a mouse or trapping a tapping a smartphone, lenders
retain the ultimate control.” Examples of single mothers unable to take
their kids to the doctor or getting stuck in unsafe neighborhoods are deeply
troubling.
Go into most low-income neighborhood in America and you step
into the territory of unrepentant usury; bright neon signs scream “instant
cash,” and “no credit required,” and the absence of banks and credit unions
looms large. As the country recovers from the Great Recession, a game of
financial whack-a-mole continues unabated: for every attempt to regulate one
financial injustice, another one quickly pops up. At Capital Good Fund,
we strongly believe in policies that protect that poor from usury. However, we
are even more passionate about putting the bad guys out of business by
competing on price, convenience, customer service, and impact.
If we are going to really compete with what we call the
“cabal of financial injustice,” traditional philanthropy just won’t cut it.
Our competitors are extremely well funded and have a ubiquitous presence,
not only in communities but also in the halls of power. Simply put, the
industry has an aggressive lobby and wields its influence effectively. As
a case-in-point, we are part of a coalition of Rhode Island community
organizations that has tried—and failed—to lower the interest rate cap for
payday lenders from 260% to 36% (the maximum interest rate lenders may charge
servicemen and women) for the past four years.
In 2013, The United Way of Rhode Island (UWRI) decided to
try something different; they gave us two substantial grants to launch a payday
loan alternative product. Ranging from $300 - $500 and priced at 30% APR
(fixed) plus a 4% closing fee, our Emergency Loan is a compelling product.
Unfortunately, customer acquisition has been a challenge. Why? Our
marketing budget, compared to the payday lenders, is infinitesimal, and we lack
their massive brick-and-mortar network of stores.
What we—and others like us—need is for more funders to be as
forward thinking as UWRI. Business loans are, without a doubt, compelling
and highly impactful, but we mustn’t blind ourselves to what’s really affecting
the poor. Only by involving funders, policymakers and community members
in an honest dialogue can we chip away at the prevalence of financial injustice
and begin to free the poor from the shackles of usury. It will take
significant investments—grants for operations, low-interest loans to fund loan
pools, lobbying for change—if we are to give the bad guys a run for their
money, but we owe it to those we serve to give it our best shot.
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