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!

Wednesday, October 1, 2014

Reconsidering Need: The Case For Personal Loans

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.  
 At first, I resisted the idea of making personal, or consumer, loans.  “That’s not what microfinance is about,” I told myself.  Still, I couldn’t get my mind off the utter lack of access to equitable capital for disadvantaged communities, and the financial collapse of 2008 only made it harder for me to ignore the need.  Ultimately, we decided to take the bold step of making loans to cover the cost of the naturalization process.  Pretty soon, we were processing dozens of loan applications per month and garnering national attention for our “Citizenship Loans.”

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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