• Fri. Dec 4th, 2020

This lender wants to ‘put poverty out of business’

When the coronavirus pandemic left Michele Hamed furloughed from her waitressing job, she panicked.

The 45-year-old single mother from Jacksonville, Florida, had nothing saved in case of emergency.

“We weren’t prepared for anything like this,” said Hamed, who has two adult children and a 5-year old, as well as a 6-year-old grandson, in the home.

“We had to go to food banks and try to collect whatever we could,” she said. “We ate ramen noodle soup.”

After a few weeks of scraping by, she discovered her local Community Development Financial Institution (CDFI), Capital Good Fund, was offering COVID-19 crisis relief loans. CDFIs are banks, credit unions, microloan funds, or venture capital providers that provide low-income communities access to financial services.

Hamed, who has been rejected by traditional banks for loans in the past, applied and received a $1,500 loan with a 5 percent interest rate. Capital Good Fund didn’t require a first payment for 90 days, which held her over until her job resumed. She said the process wasn’t intimidating or complicated.

“Nobody wants to loan me money,” she said of traditional institutions.

“I’m high-risk,” Hamed added. “I don’t have a really big credit history.”

Often, people in underserved communities don’t use banks much, if at all, because they don’t trust mainstream institutions, said John Holdsclaw IV, board chair of the Coalition of Community Development Financial Institutions.

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He calls CDFIs the “best kept secret of the financial services world.”

“It’s not about the margin, it’s about the mission,” which is to “deliver affordable credit, capital and financial services to residents and businesses in minority and economically distressed communities,” Holdsclaw said. That means a large portion of their clients are Black, brown and Native Americans, he added.

There are currently more than 1,100 CDFIs across the country, with a total of $211 billion in assets. Recently, they distributed $7.3 billion in Paycheck Projection Program loans, which were made available to small businesses impacted by COVID-19.

An alternative to payday loans

A Payday Loan Store in downtown Chicago, 2019.Interim Archives / Getty Images file

At Capital Good Fund, headquartered in Providence, Rhode Island, there is no minimum or maximum income or credit score requirement to take out a loan, said CEO and founder Andy Posner.

Immigration status also isn’t an issue, either. About 40 percent of Capital Good Fund’s clients are Latino and 25 percent are Black.

“One of our goals is to put poverty out of business,” Posner said, who founded Capital Good Fund when he was 24 years old.

A July report from the Urban Institute estimated that 29.3 million people in the U.S. are living in poverty, resulting in a national poverty rate of 9.2 percent. For non-Hispanic Black people, the annual poverty rate is projected to be 15.2 percent this year. For Hispanics, it is estimated to be 13.7 percent and for non-Hispanic whites, it’s projected to be 6.6 percent, the report stated.

However, those numbers would have been higher without coronavirus relief measures like stimulus checks and extra $600 unemployment payments in place. Without that help, the overall poverty rate would have been 12.4 percent, with 39.5 million Americans living in poverty.

The poverty threshold is $13,300 in income for a single person under age 65 and $25,926 for a family of two adults and two children, according to the U.S. Census Bureau.

In order to address racism, the financial system has to provide better access to affordable services to Blacks, Hispanics and other people of color in order, Posner said. He’s also a proponent of overhauling the criminal justice system.

“American’s original sin of slavery, we’ve never expiated that,” he said. “It has just manifested itself in different ways now.”

Posner is specifically focusing on the predatory loan industry, like payday loans.

Millions of low-income Americans turn to payday loans, which are short-term, high-cost loans that are typically due on the next payday. Often, borrowers get caught up in a cycle having to continually borrow to pay off their loans. Four out of 5 payday loans are rolled over or renewed within two weeks, according to the Consumer Financial Protection Bureau.

What’s more, the average payday loan borrower spends an average of $520 in fees to repeatedly borrow $375, the Pew Charitable Trusts found. Annual percentage rates average 391 percent, the organization said.

Sherlie Martinez, pictured with her daughter, was able to finance a used car in 2015.Courtesy Sherlie Martinez

Sherlie Martinez, who is 30 and lives in Providence, understands how people can get caught up in payday loans. She took took one out in 2011. Luckily, she was able to pay it off after a few cycles with her tax refund.

Then in 2013, Martinez turned to Capital Good Fund to get an emergency loan of $300 to fix a broken windshield.

“I didn’t have a savings account and I didn’t have a family member to turn to to borrow money from them,” she said.

In 2015, Martinez took out a $12,000 car loan, with an 11 percent interest rate, to buy a used car. She’s just paid it off.

“I am so excited, relieved,” she said. “Five years ago, I was not in the same place I am now.

“Me being able to get my car all on my own as a single mom — it was a big deal.”

Focus on financial literacy

Capital Good Funds’ Posner said that the organization focuses on helping clients build up their credit scores and gain a better understanding of money.

When clients take out loans, it is reported to all three main credit scoring companies and helps boost their credit score. They have seen an average FICO score increase of 90 points, he said.

The nonprofit also has a free hotline for those significantly impacted by COVID-19 and also offers year-long, one-on-one financial coaching for $15 a month.

Andy Posner at work at Capital Good Fund’s headquarters in Providence, R.I.Cat Laine / (C) Cat Laine (www.paintedfoot.co

When clients pay on time, it helps build positive credit history, Posner said. In addition, it has instituted a “crash course” for those impacted by COVID-19 — condensed into three months for 12 monthly payments of $5 each.

“We do not believe the main reason people are poor is because they don’t know how to manage their money,” Posner said. “They are poor because they don’t have enough money to manage.”

Martinez called her time with Capital Good Funds a “good learning experience.”

“It is something that I can pass onto my daughter and my nieces and my nephews,” she said.

“A lot of us grow up being financially illiterate: not knowing how important it is to save, how important it is to save for retirement, how important it is to maintain good credit.”

‘There aren’t any easy solutions’

One of the biggest obstacles for CDFIs is access to capital, Holdsclaw said.

CDFIs are funded by both private and public sources, including the federal CDFI Fund administered by the Department of Treasury.

The House Democrats’ HEROS Act also provided $1 billion in funding, but so far is not a part of the coronavirus relief bill Senate Republicans have proposed, Holdsclaw said.

“A billion would be such an infusion of much needed capital for many struggling rural and urban communities,” he said.

Posner agrees more funding needs to be invested in CDFIs.

Capital Good Fund sees 70 percent of its revenue came from grants and donations and 30 percent from interest in its portfolio.

However, while the institutions are an important way to “uplift marginalized communities,” something on a larger scale is needed to fully address the racial wealth gap.

“The issue is that there aren’t any easy solutions,” Posner said.

“Our loans are a very important part, but you can’t microfinance your way out of the racial wealth gap.”

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.