That Personal Touch Helps Americans Save Money

A handful of nonprofits, credit unions, and start-ups are trying new and different ways for customers to establish good credit.

Customers use an ATM at a Bank of America branch office on April 17, 2013 in San Francisco, California.
National Journal
Amy Sullivan
Dec. 6, 2013, 6:30 a.m.

As 2013 draws to a close, the Next Eco­nomy pro­ject is tak­ing a look at some of the most in­nov­at­ive pro­grams aimed at build­ing and sup­port­ing a strong middle class that we’ve pro­filed this year. What makes the best pro­grams work? And what les­sons can we draw from their suc­cess? Today we start with ini­ti­at­ives to pro­mote as­set-build­ing.

It’s a tricky busi­ness try­ing to fig­ure out why some U.S. fam­il­ies move up the eco­nom­ic lad­der and some don’t. But it’s be­come in­creas­ingly clear that hav­ing wealth plays a key role. Fam­il­ies with ac­cu­mu­lated sav­ings and oth­er as­sets are bet­ter able to weath­er peri­ods of un­em­ploy­ment or health crises, and they have a great­er meas­ure of eco­nom­ic se­cur­ity. A re­cent re­port from the Pew Eco­nom­ic Mo­bil­ity Pro­ject found that these fam­il­ies who en­joy a cush­ion of wealth are the most likely to be up­wardly mo­bile.

But an­ti­poverty ad­voc­ates are learn­ing that it’s not enough to en­cour­age low-in­come Amer­ic­ans to open bank ac­counts and in­crease their sav­ings. In­di­vidu­als also need to es­tab­lish good cred­it rat­ings in or­der to qual­i­fy for the kinds of fin­an­cial re­sources that help build eco­nom­ic se­cur­ity, such as mort­gages, car loans, or small-busi­ness loans.

As ac­cess to tra­di­tion­al forms of loans has tightened in the years fol­low­ing the fin­an­cial crisis, in­de­pend­ent ven­tures have stepped in to provide both cap­it­al and cred­it-build­ing op­por­tun­it­ies for strug­gling Amer­ic­ans. Maurice Lim Miller, who foun­ded the Fam­ily In­de­pend­ence Ini­ti­at­ive in the San Fran­cisco Bay Area, ex­plains that what many low-in­come in­di­vidu­als need is an al­tern­at­ive way of vouch­ing for their fin­an­cial re­li­ab­il­ity. “A lot of these fam­il­ies don’t have a cred­it rat­ing,” Miller says. “But what we can do is give a car deal­er a cred­it score that’s sim­il­ar, it’s a proxy for that whole thing. We’re col­lect­ing the data to show that these fam­il­ies are re­li­able, they’re re­source­ful, you can count on them — they just don’t hap­pen to have a cred­it rat­ing.”

Through the Next Eco­nomy pro­ject, we’ve found cred­it-build­ing ef­forts as var­ied as a cred­it uni­on that caters to Lati­nos, a non­profit that sets up lend­ing circles for low-in­come im­mig­rants, and even for-profit on­line lenders that provide a path­way to low-in­terest loans.

We’ve also dis­covered that many of the most ef­fect­ive pro­grams to help Amer­ic­ans gain eco­nom­ic se­cur­ity do so by tak­ing a very per­son­al ap­proach — provid­ing ser­vices in cli­ents’ nat­ive lan­guage, provid­ing peer sup­port and ac­count­ab­il­ity for good fin­an­cial prac­tices, or work­ing dir­ectly with homeown­ers to struc­ture mort­gage pay­ments that can al­low them to keep their homes. It’s far-re­moved from the ex­per­i­ence of be­ing a face­less num­ber while banks pass around your mort­gage like a game of hot potato.

These are our fa­vor­ite as­set-build­ing ini­ti­at­ives for 2013:

  • Mis­sion As­set Fund. This Bay Area non­profit sets up lend­ing circles, primar­ily for low-in­come im­mig­rants, that provide no-in­terest, no-fee loans. After five years and ap­prox­im­ately $2 mil­lion shared through 1900 loans, MAF boasts an astound­ing re­pay­ment rate of nearly 99 per­cent. Par­ti­cip­a­tion in a lend­ing circle raises an av­er­age cli­ent’s cred­it score by 168 points and re­duces their debts by $1,000. When MAF launched, half of its tar­get house­holds in San Fran­cisco’s Mis­sion Dis­trict had no bank or sav­ings ac­count, and nearly as many lacked any kind of cred­it rat­ing.
  • Oak­land’s Pre­paid Deb­it Card. The city of Oak­land of­fers a mu­ni­cip­al iden­ti­fic­a­tion card to res­id­ents, and this year it ad­ded a func­tion so that the ID card can be used as a pre­paid deb­it card as well. Res­id­ents can dir­ect-de­pos­it paychecks to the card, with­draw cash from ATMs, and shop with it as they would any oth­er pre­paid card. The new ser­vice is in­ten­ded to broaden fin­an­cial op­tions for low-wage work­ers bey­ond check-cash­ing stores and pay­day lenders, which can charge bur­den­some fees and in­terest rates.
  • On­line Lower-In­terest Lenders. Also look­ing to provide an al­tern­at­ive to pay­day lenders are a group of new start-ups in­clud­ing Spotloan, Len­dUp, and Fair­Loan. A typ­ic­al pay­day loan of $300, due in two weeks, car­ries a $45 in­terest fee. These new lenders are us­ing data min­ing and ana­lys­is to identi­fy re­li­able bor­row­ers and cre­ate loan struc­tures that re­ward re­spons­ible bor­row­ing. For ex­ample, a 30-day, $250 loan from Len­dUp car­ries a fee of $44. If a bor­row­er re­pays on time or early, they can bor­row again at lower rates. Over time, Len­dUp aims to trans­ition re­spons­ible bor­row­ers in­to a 2 per­cent monthly in­terest rate loan that can be re­por­ted to a cred­it uni­on or a bank, es­tab­lish­ing a cred­it his­tory.
  • Latino Com­munity Cred­it Uni­on. This cred­it uni­on with 10 branches in North Car­o­lina tar­gets Latino im­mig­rants and provides all ser­vices in both Span­ish and Eng­lish. It’s also one of the fast­est-grow­ing and most fin­an­cially stable cred­it uni­ons in the coun­try. Its 54,000 mem­bers have a lower de­lin­quency rate than the in­dustry av­er­age, des­pite the fact that the cred­it uni­on takes on mem­bers who have pre­vi­ously been un­banked and it provides loans to bor­row­ers with no cred­it his­tory at no ex­tra cost.
  • Mort­gage Res­ol­u­tion Fund. A part­ner­ship between four na­tion­al hous­ing non­profits, MRF aims to pre­vent fore­clos­ures by buy­ing bundles of de­lin­quent mort­gage notes and work­ing with homeown­ers to either modi­fy the loans or help fam­il­ies re­lo­cate. In many cases, they try to ad­just loan pay­ments to re­flect the ac­tu­al value of a bor­row­er’s house in­stead of the in­flated val­ues many were as­sessed at be­fore the hous­ing bubble burst. Since 2011, MRF has pur­chased more than 1,000 de­lin­quent mort­gages in dis­tressed Ohio and Illinois neigh­bor­hoods.

Up­com­ing in­stall­ments will look at ini­ti­at­ives in edu­ca­tion, eco­nom­ic de­vel­op­ment, and pro­mot­ing up­ward mo­bil­ity.

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