Detroit Free Press
August 31, 2017
Gloria Joiner has a credit score that’s sitting around 572 — smack in subprime territory —- as she takes her first steps into what’s called the Lending Circle.
As part of the circle, a small group meets and agrees to chip in a set amount each month — maybe $50, $100 or $200 — that will be used to make loans to one another. What’s key is that the program has been set up so that monthly payments will be reported to credit bureaus. As a result, many participants hope that the process will help them raise their credit scores by 100 points or more.
More than 7,000 people have participated in about 800 Lending Circles connected to nonprofit organizations across the country since the program began in 2008. About $7.5 million has been loaned. Lending Circles are operating in about 30 cities.
In metro Detroit, the program has been offered through Detroit-based Southwest Economic Solutions since last year. It is open to people in Wayne, Oakland and Macomb counties.
To date, 56 loans totaling $61,500 have been made through Lending Circles associated with Southwest Solutions. None of the participants have defaulted or had a late payment reported to credit bureaus.
“People don’t think that poor people will follow through on their commitments, but they actually do,” said José A. Quiñonez, founder and chief executive of the Mission Asset Fund, a San Francisco-based nonprofit that launched the Lending Circles program in 2008 as a way or consumers who are on the financial fringes to build better savings habits and stronger credit and ultimately, to find their way into mainstream banking.
“People actually want to help each other,” he said.
Quiñonez said that credit scores on average have risen about 165 points for those in Lending Circles programs.
The default rate for the program, based on a two-year evaluation, is 0.7%, Quiñonez said, which is much less than some 15% default rates through other micro-lending programs run by nonprofits.
About one-third of participants across the country have no credit history, perhaps because they’re young or immigrants. Others are dealing with tarnished credit.
A good credit score is vital to improving financial health.
Joiner, who lives in Pontiac, is happy to have had a job at a Ford plant for the last 17 years and glad to be making good money. But Joiner told the small group gathered at a Southwest Economic Solutions office in Detroit that her credit is bad following a divorce, and that she’s doing whatever she can to get her score closer to 700.
As part of the plan, Joiner and five others in this Lending Circle — which members dubbed “Detroit Strong” — are committing to having $50 automatically withdrawn from their bank accounts each month for the next six months.
The structure of the loan program is a bit different from that of other loans. No one repays a lump sum. Instead, members contribute to a pool of money that essentially gets loaned to another. Each member in this group will receive a single 0% loan for $300.
But what’s important to understand is that only one person at a time receives $300. At the first meeting, the group decides who gets the first $300 loan, the second and so on.
Because there are only six people in the “Detroit Strong” group, the first person receives the loan for six months but others receive a loan for a shorter time. For the last person, the program is more like forced savings because they’ve already contributed money for several months without receiving a loan early in the game.
A bigger circle — say with eight members — would run for eight months. The size of the loan can vary, too, based on the size of the group and members’ ability to make a set monthly payment. Some groups decide they can afford to pay $100 or more a month.
In January 2016, Southwest Solutions, JPMorgan Chase and the Mission Asset Fundannounced the launch of Lending Circles in metro Detroit. Chase has provided the Mission Asset Fund with $2.11 million since 2013 to develop and expand its peer-lending model to more communities across the country.
“If you have bad credit, it’s going to be hard to get a loan,” said Libby Palackdharry, director of financial stability programs for Southwest Solutions.
Southwest is one of more than 50 nonprofit providers in the Lending Circles program — and the first and only nonprofit to provide this service in Michigan. People can sign up to participate at LendingCircles.org. One can send an e-mail to email@example.com to learn more about the program, as well.
Southwest Solutions, a United Way for southeastern Michigan funded organization, offers financial coaching programs, home buyer education classes, foreclosure counseling, entrepreneurial training and other services. Southwest Solutions has three main branches — Southwest Counseling Solutions, Southwest Housing Solutions and Southwest Economic Solutions.
Hector Hernandez, executive director of Southwest Economic Solutions, said the Lending Circles program is open to any adult in metro Detroit who wants to build his or her credit in order to reach financial goals.
“The ability to leverage credit is vital for individuals and families to achieve economic success by investing in home ownership, advancing their education and career prospects, starting a small business and more,” Hernandez said.
Joseph Lauchlan, who is leading the circles and is the lab coordinator for the Adult Learning Lab at Southwest Economic Solutions, said that when clients enroll in any of the Southwest Economic Solutions programs, “we try to gauge whether they are interested in any other services, such as the Lending Circles program.”
The Lending Circles program is discussed at home buyer education classes and money management workshops, for example.
Before being able to participate, applicants must provide proof of ID, a voided check with a routing number that can be used for setting up an automatic payment each month and proof of income, such as two months of pay stubs or three months of bank statements.
Lauchlan said the program does not prevent anyone from participating based on a current credit score.
He said the program will review a person’s expenses, such as student loan payments and credit card bills, to make sure that the applicant is not taking on a financial obligation through the program that he or she wouldn’t be able to meet.
As part of the Lending Circles program at Southwest Solutions, participants are asked to attend one meeting to make the group decisions, such as how loans are paid out. The first meeting is also when participants sign paperwork involved with the loans. But everything else — including loan payments and distributions — takes place remotely, Lauchlan said.
Participants must complete an online financial education program and a short survey. Members in the Lending Circles are required to have checking accounts. As a result, no cash changes hands. Some people who might not have had a bank account find another reason to take a step into the mainstream financial system by opening a checking account.
“We are looking at growing the program, specifically by offering a Lending Circle exclusive to participants in our business training program known as ProsperUS Detroit,” Lauchlan said.
Southwest Solutions has run seven Lending Circles so far. Two groups had 12 people each; but other groups have had six or seven people.
The first group called itself “Mitten Money.”
Hard-luck stories abound in metro Detroit and elsewhere. Figuring out the right way to rebuild one’s credit can help someone get a far better interest rate on a car loan, rent an apartment, qualify for a mortgage and get on a better financial footing overall.
What’s key about the Lending Circles platform is that every on-time monthly payment is reported to the credit bureaus, enabling group members to build a stronger on-time payment history and a higher credit score. It’s a new way to rebuild credit and get access to a short-term loan without a sky-high interest rate.
The more on-time payments, the stronger the payment history and the larger the impact on one’s credit score. Chase said it supports the program because it has proven to be one that can build on-ramps to mainstream financial products.
If someone has an established credit history, Lauchlan said, he’d expect that their average increase on a credit score may be 80 points to 100 points after participating in Lending Circles for 10 months to 12 months. Sometimes, people participate in one Lending Cirlces group and then another.
If someone has no established credit history, the average increase will be much more dramatic, experts said.
Sometimes people do default when their lives are disrupted, such as when they lose jobs or are deported, Quiñonez said. But the structure of the program maintains that people still participating in the group will get their loans. The program has raised funds to create reserves to cover losses.
Quiñonez noted that some online lending groups have emerged since he developed the idea for the Lending Circles. But many of those services target millennials or others, not poor people, and the other groups often charge a fee for their service, he said.
The Lending Circles program, he said, is founded on the idea of respecting people and realizing they have a free choice. By holding an initial meeting, people who are members of a circle get a deeper understanding of each other and their individual financial goals.
Janis Bowdler, head of community development for JPMorgan Chase, said participants in the circle are accountable to one another and realize that how they make payments will impact others in the group, as well.
The program helps build participants’ muscle for habits such as regular savings and timely bill payments, too, she said.
For those who lack credit histories, or what some call the “credit invisible” consumer, the circles have a lower bar to entry than trying to save $300 or $500 upfront for a cash deposit and paying an annual fee to open a secured credit card to establish a credit history.
When the Detroit Strong group first met in early August, participants talked about the bills and objectives of each member. They decided who in the group had the most pressing financial need and who should get their loan first.
One woman needed help toward a down payment for buying a used car; another had trouble making rent and juggling other bills.
The group easily decided that the woman who needed to pay her rent would receive the first loan of $300 in late August.
Many of the members in this group, including Joiner, say they can wait a few months to receive their loans. Getting the first loan means you have access to cash for a longer time, while waiting four or five months into the program means you’ve paid more money upfront and it’s more like forced savings. But signing a promissory note means your payments are picked up by credit bureaus.
One man in the group admitted his student loan debt is in the six-figure range. About half of his paycheck goes toward those student loan payments. But he said he’s willing to wait on the loan, saying he’s mainly working on the program to rebuild his credit score. He will get his loan in January.
One loan is made each month and the timetable for who gets a loan in what month is set at the first meeting. There aren’t any restrictions on what the loans can be used towards — and some will use this as a way to save.
Leo Altman, 66, who lives in Detroit, said he had no credit history after 28 years in prison and needed help building a history.
Rodney Wheeler, 60, who lives in Wayne County and has a building maintenance job, said he is focused on rebuilding his credit after dealing with a divorce and other family-related challenges.
He was part of an earlier Lending Circles group that had agreed to set aside $200 a month and he used what was a $1,400 loan to deal with a legal matter. He said working with that group and other efforts helped him add about 100 points to his credit score, which started out at 537. He wants to continue working on his credit score.
Wheeler would like to use some of his loan now toward buying tickets for the UniverSoul Circus at Detroit’s Chene Park. He sees getting his loan in October as a way to save toward that goal.
“It’s like setting up a budget for you,” Wheeler said. “It’s like a forced piggy bank.”