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.