How We Did It
While living in Tacoma, WA from 2009 – 2019, I struck up a friendship with Jamie Strayer. Jamie, now the innovative and creative force behind the wonderful show Opportunity Knock$, founded Credit Union Strategic Planning— a credit union consulting firm that writes grant applications for credit unions to become Community Development Financial Institutions, designated by the US Treasury Department as such. CDFIs receive grants from the program for loan capital, loan loss reserves, technical assistance, etc., so that they can do special purpose lending in low/moderate income communities.
When a financial institution makes a loan, their decisions are monitored by State and Federal regulators. Banks and credit unions make loans at such a high volume that they depend on credit scores as an easy way to decide how much “risk” their loans carry. If they made loans without being cautious about whether borrowers will make payments, in theory it could lead to too many defaults, and then in theory the financial institution would lose too much money on loans, which in theory could collapse the bank and threaten financial systems. A higher credit score tells the financial institution that in theory “this person doesn’t have too much existing debt, they pay their bills on time, they successfully carry BIG bills like mortgages on time,” using an algorithm that deems the borrower, in theory, “safe” to lend to. Instead of getting to know a loan applicant and learn about their ability to make payments on time, banks and credit unions can save money and staff time looking at a credit score and saying “yes” or “no.” This way, they can easily show their regulators that they aren’t performing activities that deviate from what’s an acceptable level of risk.
Unfortunately, these “theories” produce a credit scoring system is racist and classist. Usually, you’re not scored on things like on-time rent payments, and since, for example, Black homeownership rates are much lower than white home ownership rates, and mortgage payments are factored in while rental payments are not, white households are advantaged. Additionally, credit scores depend on savings and current assets, and Black and Brown household have less inherited wealth and fewer assets than white people.
The CDFI program provides money to financial institutions to mitigate some of these factors. Loan loss reserves offer collateral so the CDFI can pay itself back if someone defaults. Funds for technical assistance allow CDFIs to hire staff who can spend more time with a borrower to get to know them and asses their default risk without relying solely on a credit score. Grants for loan capital and technical assistance hires are from a government— so the CDFI doesn’t have to pull from their own assets, therefore satisfying regulators— because funds are “house money,” not a risk to deposits.
Jamie introduced me to all of these concepts in 2014 when I was working in the Pierce County, WA emergency food system. She taught me that the Treasury Department had an aligned program related to healthy food access too (the HFFI Program). She introduced me to a VP at Harborstone Credit Union who was interested in working with community-based orgs like a CDFI might, and we had some lunches together.
A year later I became the Executive Director of my own small agency. When I took over, the agency was struggling. We did all kinds of things with a very small staff and tiny grants, like SNAP outreach, Affordable Care Act enrollment, free tax prep, rental assistance, Project Homeless Connect, and other small programs. I had a grant for just a .25 FTE from HUD for a part-time housing counselor who did homebuyer education classes. I thought maybe I could find funding from banks and foundations for this person to teach financial literacy classes, so I went door to door to raise funds. I wrote down a business plan and in phase 2 of that plan, I wrote “small business loans.”
In one meeting with the Russell Family Foundation and the VP there at the time, Henry Izumizaki, he noticed “small business loans” on my page and asked about it. I told him I was thinking maybe loans of around $5,000 - $25,000 to help startups. Henry said, “get back to me about what you would do with $250,000 around small business lending.”
I immediately called my contact at Harborstone Credit Union, John Renforth, and met for coffee. John said “what if we put that $250,000 into loan guarantee and we loan 5x times that amount?”
I called some colleagues (strong thought partners like my colleagues Brian Humphreys and Petra Perkins) and convened a meeting of local agency folks and community members on the Hilltop in Tacoma. About 25 people showed up to discuss small business lending and what we could do with $1 million. To my surprise, most people in the room said that we should not do business loans. They said people need consumer loans to help them remove barriers to exiting poverty, loans in the $500-$1500 range for things like paying off parking tickets to get a suspended drivers license back, or ways to consolidate predatory loans, or credit building loans.
I went back to John at Harborstone with this, and he told me the problem with this idea is that the cost of underwriting small loans is too high. It takes staff time to go through the underwriting process, and time means salaries, and that it costs the credit union just as much to underwrite a $500 loan as it does a $50,000 loan, but the $50,000 loan promises a big return and the $500 loan isn’t worth a financial institution’s time.
At this point, I was starting to feel like I needed to learn more about micro-lending. I spoke with a local philanthropist whose church did micro-loans, but they had no way to hold borrowers accountable to repayment, which made him jaded and judgemental. I researched Grameen and Kiva, but realized they make a big impact because in developing countries, a $2000 loan can make a huge difference, leading to multiple hires and successful revenue streams, but $2,000 in North America doesn’t scale in the same way due to higher costs of living.
Then, I thought about our .25 FTE HUD Housing Counselor. This person understood household finances and I thought, what if my staff member could do the underwriting for free for the credit union? A cash flow analysis based on a close, one-on-one relationship with the borrower, with the counselor seeing bank statements and credit card bills and household debt— wouldn’t these steps be a better indicator of the likelihood of repayment than a FICO score and credit check? John had a left Harborstone by this point, and Jamie introduced me to Jeff Ivey, his successor. Jeff thought it could work, but we would need a loan guarantee, and we would need to train our counselors well and build trust at internally at the credit union.
It took a year. I never got the full $250,000 from Henry but they did contribute to the initial pool of funds when a local donor named Rick said he liked the concept and pledged $10,000 in matching funds. We raised about $25,000 for our initial loan guarantee fund.
Then, an interesting thing happened. The CEO of the Tacoma Housing Authority, Michael Mirra, wanted clients with housing vouchers to have access to special loan products through our effort, so he provided Sound Outreach with full funding for an FTE with the understanding that my agency would hire and train the individual (eventually as an AFCPE-accredited financial counselor) who would work exclusively at THA. The City of Tacoma liked the concept and provided $75,000 in CDBG funding so I could hire a program manager.
THA was very patient with our developing credit union relationship and paid for an entire year of just financial counseling without the micro-loans. By the time we reached 2017, our THA financial counselor had such good results with clients, even without a single loan available (yet), that it became clear that the financial counseling was just as valuable to our partners as the loans.
After one year of Harborstone and Credit Union Strategic Planning working on product development and trust-building meetings, underwriting trainings, and privacy agreements and MOUs between my agency and the Credit Union, Harborstone Credit Union came through with a credit-building loan, a $1,000 emergency loan, and a fantastic auto-refi product that could take a predatory “buy-here, pay-here” loan at 29.99% APR and bring it down to 13.99% (to start) through the credit union, saving our clients in some cases $200 each month. This was all based on the borrower’s history of on-time payment at the predatory rate, not because of a credit score.
Other agencies started paying for Financial Counselors. United Way Pierce County funded a few for various workforce agencies as part of their LISC-supported Financial Opportunity Centers. The Port of Seattle/Tacoma paid for one to work with their bilingual drivers in need of engine upgrades, a local Technical College paid for one for a retraining program, JPMorgan Chase paid for one to work with artist/entrepreneurs. The City of Tacoma paid for one to work with seniors on fixed incomes. By 2019, we were on our way to 12 FTEs of financial counselors as I was leaving Sound Outreach to move to Toronto. Jamie and Credit Union Strategic Planning helped Harborstone receive a $776,000 CDFI award based on this partnership.
This work is all replicable, with time, funding, and patience, and an entrepreneurial community-based organization. I’m hoping it can pick up steam in Canada (no CDFI infrastructure here YET), and hoping more communities in the US explore these partnerships and models.