Is This the Solution to Predatory Lending We've Been Waiting For?

“Of all the loans we make, immigration loans are my favorite. My mom is an immigrant and we are a nation of immigrants. What can be better than empowering them to fully participate in our democracy?”

This is Andy Posner on Facebook, sharing why he believes in the work he does as Founder and CEO of the Capital Good Fund, a nonprofit lender based in Providence, Rhode Island. Posner has big plans for Good Fund and is in the process of raising $4.25 million in investment capital to scale up the enterprise.

The bulk of loans from Good Fund go to people with income under $25,000, offering them a rate of interest that undercuts the competition—payday lenders—by huge margins.

From car repairs to security deposits and immigration expenses, Good Fund makes loans from $300 to $20,000, and provides other services such as financial and health coaching. Good Fund also documents the stories of its borrowers—college students, single mothers, elderly people—showing exactly who is benefiting from its services, and how. In 2015, 68 percent of its loans went to women, and 69 percent went to non-Caucasian borrowers.

“I started by learning about the need for credit in the community, and one of the first things I learned was that many people want to apply for citizenship, but don’t have the money to do it. It’s $680-plus legal fees, so that’s what our first loan was for," said Posner, in a recent interview with Inside Philanthropy at the Capital Good Fund's Providence headquarters.

The nonprofit has spent the past six years building a suite of financial products and the staff to disseminate these products to the community. The small CDFI lender has now made almost 1,300 loans totaling $1.5 million, and has a 92 percent repayment rate. "Our $300 loan is at 35 percent APR. That is only $60 in interest to the borrower, but it’s hundreds of dollars less than a payday lender charges. No one does this the way we do it, at our prices."

Microfinance is hardly a new idea, and there's now a long history of both nonprofit and for-profit lenders making small low and unsecured interest loans to poor people. But here's the thing: Most of that lending has occurred overseas, in developing countries. Meanwhile, here in the United States, payday lenders and other predatory actors dominate the market for small loans, trapping millions in a cycle of high-interest debt.

Philanthropy has been fighting this problem for years, as we often report, looking to change policy and back financial literacy, often with limited impact. What the Capital Good Fund offers is a solution that is potentially far more powerful and scalable: better loan options for low-income people. It's not the first player to bring microfinance to the U.S., but given all the interest in impact investing right now, maybe the stars are finally aligned to mobilize real capital behind this market-based approach.

Good Fund's results should be encouraging to would-be backers. Most of its clients show measurable improvements in their finances within six months of entering into services. In 2015, clients reported an average credit score increase of 73 points, and a 68 percent decrease in use of predatory loan services.

Beyond his important focus on lending to the poor on fair terms, Posner has strong ideas about how nonprofit organizations can do a better job at raising capital to advance their mission.

By borrowing from investors who wants to make a decent return, Posner is gradually increasing the capacity of Good Fund to make more loans to low-income individuals trying to get on the first rung of the ladder to economic security. So far, Good Fund has borrowed $730,000 from 50 social investors toward the goal of $4.25 million, and has made ten new hires this year to scale up.

“A lot of nonprofits don’t realize it, but along with raising money from grants and donations, they also have the capacity to raise investment capital through a tool called a Direct Public Offering,” Posner said.

For those not schooled in financial lingo, the Direct Public Offering is kind of like the original crowdfunding mechanism. The DPO allows investors to loan money to enterprises so that they can scale up and become self-sufficient. Good Fund has been paying social investors up to 6 percent.

“One of my goals is to make the nonprofit world aware of the DPO as a mechanism, so they can start thinking about how they can use it to achieve scale.”

How did Posner get into all this? In 2008, he was at Brown University, studying for his Master’s degree in Environmental Studies when the Great Recession hit. While learning about financing mechanisms for clean energy, he also became concerned about the devastation the financial crisis wrought on low-income communities.

“I wrote my Master’s thesis on how to reduce environmental damage and move people out of poverty. That’s one reason why Good Fund has an energy efficiency product.”

Good Fund’s energy efficiency loan has found a way to address two of society’s most pressing needs—reducing energy inefficiency and building economic security in low-income communities. Low-income borrowers get no-interest loans to do upgrades or repairs that make their homes more energy efficient. The Good Fund gets paid the interest on these loans by Rhode Island’s utility company. “It’s a great program for the community, and it’s actually a revenue generator for us as well.”

Posner is also drawn the social enterprise because, like so many others, he sees major limitations for the nonprofit sector because it is only able to access roughly $375 billion in annual charitable giving in the U.S. “If the nonprofit sector could tap into the capital markets, and get below-market-rate social investment money, it could transform the sector.”

While Good Fund has big plans for expansion, including to Florida, Posner is a realist about the ability of microfinance to solve poverty by itself. “Microfinance is not a silver bullet, and in most cases cannot, on its own, bring a family out of poverty,” he said. “What it can do, however, is reduce financial insecurity and stress, create a backstop against financial crisis, and connect borrowers with other community resources in order to maximize social impact.”