Sandra Carillo was 12 years old when her mother, a single parent in Zacatecas, Mexico, moved the family to San Francisco, seeking a better life.
She now has three degrees from San Francisco State University, but when she wanted to turn a shirt screen printing hobby into a small business, a low credit score prevented her from getting a business loan. Her fashion label, Friscolitas, has a growing clientele attracted to its style and roots in the city’s Mission District, a rapidly gentrifying neighborhood fighting to remain a cultural center for the Latino community in San Francisco.
Carillo recently received a small, zero-percent interest loan from the Mission Asset Fund (MAF), located right in the neighborhood. She’s using it to build her label’s website. Even more importantly, as a result of receiving and making payments on her small loan, Carillo’s credit score is now above 800, positioning her to access larger business loans from other lenders.
Carillo is one of over 4,079 borrowers, across 17 states, that have benefited from MAF’s work so far. MAF borrowers have accessed $5 million in zero-interest loans, improved their credit scores by an average of 168 points, saved an average of $360 per loan in interest and fees, and unlocked an average three new sources of credit. Many use their loans to pay down debt, resulting in an average debt reduction of $1,000 per borrower.
In recognition of MAF’s unique lending model, and impact so far, founding CEO José A. Quiñonez was named one of this year’s MacArthur “Geniuses” last week.
“The broader context of our work is that people are hardworking, struggling, not earning enough to pay their bills or pay their rent but just because of that it doesn’t mean they’re not credit worthy,” says Quiñonez.
Rather than injecting new capital into these communities, MAF utilizes lending capital that’s already there, through a structure that is familiar to many U.S. immigrant communities: lending circles. Among Latinos, they’re often known as tandas. West Africans call them sou-sous.
The lending circle concept is simple. For example, 10 friends get together on a monthly basis, each paying $10 into a pot, and every month one of the friends gets a turn to have the pot of money to spend on whatever they might need. The expert jargon name for it is a “rotating savings and credit association,” or ROSCA. In the landmark 2009 book Portfolios of the Poor, researchers showed how ROSCAs emerged and operated organically among economically marginalized communities in India, Bangladesh and South Africa.
“When I was growing up, everybody knew about tandas,” says Quiñonez, the fifth of six children born in Durango State, Mexico. His father was murdered when he was 2, and after his mother died of cancer, he landed with extended family in San Jose, California, where Bay Area Latinos also form tandas.
“I grew up around people who are working hard not just to survive but to thrive, but their contributions to the economy or society are always ignored or downplayed or discounted,” says Quiñonez, who is now 45. “When I got into this particular job, I was able to start with that in mind, that there’s a lot more to people’s lives than we give them credit for.”
MAF was founded in 2007 with the help of $1 million from the San Francisco-based Levi Strauss Foundation, and kicked off with a survey of Mission District residents that found 44 percent of all households had no credit scores.
According to the Consumer Financial Protection Bureau, as of 2010, 26 million consumers in the United States have no credit records, representing about 11 percent of the adult population. Another 19 million consumers, or 8.3 percent of the adult population, had credit records that were treated as unscorable by a commercially available credit scoring model. Almost 45 percent of consumers in low-income neighborhoods lack credit histories or have limited credit histories. As a result, many families turn to predatory financial services like payday lenders, which have almost as many locations as McDonald’s and Starbucks combined. The Mission District today is still littered with payday lenders, pawn shops and other historically predatory financial institutions, sharing the same sidewalks with banks, credit unions and other nonprofit lenders including MAF.
“The conventional wisdom is that a lot of folks in the nonprofit world, they think with just another glossy brochure or an injection of capital we’re going to nudge people this way or that way and save them,” says Quiñonez. “We said let’s reject that, because it’s based on the idea of the deficit model of looking at people. Instead we said there’s a lot of good that’s happening in people’s lives and we don’t even recognize that, it’s not visible to us.”
Taking inspiration from Hernando de Soto’s The Mystery of Capital, Quiñonez took MAF down a less traveled path: formalizing the informal as a development strategy. Starting in his country of Peru, de Soto popularized the idea that the key to wealth creation for the poor was formalizing the informal property rights they had established among themselves, in urban slums as well as far-out rural areas. He advocated that with a formal title to their land — literally just a piece of paper — the poor would gain a bit of economic stability and also gain access to collateral for a loan. The idea has not been without its critics or shortcomings, but it has inspired a global movement to formalize the informal property of the poor as an equitable economic development strategy.
MAF’s model formalizes the lending circles that economically marginalized communities have been using all along.
“Here’s an opportunity to enact de Soto’s idea in the context of the U.S. This is really his idea embodied,” Quiñonez says.
MAF clients start by taking a brief online literacy course, then get placed into a lending circle with six to 10 other people who begin by meeting in person to decide on a loan amount. Everyone in the lending circle makes the same monthly payment, ranging from $50 to $200, funding a loan for one member of the group that month. The loan rotates each month to a different participant, until everyone in the lending circle has a shot.
After completing the program, many participants establish credit scores for the first time or improve damaged ones. About 35 percent of lending circle participants subsequently join a second lending circle, 20 percent have subsequently joined a third, and 10 percent have subsequently joined more than three lending circles.
MAF’s innovation was figuring out how to connect lending circles to the credit bureaus.
“We didn’t go to the credit bureaus and tell them ‘oh look at how these exotic brown people do this or that,’” Quiñonez explains. “What we did was create a promissory note, just like what you and I would sign when we get a loan from anywhere, a legal document that formalizes informality.”
From the credit bureau’s perspective, MAF is the entity making the loans. MAF is the lender of record on each promissory note, meaning MAF must verify identities of borrowers (using government-issued IDs, individual tax ID numbers from the IRS or social security numbers when they’re available), collect data on when repayments get made and if they’re on time, and report it to credit bureaus.
When you think about it, it’s not that far-fetched compared to what a regular bank or credit union does, pooling customers’ savings and making loans and investments out of that pool. Lending circles are essentially the same structure, scaled down to a small group of people who have a face-to-face relationship.
MAF uses its own capital to guarantee every loan that gets made using the lending circles structure. So far, they haven’t had to spend down very much of those capital reserves. MAF borrowers have a default rate of 0.7 percent (typical consumer loan default rates hover around 3 percent).
In order to scale beyond the Bay Area, rather than opening separate offices and staff, MAF partners with other nonprofits. So far, 53 other nonprofits across 17 states plus the District of Columbia partner with MAF to provide lending circles.
“If we just sat on this idea ourselves, we wouldn’t have the ability to work anywhere outside of San Francisco,” says Quiñonez. “We said let’s partner, like a franchise model, and let a thousand flowers bloom.”
Partner nonprofits originate loans by doing outreach and forming groups to go through the process, while MAF issues the promissory notes and handles the data collection and credit bureau reporting on the back end. Partners pay a fee to help with the cost of handling the data collection and reporting. (MAF won’t disclose the fees, as they are negotiated on a case-by-case basis.)
By establishing or improving credit scores, MAF’s model aims to crack the only nut that Quiñonez says can really meet all of the financial needs of marginalized communities.
“It’s a completely different strategy than saying we’re going to come up with loan capital of $2 million and lend that out. Our community needs more than $2 million, they need billions of dollars, and who has that? Banks and credit unions,” says Quiñonez.
The Equity Factor is made possible with the support of the Surdna Foundation.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.