This innovative idea can 'unshackle' poor people from payday loans and bad credit scores
José A. Quiñonez knows what it's like to live in the shadows.
Growing up in Mexico, Quiñonez was brought to the United States after his father was assassinated and his mother passed away from lymphoma, too poor to afford treatment. Quiñonez and his five siblings were split among relatives they barely knew, told to make themselves invisible and to do nothing that would bring attention to their illegal status.
"The fear of getting caught and deported permeated our lives for years," he wrote earlier this year.
It wasn't until President Reagan signed the Immigration Reform and Control Act that Quiñonez, who was awarded a MacArthur fellowship, or "genius grant" today, could fully integrate into society, going to college at University of California at Davis and then on to Princeton.
Today, Quiñonez is the CEO of Mission Asset Fund, helping low-income immigrants like himself who work and live in the informal economy and whose invisible status hinders their economic prospects.
In San Francisco's Mission District, Quiñonez began Mission Asset Fund's Lending Circles. The premise is simple: a small group of people chip in a certain amount of money every month, and each month, one person gets the loan until everyone has received one. The loan has zero interest, and the monthly payment is reported to credit bureaus to help participants build or repair their credit scores. This gives participants access to credit in the financial mainstream and helps them avoid predatory alternative financial services, such as payday loans, which often drive people deeper into debt.
This concept of lending circles is not new, but Quiñonez has built upon a widely used practice in the informal economy to give people more financial freedom. His work has led to the MacArthur fellowship — a $625,000 grant for fellows who have a "track record of significant accomplishment."
Today, Lending Circles has partnerships across the country. The model is active in 17 states and the District of Columbia.
I talked to Quiñonez about Lending Circles, the MacArthur Award, immigration and how his own experience drove him to help others.
You have written that it's important to help low-income people without belittling them and said that financial education is not the issue. Can you explain what you mean?
I think society as a whole, we have this belief that poverty is poor people's fault. We think that they are making a lot of bad choices — that the situation is only their own individual fault. And we come up with solutions that conform to that idea. Financial literacy, even the name itself, it's supposed to solve the idea that poor people are financially illiterate — that they just don't know enough. And so it's assumed that they don't know how to manage their money, or they don't know how to create a budget and all we need to do is educate them. And when you engage people with this premise in mind, you already set the power dynamics in terms of "us saving them."
When I look at my community, I know that people are truly financially savvy, particularly immigrants. They know more about interchange rates than any of us. A lot of them use multiple currencies, and they manage budgets in multiple households across countries. I'm trying to challenge this notion that poor people are somewhat broken; there's a lot more to them than we give them credit for. We're building around that idea and through that approach, we can help people more efficiently and more effectively without diminishing them.
How do you go about working with low-income people without diminishing them?
What we found is that particularly in urban communities, there's this rich tradition of people coming together and lending and paying money together. In academics, they call this a "rotating credit association." Informally, it's called tandas in Mexico or susus in Africa — it's a worldwide phenomenon has been occurring for millennia. What we're doing is recognizing the activity for actually what it is, which is a financial activity that is informal. What we're doing is simply formalizing it, so we can report that activity to the credit bureaus. By doing that, we're helping people build or improve their credit scores. By building perfect credit scores, we're opening up doors of opportunity into the financial market that otherwise they would not have.
These lending circles are the same thing that you and I do when we walk into a bank and get a loan and pay that back. The activity of paying back is exactly the same. The difference is that one is formal, which is recorded or reported to credit bureaus. The other one is informal, meaning nobody is recording it. Nobody is reporting it. Nobody is tracking it except the people themselves. The activity itself, it sort of disappears.
What they're doing is actually phenomenal when you think about it. Poor people are coming together and saving and then borrowing from each other. How crazy is that? They're poor. They're not supposed to have anything according to our conventional wisdom.
The real value we bring to them is by formalizing it, we're helping them build their credit scores, because they need that in order to be successful actors in the economy. You need a credit score. You need a credit report. So we're using that as a sort of bridge to get into the financial mainstream, but without diminishing their tradition. In fact, we're lifting that up and saying, "That's phenomenal. Let's build upon that."
How did you go about creating Lending Circles?
When I was starting the Mission Asset Fund, we had this very ambitious goal of helping immigrant residents in the Mission District improve their financial situation by improving financial security. How do you do that? The conventional wisdom at that time was another financial literacy class, and make sure that the brochures are nice and shiny. We said: "That's not going to work."
The question was: How do you help people who are poor, who have no checking accounts and have no credit and no credit history? So we needed to tackle these two significant barriers in a meaningful way. How do you engage people, particularly adults, who are busy and who have kids and have multiple jobs? How do you get them to come to you, so you can help them? We built around that notion, but we started with the really honest question: How do you help people in the margins of society, in the financial shadows? We then developed the idea to build on what they're already doing, which is lending circles. Then we came up with a concept that if we formalize it, then we can report it to the credit bureaus, and by doing that, we're definitely unlocking their potential. We began Lending Circles in 2008. Then we scaled that by partnering with other nonprofit organizations throughout the country, so they can deliver the program in their own communities, and we do the servicing of the loan for them.
Is it mainly still in immigrant communities or has it spread to other low-income communities?
We thought it was only going to work with Latino immigrants. But the idea of people coming together and helping each other is not owned by anybody. We all do it. One of our partners work with the San Francisco LGBT center, and they work primarily with white LGBT communities there. The program is working great with them as well, because they have a sense of community, of cohesion and social capital.
How much has Lending Circles grown?
So we started the program in 2008 with four people in one lending circle. The first three were family members and the fourth was a reporter who was really curious about the process and wanted to document it. That first group was lending each other $200 dollars a month for a total of $800. As of this past month, we just surpassed $6.2 million in loan volume. We made over 6,300 loans in the 2015 calendar year. We closed 2,300 loans in one year. And we've been growing significantly year to year to year, because of our partnerships, but also because of the map of organizations we work with, we're increasing our capacity to provide more and more loans.
Are the people joining lending circles doing so to avoid using alternative financial services, such as payday loans, or were they already making use of informal lending circles?
We have a full gamut. Some people join our program, because they want to have access to the zero-interest loan, so they can refinance high-cost loans, whether they be a credit-card loan or a payday loan or a car-title loan. And we want them to do that, because that gives them the room to recorrect their finances, so they can move ahead.
We have a different segment of people who use the program as sort of a forced savings habit, where they make a commitment to put $100 dollars in a month, and they're saving that $100 dollars and putting it away, or they're saving it as a down payment for a new house or for a car or just as a rainy day fund. And we don't limit the purposes; it's their money, and we just want to help protect it. And then there are other people who come to us who say they need to improve their credit score, because five years ago they foreclosed on a house, or they had problems with credit history sometime ago, and they need to repair or improve their situation.
And have you seen a number of people who have built up their credit score decide to continue with the lending circles even though they could get a credit card instead?
Within 12 to 14 months, on average, participants added two trade lines to their credit reports. Adding a trade line is like getting another credit card or another loan that gets reported to the credit bureaus. We think that's a sign of a success, because that means they are getting access to mainstream products that are being reported. So yes, they do get the credit cards, and some of them may not continue doing lending circles past the first one, which we think is OK. But about 25 to 30 percent of our clients come back and do a second and third lending circle. And about 10 to 15 percent continue on to do a third or fourth lending circle.
We don't put a stop to it, because those people who have two or three lending circles with us, they help us with the newbies. When they come into a lending circle and say, "Oh yes, I've done this the past two, three years," that gives people a sense of ease.
We conducted a study and found that about 30 percent of our clients start with zero, meaning they're credit invisible, and they have no credit report or credit history. And so they go from a credit score of 0 to 600 within 10 to 12 months. It's amazing, but it's normal. And so people who join our lending circles who have a credit score to begin with, their scores go up about 19 to 20 points. When we look at them as a whole, the average increase in credit scores is 168 points.
What's the next step?
That's still a big question. I think there's still a lot more that we need to learn and unpack about lending circles and the program. We're trying to do is demonstrate that there is definitely a better way to engage low-income communities — that we can be more efficient, more effective at helping them without belittling them. But I think we still need to unpack what we've learned about lending circles. For example, why is it we have such a phenomenal default rate? Why is that people are paying us back in ways that every bank would salivate over? And I think there's really something for us to learn there. Once we do, I'm hoping we can use that as an example for how we can engage poor people better. Because I think that in the current mode that's actually not good for anybody.
In your "Innovations Case Narrative," you write, "I was 20 when I realized my mother had died, because we were poor." Did that change you in some way, or did that realization drive you further?
It made my mind focus on the problem that poverty is a human construct. Poverty is something we can eradicate. My mom didn't die because God was mad at us or was punishing her or because she was this or that — it wasn't that at all. So I was able to understand there was a structural issue that led to my mother not getting proper care or no care, and ultimately, she died, because that was the economic situation of that day. And so when I was able to sort of realize that, I was able to hone my mind to "Well, this is the beast that I need to fight."
You've mentioned how President Reagan granting amnesty changed your life. And you've made the case that we need to allow people to come out of the shadows and to really be able to fully function in society.
I wanted to talk about what it means to be shackled, if you will, because I was undocumented, and I was taught to not say a word, to try to be unseen, and that would have severely diminished my potential. I would have never really fully developed as a human being or even as a contributing player and actor in our society if it were not for getting amnesty in 1986. And I think the same could be said about the millions of people in our country right now that are forced to be in the shadows or forced to live life in fear. Immigration reform can be a huge, it would be a huge uplift not just for the individuals, but for the country as a whole. I think we are diminished every day when that doesn't happen.
Is there anything else you think PBS NewsHour readers should know?
I'm deeply honored by the award and the recognition, and that type of recognition doesn't really happen for people like me — people who have lived in the shadows, people who have struggled. It doesn't happen.
But it really is a recognition of the ingenuity of poor people and what they have to do to survive and thrive in life. I come back to that idea, because it's not about me or my work; we are just lifting up the things people are already doing in their lives to survive and thrive. I think we need to a different narrative too, because the narrative of immigrants today is horrible. People think we are coming here to rape or pillage or whatever they say, and that is not true. There is so much more to our experience and our contributions to the country, and I hope this award, this acknowledgement can help us set a different narrative about our experiences here.
Editor's Note: The text has been edited for clarity and length.