A small lender sorts through the rubble of American finances

When Andy Posner visited Brandeis University on March 9 to give a talk, professors and students bumped their arms instead of shaking hands.

Having previously ignored the coronavirus, he now worried about all the ways the pandemic could upend the world and the shaky finances of his borrowers.

Within weeks, Mr. Posner stood right in the middle of the great decimation of American household finances. His small non-profit lender was inundated with loan requests from jobless and cashless people. Hundreds of other borrowers had stopped paying their monthly payments.

“Emotionally,” he said, “it was very devastating.”

Many Americans have spent years barely getting by, going deep into debt to pay for their homes, cars, and other necessities. Nearly a quarter of Americans had no money saved for a rainy day before the coronavirus pandemic, and less than half had more emergency savings than credit card debt, according to Bankrate.com surveys.

For those on the fringes of the financial system, lenders like Posner’s Capital Good Fund are a safety net — a place to get an affordable loan to buy a house or car or to cover an unexpected expense. But these community development financial institutions are only a tiny part of the banking system; In total, they have about $222 billion in assets, roughly the size of a regional bank.

Foundations, governments and banks have poured hundreds of millions of dollars into community lenders in recent months to help keep cash-strapped Americans afloat. It is not enough; millions of Americans have lost their jobs and fallen behind on their bills since the country went dark to fight the coronavirus.

Mr. Posner and his 30-odd Capital Good Fund staff watched America try to make ends meet in real time. Since mid-March, lender Providence, RI has given hundreds of borrowers a break on their monthly payments. He’s given loans to hundreds more — $300 here, $1,000 there — the money needed to keep the lights on in the absence of a paycheck.

For Mr. Posner, the crisis revealed a weakness in the American financial system: the overwhelmed American consumer. A debt burden that seemed manageable when everyone had a job became unbearable within weeks. Many of these obligations are suspended for the time being. Meanwhile, unemployed Americans are falling further behind.

“Americans don’t want to admit how precarious their financial situation is,” he said.

Mr. Posner founded Capital Good Fund in 2009, when he was 24 years old. In its 11 years, the company has granted nearly $11 million in loans and nearly went bankrupt three times in the process.

At the start of the crisis, Capital Good Fund had a year’s worth of cash, which put it in a good position to weather the pandemic. A recession, Posner said, is when companies like his prove their strength to donors and customers.

On March 19, the company launched a program to provide crisis loans to cash-strapped people. A day later, he told his nearly 2,000 borrowers they could defer payments for up to three months, no questions asked.

Mr. Posner works from his home office in Dedham, Mass. “Americans don’t want to admit how precarious their financial situation is,” he said.


Photo:

Kayana Szymczak for The Wall Street Journal

Kevin Smith saw the payment deferral email and called to request a break on his Capital Good Fund car loan. His consulting business in Miramar, Florida, was struggling during the shutdown. Her son lost his job as a personal trainer and her daughter lost her part-time job at a game room.

Mr. Smith has opted to pay interest only for the time being, bringing his monthly payments down to $76 from $298. He plans to catch up on missed payments at the end of the loan.

The crisis was a rude awakening for Mr Smith’s family of seven, who moved to the US from Africa in 2016. In good times, his steady income helped cover loans on three cars, including a BMW X5, and the occasional Friday dinner.

Now groceries should come from Target or Walmart instead of Whole Foods. Mr Smith has listed some of his cycling gear on eBay and listed his son’s leather jackets on Poshmark to raise funds. He maxed out his credit card to cover bills, dropping his credit score to around 590 from 640.

“I said, ‘This is where we are,'” he said. “You build a lifestyle around an income.”

Capital Good Fund aims to build a loan portfolio of $100 million by 2024; it currently has about $5.3 million. The crisis loan program would be one way to achieve this. The small loans, offered for amounts between $300 and $1,500 at an interest rate of 5%, could be used for almost anything. Reimbursement does not begin for three billing cycles.

Applications poured in. Homebound employees struggled to balance work and childcare. An employee was cursed by a woman who was rejected for a loan. Appellants confused Capital Good Fund with Capital One Financial Corp.

the for-profit bank.

In March, Mr Posner’s Capital Good Fund announced to its roughly 2,000 borrowers that they could defer payments for up to three months. He had a lot of takers.


Photo:

Kayana Szymczak for The Wall Street Journal

Leonor Tavarez had been a loan officer at the fund for barely a month when she started working from her home in Providence. Her mother, who lives downstairs, has moved up one floor to help care for Ms Tavarez’s seven-year-old daughter. Ms. Tavarez homeschooled her daughter while communicating with clients about their loan applications.

“There was a lot of concern in their voices, not knowing if they would be approved for the loan,” Ms Tavarez said. “I brought a client to tears because she was so upset and worried about her health and future income.”

Michele Hamed contacted the company in early April after her adult son found out about the online loan scheme. Her income dried up in March when the restaurant where she served closed its dining room. His son, a cook in the same restaurant, did not work either.

With two young children also living in their home in Jacksonville, Florida, their finances immediately took a turn for the worse. They ate ramen noodles and bought canned food and cereal from food banks. They drove as little as possible. They loaded toilet paper from the restaurant. “We’re not even middle class,” Ms. Hamed said. “We basically check live to check.”

She received a loan of $1,500 from the Capital Good Fund and her son received $500. They used the money to pay their rent and car loan and buy groceries while they waited for unemployment and stimulus checks to arrive.

On April 7, Capital Good Fund sent another reminder email regarding payment deferrals. The company had already halted payments on nearly 10% of its $5 million in outstanding loans. Mr. Posner predicted that this share could climb to around 15%.

Grant money was pouring in from foundations and banks, but Posner was worried. Many of its donors appeared to be advancing funds that had been earmarked for next year. That likely means less funding in 2021, and it’s not sure the crisis will be over by then. “I think it’s going to be terrible,” he said.

Low-cost loans are another way for nonprofit lenders to fund themselves. With interest rates close to zero, Mr. Posner and his board decided in mid-April that it was time to borrow more. “We want to suck in as much money as possible,” Posner said.

The Capital Good Fund granted 168 loans in April, surpassing its previous monthly record of 143. Most were crisis loans.

Mr. Posner continued to receive more and more requests for help, some from local governments. Could he set up a loan program to help people at risk of losing their health insurance? Could it help people threatened with eviction from social housing?

He had always thought of the Capital Good Fund as a place where people could come and improve their finances. But lately, it’s been like a food bank, handing out small loans that, like a bag of groceries, wouldn’t go very far in a crisis whose effects could linger for years.

“The nonprofit system has never been able to solve all the problems we have,” he said. “But at this point it starts to seem almost futile.”

As of Friday, the company had issued 273 crisis loans. Additionally, 240 borrowers had deferred payments on approximately $792,000 of loans, or 15% of the company’s portfolio.

The company had decided not to send a third notice to remind its borrowers that they could defer payments. Mr. Posner did not want to advertise the option to people who did not need it.

In the coming weeks, many of its borrowers will have to start repaying their loans or ask to extend the deferral. The hope is that they will be on a more stable footing. But companies have continued to lay off millions of workers and much of the economy remains shut down. Many jobs may disappear forever.

Capital Good Fund has increased its reserves against potential losses to 7% of the portfolio, compared to 4% before the pandemic.

Mr Posner is informally budgeting for borrowers to default on 15% of the company’s crisis loans. The company will suffer no loss as long as two-thirds of its borrowers get out.

“It all depends on whether people can go back to work, and I just don’t know,” he said.

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Write to Ben Eisen at [email protected]

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