Last week, millions of Americans were disappointed when President Bush announced he was freezing interest rates for a small number of certain subprime loans. The subprime lenders' practice of targeting "at-risk" borrowers and charging them higher than average interest rates that ballooned over time left a wave of foreclosure and bankruptcy in their wake. Instead of boosting our economy, lending companies left both their borrowers and themselves in a greater financial crisis, and even with President Bush's interest rate agreement, millions of people across America are being forced into foreclosure. Here in New York, tens of thousands of people are facing the loss of their homes.
Some have been quick to write off the failing loans as what you get for lending money to risky borrowers. But it's the predatory practices of these lenders that are at fault, not the borrowers themselves.
The funny thing is, my organization has been lending money to the same "risky borrowers" for ten years - New Yorkers with low incomes, bad credit history, or no collateral. Granted, we give small business loans and not mortgages, but our borrowers are in the same neighborhoods that are now seeing an almost 50% rise in foreclosures. Yet, our loan recipients are not going bankrupt - in fact they, and we, have done quite well, with an impressive 92% repayment rate for our loans over a period of 1-2 years.
So why have we succeeded where others failed? Well, for one reason, because we based our business model on opportunity, not failure.
As we all know by now, subprime lenders target "less than desirable" borrowers who would otherwise have a difficult time getting a loan, and slap them with a high interest rate. Then they bundle that loan together with a number of others, including less-risky loans, and sell shares of that package to investors - banking on their chances that while many borrowers will default, the 'safer' loans combined with the high interest rates risky clients pay will make up for any other lost money.
Our loans have low, reasonable interest rates, so that our borrowers can actually repay them. We give our loan recipients the tools to come out ahead, by teaching them business skills and helping them develop a business model and loan repayment plan. We give our borrowers a support network in addition to their loan -- doing all that we can to not only help our recipients repay their loans, but to turn their loans into a bright future.
Subprime lending institutions targeted low income and middle class people by selling them the promise of the American Dream, complete with a two bedroom house and white picket fence. Yet it pulled the rug out from under them - leaving their customers bankrupt, homeless, and even further away from where they'd started. Now, with millions of dollars of losses and whole lending arms folding, the lenders are paying the price too. Maybe next time they should work with the borrowers, not against them.
Arva Rice is the Executive Director of the non-profit microlending group Project Enterprise. She lives in Harlem.