Rethinking Lending

by Leslie Lytle, Messenger Staff Writer
Compared to traditional lending institutions, MoFi has radically different criterion for accessing who gets money and why they get it. President and CEO David Glaser addressed the community at a Nov. 28 lecture sponsored by the Babson Center for Global Commerce.
The mission of the Montana based financial institutions serving the northern Rockies “is to deliver capital to poor communities,” explained Glaser. Community Development Financial Institutions (CDFI) like MoFi have a “double bottom line, to create both social and financial return.”
“MoFi is a nonprofit, but we’re profitable,” Glaser stressed. “We don’t pay out profits to shareholders. We put the profits back into the organization.”
“In the past 40 years there’s been an accumulation of wealth in the top 5 percent of the U.S. population. Forty percent of Americans don’t have $1,000 in savings. They live on the edge worried every day what’s going to happen.”
Embracing the challenge of how to use capital to help those people, Glaser left his career as a business-minded environmental scientist and joined MoFi in 2010.
MoFi got its start making loans to startups and small businesses that had hit a rough spot. Banks frequently send MoFi clients who don’t qualify for bank loans. MoFi charges slightly higher interest than banks with the goal of “getting people to bankable as quickly as possible.”
Success in small business ventures inspired MoFi to look for other ways to help.
One was to assist initiatives qualifying for New Market Tax Credits that incentivize development in low income areas. A MoFi bolstered business created 220 jobs in a town of 1,000.
Consumer Small Dollar loans help people who would otherwise be victims of predatory lenders charging fees equivalent to 50-500 percent interest. A woman came to MoFi who was about to put her car up for collateral to repair her trailer so she wouldn’t get kicked out of the trailer park. MoFi made her a 2.5 percent loan she was able repay. If she’d borrowed from the predatory lender, she would have lost not only her car, but without transportation, lost her job and home.
MoFi focuses on clients’ willingness and ability to repay a loan, sometimes putting them on no interest to begin with.
Return on Capital loans assist trailer park residents in purchasing the land beneath their homes. People immediately begin improving the area with playgrounds and other amenities once they own the land, Glaser pointed out.
Another popular MoFi initiative is Home Now down payment assistance where clients receive the down payment for their home purchase as a gift or 30-year no interest loan.
“This is the product we’re most proud of because of the impact on everyday people like teachers, firefighters, and hospital workers,” Glaser said.
MoFi makes a small profit on the transaction by buying the mortgage from the bank then selling it to U.S. Bank which repays MoFi for their investment plus a small premium. U.S. Bank benefits by earning a boost to their Credit Regulatory Agency score.
A single bank incentivizing people to buy homes could lead to trouble like the 2008 housing bubble, Glaser stressed, explaining why U.S. Bank didn’t offer no interest loans on its own.
MoFi uses a logarithm with 99 percent accuracy to assess the likelihood clients will repay loans. But Glaser attributes MoFi’s remarkable .12 percent loss rate to two less quantifiable factors. One, MoFi’s classification as a CDFI gives the institution “flexibility,” freedom from banking regulations that enable MoFi to employee strategies like temporary no-interest loans where rates increase when people can pay more.

The other factor is even more subjective. Glaser predicts without it, MoFi’s loss would increase to 6-12 percent. “Each loan comes with love,” said Glaser.