In the last year, Jessica Ortega has qualified for multiple loans now invested in growing her housecleaning business. While qualifying for a loan is an accomplishment for any business owner these days, it’s an especially big one for her considering 15 months ago she had absolutely no credit history.
Now Ortega is just one of more than a hundred borrowers that are quickly spreading word throughout the Bay Area’s Latino community of Cestas Populares, an interest-free and fee-free lending circle program created by the Mission Asset Fund a year and a half ago.
Each lending circle, or cesta, draws together groups of friends, families and community members to make equal deposits of money into a bank-insured pool. Members then take turns borrowing the entire pool of money interest-free to pay off large bills while building and improving credit scores.
Clamoring to borrow the program’s interest-free loans are the district’s low-income and predominately Latino immigrants whose poor or non-existent credit history often leaves them vulnerable to pay-day loan lenders. Now the cesta program positions them as financial trend-setters because there is no other insured lending model like it in the nation.
“It’s crazy. We’re getting more and more people every month I think through word of mouth,” said Lorena Melgarejo, community engagement program director for the Mission Asset Fund.
Now the Mission Asset Fund is preparing to show the lending program has the potential to increase immigrant communities’ access to credit on more than a regional level, said Jose Quinonez, director of the origanization. Starting in June, the program will be run through Citibank instead of the smaller Oakland-based OneCalifornia Bank.
“Working with Citibank is going to give us the flexibility to work nationally and ultimately gives us a larger infrastructure to work with,” Quinonez said.
Since its creation, more than a 170 cesta loans have been made, totaling more than $216,750 to more than 155 participants. Loans average about $1,271 each and there’s been a zero default rate. Most borrowers have seen their credit scores improve at least 49 points in three to six months time, according to Mission Asset Fund figures. If participants had used a credit card or personal bank loan to get the same amount, the fund estimates they would have paid $21,623 or more in interest and fees. And that figure is conservative since fund leaders believe that most participants would have been forced to either go without credit or turn to sky-high interest loans from payday lenders or loan sharks.
The concept for the lending program is an old one based on informal lending systems that go by a variety of names throughout the world, including “tandas” and “cundinas” in Central America, “susu” in West Africa and the Caribbean, and “hui” in China.
In such informal systems, however, the only guarantee someone won’t run off with the money is the social pressure established by the members’ personal relationships. Latino immigrants who continued using such informal lending circles in the United States also weren’t improving their credit history with it.
Enter Quinonez, who said he thought that was a shame because 44 percent of Mission District households have no credit history and 50 percent of Mission Latinos have no bank account, according to a 2008 report completed by Social Compact, a non-profit agency.
So the Mission Asset Fund formalized the lending circle system with insured investments and credit reporting through the backing of Oakland-based OneCalifornia Bank, which specializes in funding non-profits and low-income populations. Borrowers also have the convenience of managing payments and direct deposits online.
Each cesta is customized by the number of people in it, the amount regularly deposited, and how often people deposit into it. For instance, in a cesta of four people, each contributes $200 to the initial pool, continues paying $200 a month into it from then on for at least a year. At the same time, each of the members take monthly turns getting a direct deposit windfall of $800. Cestas range from one that cycles $800 deposits to its members to one that deposits $24,200 on every turn. The groups with turns for larger monthly deposits typically have more people in them and are paying larger amounts into the pool every month.
The Mission Asset Fund hosts monthly meetings to explain the way cestas work and facilitate the formation of new cestas. Melgarejo said that, on average, groups of 20 to 30 people are forming two cestas a month and that the number of people coming to learn more about it is steadily increasing. She said many of the people they are reaching have already been handling money responsibly, but have felt uncomfortable building their credit with loans.
A case in point: Ms. Ortega, the housecleaning entrepreneur, previously lacked a credit score, having avoided loans altogether despite maintaining a checking account at Bank of America for ten years. Then she took a class on starting a small business at the Mission Asset Fund, and was urged to join the program’s first cesta.
Ortega said she warmed to the cesta concept because in her native Peru, social groups engage in similar lending through accounts they call “juntas.” Now she said she is in three cestas because each is different, and because she appreciates the flexible and familial style they retain – even after being formalized by the asset fund.
When Ortega entered her first cesta of eight members paying in $100 a month, her group asked around for who needed the money the soonest. Ortega raised her hand because the old car she needed to operate her house-cleaning business needed an expensive repair. She got her loan.
Later, when it was time for a new car entirely, Ortega said her credit union was pleased with her credit score and she was able to get a decent car loan from them for the purchase. Her improved credit and cash flow has also made it possible for her to hire another employee, she said, adding she’s confident her business will continue to grow as her credit grows.
“It forces me to save money and be responsible,” Ortega said of the lending commitment. “It’s also good for people who didn’t save before. Once we have the cesta, we have to do it.”
Since that first loan, she’s also gotten her sister and best friend–both of whom were skeptical at first–into a cesta.
“In the beginning they didn’t believe me. They thought that people would take and run away with the money,” Ortega said. “But then they saw that these were good people and it’s a good organization helping the Latino community to be successful and see its true potential.”
“I’m thankful,” she added, not just for the money, but for the Mission Asset Fund “trying to show the Latino community they can be seen as being honest and responsible with their money.”