LAWRENCE — Teofila Richardson is essentially a community banker, although you’d never guess it as she hustles between jobs as a housecleaner at local nursing home and for residents around the city.
But the 58-year-old grandmother collects and lends thousands of dollars each month, interest-free, helping friends and acquaintances buy cars, make down payments on homes, and retire their credit card debt.
Richardson runs a san, as it is called by Dominican immigrants who live in the city, a network that connects borrowers and sellers and helps them reach their financial goals. Also known as lending circles, these networks of friends and relatives have long flourished in immigrant communities, providing banking services to people often shut out of the financial system.
Now, nonprofits in Massachusetts and across the country are trying to bring these lending groups into the mainstream, formalizing these networks to provide low- and moderate-income families a gateway to traditional financial services. Their aim is to help people develop or repair credit histories and build financial identities that allow them to borrow from banks and credit unions without paying exorbitant interest rates.
Lawrence Community Works launched a formal lending circle with a local credit union in 2013 and hopes to start two more this year. In Boston, the Family Independence Initiative is supporting 20 lending circles that have helped families save money for Christmas presents, buy equipment to launch small businesses, and pay college tuitions.
In San Francisco, Mission Asset Fund, which started managing lending circles in the Bay Area eight years ago, has expanded into 10 states, including Massachusetts, and is working with the Family Independence Initiative.
“It’s almost a very capitalistic way of helping families advance economically,” said Juan Bonilla, deputy director of Lawrence Community Works. “You’re teaching people about the banking system and how to build their assets.”
The basic premise of a lending circle is that members of the group borrow money from each other on a rotating basis and each member pays the loan back in installments. For example, 10 people agree to join a circle with a monthly contribution of $100 over 10 months. In the initial round, the first participant will get a $1,000 loan. She will then pay back that loan back over the remaining time of the circle by depositing $100 monthly into the pot. Each month, somebody new in the circle borrows the $1,000 pot.
The problem, however, is business is transacted in cash, so members can’t build or improve their credit, shutting them out from lenders. As a result, nonprofits, such as Lawrence Community Works, sponsor lending circles that require participants to open bank accounts, so money can be transferred among members electronically.
The nonprofits can then report to credit bureaus whether group members paid into the circle regularly. As members make payments on time, it improves their credit score.
Most lending circle participants start with damaged or no credit because they’ve defaulted on loans or never applied for credit cards or bank accounts, said Tara Robinson, chief development officer for Mission Asset Fund. On average, the 3,000 participants in Mission Asset Fund’s program started with a credit score of 435 points. By the time they completed a lending circle, the score climbed on average to 603 points, still too low for most traditional mortgage programs.
But it’s a start, Robinson said. With the financial planning classes offered by many of these nonprofits, credit scores can be raised further.
To help get people to take this first step, nonprofits provide a guaranty that if a member drops out of the circle, they will make up the difference so nobody loses money. Liliana Parra, a 37-year-old mother of two from Boston, said that reassurance convinced her to participate in a lending circle through the Family Independence Initiative.
“I trust them,” Parra said through a translator. She contributes $50 a month to a circle that includes nine members. She used her $450 pot to pay off credit cards and hopes to eventually build an emergency fund for unexpected medical expenses.
Even Teofila Richardson, who participated in informal lending circles for years, said she learned a lesson when she took part in Lawrence Community Works’s program last year. The circle included training on accessing and understanding credit reports, and she discovered she owed money on her college-aged daughter’s cellphone bill, which debt collectors had reported to credit agencies.
Richardson paid the bill. In her year participating in the circle, she has raised her credit score by 40 points to 650.
“It’s not something just to do for the immediate need,” Richardson said. “You can develop a long-term plan to manage your money.”