Social Enterprise Essential to Combat Predatory Lending

With select state legislatures moving to ban Payday Loans via interest rate caps and the Federal Government looking to put its hat in the ring with a 36% federal interest rate cap, it begs the question “is government regulation enough to help consumers avoid predatory lending?” Surely setting caps at 36% will prevent the unscrupulous payday loan model that creates long term debt traps at 400% APR interest. Compare that to the APR for a 30-year fixed Home Loan which is only 5.225%. Payday Loans are unsecured – they have extremely high costs of borrowing and short term limits—thus they are dangerous product for chronic borrowers. With only 14 days to repay, payday loans create massive pressure for loan rollovers which incur more fees and increase the debt burden. This is supported by a study of practices in Indiana before new laws went into effect, that saw an average rollover rate of 10 times. This usurious practice is unsustainable for the borrowers. So banning payday lending via an interest rate cap is a good thing because these products will no longer exist, right?

Not so fast. There is a reason people are taking out payday loans. It is because they are either consciously rejecting mainstream banking products or more likely, unable to gain access to mainstream credit products that charge reasonable interest rates. So if the borrowers were so desperate to use a payday lender in the first place, how will they fair? Many will bounce checks or incur overdraft protection fees as their main source of credit. This practice can be just as exploitative as payday loans4. Credit cards can perpetuate a cycle of debt, as available credit on cards often exceeds one’s realistic ability pay down principal balances. Just as often, credit cards are typically inaccessible to many in this population population. More than 100 million Americans are considered “unbanked”, “underbanked”, or credit underserved5. So what options are left for this population if governments essentially ban short term small dollar loans? Pawnshops or black market loan sharking? The answer is that tough choices will have to be made by consumers until mainstream banks and credit unions can develop credit tools and risk models that address the needs of the underbanked.

Fortunately, there are a handful of organizations working on payday lending alternatives including community development credit unions and social venture funds. This is a perfect opportunity for social enterprise and innovative solutions. Social Enterprise can step in to prove the market, as early stage venture philanthropy will be needed to cover the initial costs of research and development and subsidize the development of risk models and new technologies to reach these consumers. To serve the underbanked, there is an immediate need to have a socially minded business model that is more focused on educating and serving the consumer for the long haul; rather than continuing a practice of short term economic exploitation. Furthermore, innovation is essential to create new financial products that are economically sustainable and viable. In the long run, for any loan product to reach scale and have a significant social and economic impact it will have to be financially profitable in order to reinvest revenues back into more loans and more social benefit. Innovation in terms of technology, risk-modeling, private-public-nonprofit partnerships, and education have the potential to reduce costs and develop a loan portfolio with risk profiles that can compete with mainstreamed personal loan products. Together social enterprise and innovation can address Payday lending properly.

It would be much easier if the problem of predatory lending could be solved via a legislative fiat. Unfortunately, this problem is a complex one that governmental regulation alone cannot fix, and worse yet, traditional business structures have neglected to substantially address. Which is why Rubicon National Social Innovations is stepping up to the challenge: to serve the poor by filling the gaps between the abilities of government, traditional charity, and for-profit businesses (see Table Below). Whether one is concerned about predatory lending’s impact upon the working poor or worried about government regulation into the market, it can be agreed that social enterprise solutions can address this issue. To learn more about the work of Emerge, our product in this area visit http://rubiconnational.org/our-projects/emerge-loan-program/

by Jeff O.
Bain Fellow

Sources:

Center for Responsible Lending http://www.responsiblelending.org/payday-lending/

Chase Home Fixed APR 30 year rate checked on Nov 5th 2009 at http://mortgage.chase.com/pages/shared/gateway.jsp

http://www.reallifedebt.com/payday-loan-cash-advance-money.html

Center for Responsible Lending, http://www.responsiblelending.org/overdraft-loans/

Reuters, July 30th, 2008, http://www.reuters.com/article/pressRelease/idUS175151+30-Jul-2008+BW20080730

Last Thursday representatives from RNSI attended the West Coast Green 2009 Conference. West Coast Green is a conference focused on environmental innovation in the building industry. Along with the usual tradeshow floor offerings, the conference hosted an overabundance of classes and seminars focused on education of eco-friendly construction practices. The conference was chock-full of interesting organizations vying for face time and growth in the green building sector. These organizations ran the gamut from traditional construction companies reforming their practices to disruptive technology producers aiming to save the world. Some of my personal favorites were Ideabuilders, North Cal Wood Products,and Driptech.

The ability to network with and learn from these organizations is what drew RNSI to this conference. Environmental protection is currently the vehicle of two of our enterprises (Mattress Recycling and Energy Efficiency Retrofit). While at the show we were able to connect with other organizations in the green space and develop our network. We are excited that at least one of these connections will blossom into a customer for our recycling program. But not only did we meet potential business partners, we also learned of exciting new trends in the industry. It is impressive the speed with which companies are adopting green practices. It took a while for the snowball to get going but it is truly picking up speed.

The West Coast Green experience was valuable for Rubicon National Social Innovations. The success is obviously manifested in the partnership we came away with, but other wins occurred as well. The conference was a valuable opportunity to make contacts with the visionaries who are changing the building industry. Additionally, it laid the seeds for future innovations and projects. Disruptive innovations could provide us with excellent opportunities to fulfill our mission, to employ the hardest to employ populations. West Coast Green was also an excellent chance to update ourselves with the technological advances that are changing construction. Our presence at the conference heightened the importance of being in the bay area, a great hub for environmental and social enterprise work. The connections and collaborations here are great for incubating ideas that we can then scale nationally.

Plugging Away

For the past year Rubicon National has been working to get mattress recycling off the ground as a social enterprise diverting waste and employing the hardest to employ workers. Now, with a facility open (and at last report covering all direct costs!) in San Jose and a facility close to launch in Philadelphia (check out the article on page 17 of Grid Magazine below), we are working to identify the remaining U.S. markets where mattress recycling is likely to be a viable social enterprise.



Key to making the market is a governmental presence committed to environmental sustainability and consumers that value waste diversion and recycling of resources enough to demand it of the businesses from which they buy their new products. We've talked to several retailers who don't think their customers value waste stream diversion enough to pay an extra $10 at the time of purchase to guarantee their mattress is recycled. We don't think that's a valid assumption. Only time will tell, but we will continue to develop the business infrastructure that will allow the opportunity to recycle mattresses to exist. When every mattress store offers a recycling option, we will know we've been successful.



Mattress recycling coming to Philly! Check out page 17: http://issuu.com/redflagmedia/docs/grid_2009.09

live from SoCap09

Our director, Jonathan Harrison, recently spoke at the Social Capital conference. One of the conference volunteers took a moment to interview him for their blog, we thought it might be interesting for our readers as well.

http://www.socialcapitalmarkets.net/index.php?/component/option,com_wordpress/Itemid,64/p,579

A Summer Intern’s Thoughts on Working for Rubicon National

Before I became an intern at Rubicon National Social Innovations, I had little idea of what social enterprise entailed. I received a summer fellowship from U Penn with funding provided by the Levy Social Impact Fund at the Wharton School. I was intrigued with the internship position because it focused on a feasibility study on the viability of a weatherization and energy efficiency retrofit social enterprise and I had similar previous coursework related to sustainable energy.

My knowledge of social enterprise was limited to the notion that social enterprise somehow uses business skills to try to solve injustices or economic inequities throughout the world. With the little experience I had from doing community service in my spare time, I honestly could not distinguish one non-profit from another in terms of their strategies and approaches to having social impact. After a phenomenal and memorable 2-month experience with RNSI, I am proud to say that I can now make that distinction (or at least I think I can).

One thing that I have questioned over the years while participating in numerous service activities is how effective those service organizations are. Although their direct services were beneficial to those they were helping, it never seemed like lasting change in people’s lives was being made. By no means are these organizations unnecessary or obsolete; it just seemed to me that their work was “patchwork,” -- only temporarily providing relief.

That’s partly why I have continually been impressed by the work that Rubicon National is doing. The approach to battling a vicious cycle of intergenerational poverty is deeply rooted in creating sustainable, long-lasting employment opportunities powerful enough to lift people up and out of their predicament. The social enterprise models that are developed are truly innovative, creating social enterprises relying on market forces (for financial stability) and operating on a national scale to maximize social impact. They clearly break away from the patchwork model of traditional charities and make a lasting social impact in the communities that need the most help.
What’s more is that their recognition that social change and environmental responsibility do not have to be mutually exclusive, a tenet to which I firmly adhere. During my time here at Rubicon National, we have been diligently developing an energy efficiency retrofit service as a social enterprise that would create green collar jobs and pathways out of poverty in cities around the United States. Because of the federal mandate for economic recovery and climate change mitigation, Rubicon National realizes that retrofitting homes with energy efficiency measures creates excellent opportunities for the hardest to employ, offering training services and career advancement possibilities in a growing industry.

By leveraging tremendous volunteer support, Rubicon National has made significant progress on the enterprise that would not otherwise have been achieved. It is incredible how much buy-in to the project Rubicon National has received from corporate, civic and professional groups, accelerating the development process exponentially. Not only have the volunteers shown their interest in energy efficiency retrofits, but also that they genuinely believe in the potential it has for making a lasting social impact.

As my internship comes to a close, I am proud to say that I contributed meaningfully to Rubicon National’s energy efficiency retrofit enterprise. As biased as this may seem, I believe that Rubicon National Social Innovations is one-of-a-kind, having unmatchable experience in the field of social enterprise and a proven track record of success. They may just be getting their footing as social enterprise modelers, but they truly are the “laboratory for scaling social enterprise” and deserve much recognition for their work.

New RNSI Website! www.rubiconnational.org

It's official!

On July 1st, after a successful two-year incubation and with the support of the Surdna, S. H. Cowell, REDF, William Randolph Hearst, Woodcock, and John S. and James L. Knight Foundations, Rubicon National Social Innovations (RNSI) was launched by Rubicon Programs as a separately governed nonprofit organization to become the national laboratory for scaling social enterprise, focusing on nationally scaled initiatives built through local collaborative partnerships.

Check out our new Rubicon National Social Innovations website at www.rubiconnational.org for more information about our current initiatives.

a note from our president

Our president, Rick Aubry has been in Davos, Switzerland over the last week participating in the World Economic Forum. Better than anything we could write to let you know what he has been up to, get the info straight from the horse's mouth...

http://www.youtube.com/watch?v=RfKxYiFd-fs&feature=email

http://www.ireport.com/docs/DOC-204161?ref=email

Who knew what you could you do with a MATTRESS?!

Turns out, mattresses are a perfect recyclable item: they are large, easily identifiable items that landfills don't particularly like as they are difficult to compress and they damage equipment such as tractors and backhoes. To dispose of them, they often require special delivery to landfills where even still they actually "float" to the surface, even when covered with dirt. If recycling was an option, people's disposal behavior would barely need to change. The problem? To date, there are few uses for mattress components - creating little market justification for the expense of the recycling process.

Until now.

In September, RNSI partnered with Architecture for Humanity to release the Discarded Dreams mattress recycling design competition. The competition challenged designers to re-envision a world where used mattresses and box springs are turned into new, useful, and commercially viable products that RNSI could test in a new mattress deconstruction facility that we are partnering with Goodwill Silicon Valley to launch in San Jose.

See the results this Thursday, January 22 from 6 - 9 p.m.
We are hosting a reception, with sponsorship from Keetsa and the International Sleep Products Association, to take place this Thursday at the Keetsa Mattress Company (271 9th Street in San Francisco, CA). The design reception will showcase the winning entries as well as over 20 entries from around the world.

This event is open to the public.