GUY RAZ, host:
This is ALL THINGS CONSIDERED from NPR News. I'm Guy Raz.
In a few minutes, we'll speak with our White House correspondent, Scott Horsley, who's traveled with the president on his surprise visit to Afghanistan, but first this hour, a quiet revolution in lending that is sometimes very loud.
(Soundbite of barking)
RAZ: These barking dogs are part of a financial trend that may soon explode across the United States. It's called microlending, and in a moment, we'll hear how it relates to these dogs.
From time to time on this program, we have explored the credit crunch, why banks aren't lending. It's estimated that it's now harder for a small business to get a loan than at any other time over the past 30 years. And when he testified this past week on Capitol Hill, Fed chairman Ben Bernanke, in his own cryptic way, suggested that as the economy improves, record low interest rates may have to rise.
Mr. BEN BERNANKE (Chairman, Federal Reserve): The Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures.
RAZ: And that can mean getting loans may be even more difficult in the future. So what does this all have to do with barking dogs? Well, first, if you followed the phenomenon of microlending in the developing world, where people can get a few hundred dollars to start a business, you're probably familiar with Muhammad Yunus, the Nobel Prize winner who founded Grameen Bank, the bank widely regarded as one of the first microlenders.
Professor MUHAMMAD YUNUS (Founder, Grameen Bank; Nobel Laureate): I believe that we can create a poverty-free world because poverty is not created by poor people. It has been created and sustained by the economic and social system that we have designed for ourselves.
RAZ: A system, he argued in the speech, that tends to favor more-established businesses, companies that already have some assets. And while most of Yunus' work focuses on places like Bangladesh, microlenders are starting to pop up throughout the United States, which takes us back to the barking dogs.
(Soundbite of barking)
RAZ: This is Dog Paws n Cat Claws. It's a pet care center in Arlington, Virginia. It's a cavernous warehouse owned by Ryan Fochler. When he first moved to the area, he was looking for odd jobs to make ends meet, and his then-girlfriend suggested he try dog walking.
Mr. RYAN FOCHLER (Owner, Dog Paws n Cat Claws): At the time, I, you know, was fairly new to the area and couldn't even believe that that job existed. So I started working part-time for the company as a dog walker, and in 2004, I ended up taking it over, just really finding a passion of mine.
RAZ: The company took off, and so in 2007, Fochler decided to expand the dog walking business into a full-service day care center for pets. No problem, he thought. Profits were doubling each year, Fochler was hiring more employees, and his credit score was strong. So he went to the bank to get a loan to buy a new building and turn it into a pet palace.
Mr. FOCHLER: Everything was just kind of lining up really well, and it made me confident to go ahead and sign my name on that lease.
RAZ: Construction was moving along, but then 2008 rolled around.
Mr. FOCHLER: Just before we opened our doors is when it was technically labeled a recession.
RAZ: The bank got cold feet, and the money dried up. Fochler couldn't pay his contractors, and the business almost collapsed overnight.
Mr. FOCHLER: Once the credit got a little tougher, you had to have pretty much matching assets to your loan, and at that point, if I had that kind of assets, I probably wouldn't be there to get the lending to begin with.
RAZ: So he started to do some research, and he came across a nonprofit microlending group called The Latino Economic Development Corporation. It's an organization that will lend small businesses between $500 and $50,000.
Now, Fochler is not Latino, but LEDC told him that's not an issue. They sent out a loan officer and started to evaluate his business model, and within a few weeks, they floated him a loan to get the project done.
Mr. FOCHLER: If they wouldn't have stepped in, there's a good possibility I would not be talking to you right now because they stepped in at a time where, if builders would have packed up their bags and said they need to stop until they got paid, that could've been another month or two of me paying this pretty hefty lease with no income.
RAZ: And since then, business has taken off even more. Ryan Fochler is now looking to hire another 10 people to keep up with demand.
(Soundbite of barking)
RAZ: The story of Ryan Fochler's success may not have been possible without a man named Rob Vickers. He is the director of lending at the LEDC, and he stopped by our studios recently to explain how microlending works.
Mr. ROB VICKERS (Director of Lending, Latino Economic Development Corporation): I started my work here, working in microlending in the United States, only as recently as 2006. Previous to that, I'd been working mostly in Latin America.
RAZ: I mean, you were at the World Bank.
Mr. VICKERS: Correct.
RAZ: Doing microlending.
Mr. VICKERS: Correct.
RAZ: Focused on developing countries.
Mr. VICKERS: That's right, and I was a little bit surprised myself when I actually started looking to work in my hometown of Washington, D.C., to provide microloans. And I learned a lot myself, that, you know, the United States has this burgeoning microloan industry.
RAZ: Broadly speaking, I mean, how does microfinancing work in the United States? We've heard about, of course, Mohammed Yunus in Bangladesh, you know, with microfinancing, microloans, $100, $50, $25. That's not what you guys do.
Mr. VICKERS: No, and in fact, that's one of the primary differences. We do loans up to $50,000. Our average loan size is $10,000, but we do loans between $500 and $50,000.
So for example, we have a Credi-start product for clients that have no credit history or a very thin credit history, which is a $500 loan designed to help them build their credit history.
The goal of nonprofit microlenders like LEDC is to ultimately graduate our clients to a commercial bank. So we don't want to undercut the private sector. In fact, my dream would be to be put out of business by a bank that figures out how to serve my clients.
RAZ: Isn't it risky? I mean, is there a high default rate for you guys?
Mr. VICKERS: No. I think that's one of the surprises about microlending is that we're very obsessed on maintaining a high repayment rate. We know
RAZ: And how do you do that?
Mr. VICKERS: We really spend a lot of time, much more time with our clients than a bank would, trying to justify the loan. I think one of the
RAZ: What are you looking for? Are you looking for assets that these people have?
Mr. VICKERS: One word: capacity. We're very focused not on someone's credit score, which commercial banks tend to focus on a little bit more. We're more focused on: Is there enough cash coming in to cover daily living expenses and to make a small debt payment?
So we look at the entire financial picture of the household. Do they have any rental income from renting out a basement? You know, are they working two jobs? So we really piece everything together to make sure that there's significant capacity to repay the loan.
RAZ: You say that you hope that eventually, if all goes well, you'll be put out of business.
Mr. VICKERS: That's right.
RAZ: But it seems as if, in this climate, with such a tight credit market, what you guys are doing is about to explode across this country.
Mr. VICKERS: Absolutely. Times have changed, and I think that there's more of a need for what we do now than ever. I think we're seeing the backlash to what was previously a credit bonanza, in which access to credit in the United States really wasn't the issue. I think education was more of an issue. Now, access is an issue.
RAZ: Rob Vickers, after the sort of the credit crunch really descended upon America, did you find that you were getting clients that you didn't expect you would be getting for an organization like LEDC?
Mr. VICKERS: Absolutely. The profile of our typical loan applicant changed dramatically with the advent of the credit crunch. I was seeing clients that I couldn't believe weren't bankable coming in, and thinking: Wow, this person has a credit score in the mid-700s, their business has existed for more than two years, and yet, not only are they unable to obtain a bank loan, but they're having their credit line slashed. And that's putting them into a cycle of having to quickly try to replace those lines of credit, which actually hurts their credit score, which makes it less likely that they'll be able to obtain another line of credit.
In fact, that's what we saw with Ryan Fochler. And so, you know, our goal was to say hey, look, this guy can repay his loan. This guy is a good risk. So that's why we made the loan.
RAZ: That's Rob Vickers. He is the director of lending at the Latino Economic Development Corporation, a microlender.
Now, one man who has been watching the microlending sector is the former chief economist at the IMF, Simon Johnson. He says its growth in the U.S. has amazed him.
Professor SIMON JOHNSON (Economics, Massachusetts Institute of Technology; Author, "13 Bankers"): I was on a panel discussion with Mohammed Yunus not too long ago, and he made this point: He said, we're going to bring these ideas to the United States. I thought that was a little bit crazy. Obviously, he's a great guy, but now, I begin to realize that he's actually on to something.
RAZ: Why aren't banks lending to more small businesses today?
Prof. JOHNSON: Well, the banks in this country have obviously taken a beating. They made many bad mistakes during the boom. They suffered big losses, and a lot of them don't have that much capital.
Capital is what banks need as a buffer against future losses. Even the banks that think they're going to survive are really hunkered down, and they see small business as relatively risky. So they're shying away from it.
RAZ: Do you think it makes financial sense for the traditional banks to get into microlending?
Prof. JOHNSON: Well, the traditional banks are good, or I guess they used to be good at some traditional things. I'm not sure that traditional banks migrating over to microlending is the way to go. I think it's important that microlending doesn't get distorted, and we don't get any kind of new sub-prime nonsense coming out of this sector. So it's been a very responsible sector. Hopefully, that will continue.
RAZ: It's been a sector that's dominated by nonprofits. So these are organizations that have to be responsible, I gather, because if there's a high default rate, they won't have any money to lend.
Prof. JOHNSON: That's right. So that's an advantage of the nonprofit approach. The disadvantage is it's relatively hard to scale up. So there are some spectacular exceptions, like Grameen Bank in Bangladesh. But in general, this microfinancing approach tends to be a little bit fragmented.
Now, in the past, perhaps we're worried about that more. Now, I mean, it may be a feature because it means you're not putting too many eggs in your basket. With the regular financial system, of course, we put an enormous number of eggs in just a couple of baskets, and they got dropped.
RAZ: Do you think that our system of credit will ever return to what it was, where it was relatively easy to take out a loan?
Prof. JOHNSON: No, I don't think we will go back to what we had before. What we had before was a lot of irresponsible lending and a lot of suckering people into borrowing money, but that's more, I would say, at the consumer level.
Interesting question: How the small business sector will do? I think some of the lending to small business from community banks in the past was very good. Some of the community banks have now lost a lot of money on commercial real estate. That part of the sector is going to be very hard-hit. The big banks are not going to step up. So there's a gap opening up there, and I don't know who's going to fill that gap.
RAZ: That's Simon Johnson. He teaches economics at MIT and is the author of the forthcoming book, "13 Bankers."
Simon Johnson, thank you so much.
Prof. JOHNSON: Thank you.
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