Traditionally lenders and insurers mitigate risk by screening borrowers and charging higher-risk borrowers higher rates. This is done across all types of borrowing and insuring – home, auto, life, business, personal credit. This has always bothered me because it strikes me as self-fulfilling prophecy. Charging higher rates can only increase the risk of default. It’s also penalizing the people who need help the most. This is the opposite of the kind of system Americans like to see; we prefer one that reinforces opportunity for those who work hard, rather than just raising the bar for those who start closer to the bottom.
Recently a friend sent me an NYT article about Bruce Marks and the Neighborhood Assistance Program of America. NACA focuses on the subprime market and has found a new way to mitigate risk. They mitigate the risk for the borrower rather than mitigating the risk purely for the lender. They do this by working with borrowers to create financial plans as part of the lending process. Instead of making borrowers with low down payments buy mortgage insurance, those borrowers pay into a neighborhood Membership Assistance Program. Membership in the MAP gives them access to free financial and credit counseling. Further, the MAP can provide up to three months of mortgage payment assistance. All assistance that protects the mortgage – by protecting the borrower. Further, they engage the homeowners by creating Peer Lending Committees to review requests for assistance.
This is the kind of risk mitigation thinking we can use more of – ways of working together instead of against each other. Reading the articles below it seems this hasn’t spread further because the founder is still very much in the culture of working against, he’s just redefined who he works against as other lenders. Still, the ideas are good ones and remind me very much of grameen bank and their lending circles.