I was recently trying to get a mortgage for a house that my wife and I were looking at buying. After 30 minutes on the phone, answering questions about my income, assets and debts, I was declined for the mortgage. I asked if there was any room for flexibility, and the mortgage broker said something that really struck me: “Sorry sir. Everything in our industry is black and white.”
At the end of a long, slouching call, that one sentence made me sit bolt upright, write it down, and now write a blog about it. Because at Kiva Zip, we’re trying to disrupt that paradigm, and this (lending) industry. We’re trying to inject shades of grey, or (even better) rich, vibrant colors into the process by which small business owners can access the capital they need to launch or grow their businesses.
There are a myriad of ways in which we are challenging the conventional “black and white” approach, but I’m going to highlight two – firstly, how we underwrite loans; and secondly, how we approach delinquent payments.
Character-Based Lending
When I was applying for the mortgage I mentioned above, I was underwritten on a purely financial basis. What was my credit score? How much money did I have in my bank account? How much did I earn last year? How much did my wife earn? What debts do I have? What is my net worth? At no point was I asked for character references. And the mortgage broker did not know me personally. It’s all about numbers and statistically-tested algorithms. I didn’t qualify for the mortgage because, on average, people in my financial standing would not be able to keep up with the payments in more than (e.g.) 10 percent of cases. Now don’t get me wrong, this numerical, financial approach is very useful. And it works. It’s why banks and lenders are able to maintain high repayment rates, and make money.
But it doesn’t paint a full picture. By failing to take into account the character of the borrower, or social data points (like the strength and extent of a borrower’s trust network) on an individual, case-by-case basis, this average-based approach misses out on nuance, and thereby disqualifies many would-be borrowers that deserve, and could pay back, a loan. At Kiva Zip, by focusing on these information gaps that exist in conventional, financial underwriting, we can introduce flexibility and “color” into our underwriting process, and help a lot more people think a “black and white” approach allows.
Grace Periods
In July of last year, we launched Kiva Zip in Richmond, Virginia – thanks to funding from Capital One, and support from Senator Mark Warner and Mayor Dwight Jones. Unfortunately, one of the borrowers we made a loan was taken seriously ill just as she received the money. In a “black and white” lending world, this personal tragedy would have been met with stern letters, late fees, and spiraling interest payments. I imagine there would have been no “exceptions”. In the Kiva Zip community, the borrower’s proactive communication on her conversations tab was met with no fewer than 15 comments from her lenders – every single one of them positive, affirming and understanding. The unanimous message was “we are so sorry to hear of your sickness. Make sure you focus on getting back to full health first. You can pay back the loan later.” This empathy and grace on the part of her community of Kiva Zip lenders blew me away, and epitomizes the “color” that comes from re-injecting human relationships and people into a financial system that (over the last couple of decades) has become overwhelmingly transactional, and subsumed by the pursuit of profit at all costs.
Now the borrower has recovered, and is paying off her loan. With any other lender, the accumulation of late fees and interest rates might have made hers an unbearable debt burden by this point, and she may have weathered one crisis of health, only to be confronted with financial bankruptcy. But on Kiva Zip, even a year later, she still has only and exactly the $5,000 principal to repay. This might be stretching the point, but on some small level, I can’t help but wonder if the flexibility she experienced from her community of Kiva Zip lenders, in stark contrast to the intransigence that she probably would have encountered from a more conventional lender, might even have helped her emotional and physical recovery. There is ample evidence linking financial worries with emotional stress, the detrimental physical effects of which are also well known. If our financial system was more people-focused, would we all be a little less perpetually worried about money, and a little happier as a result?
In a black and white lending industry, we on the Kiva Zip team want to thank all of you, our lenders, for enabling us to dream of splashing vibrant colors on the canvas.
Now I’m not saying that I should have qualified for the mortgage. But that’s because of my shady character, and dubious circle of acquaintances, rather than the paltry state of my finances.
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