James Gutierrez believes he has found the key to reaching unbanked Hispanics - credit. "In this country not having a credit score is like not having a face," says Gutierrez, whose San Jose company makes loans to Hispanic customers with little or no credit history. "What we try to do is build that face for customers."

Gutierrez founded Progress Financial fresh out of graduate school in 2005 and, today, his company operates booths in 15 California grocery stores that target Hispanics.

Now it plans to expand beyond its home state. The goal is to open booths in Texas over the next six months and to have 140 of them in several states with large Hispanic populations by the end of 2012.

Progress Financial, which has relied mostly on venture capital to fund the $20 million of loans it has made in the past four years, also hopes to start working with banks. It has applied to be certified as a community development financial institution, and if it is approved, banks could earn Community Reinvestment Act credit for lending it money.

Also, as unbanked consumers get more comfortable with using credit, they could eventually migrate to banks or credit unions, observers say.

The specialty lender is likely to face challenges as it tries to expand.

In recent years several new banks, including the $54 million-asset Libertad Bank in Austin and the $57 million-asset Oasis Bank in Houston, set out to target Hispanics, one of the fastest-growing segments of the population only to later broaden their business plans because growth was slower than expected.

But Gutierrez contends that offering the right product is key and, in his view, that would be loans.

Credit is needed to do almost everything in the U.S., from renting an apartment to buying a cell phone, he says.

"The solution is: Don't go selling bank accounts and prepaid cell phones. Give them credit," Gutierrez says.

Doing business as Progreso Financiero, the company makes uncollateralized loans of $350 to $2,500 and charges a 36 percent average annual interest rate.

A typical loan would be for nine months, with payments due every two weeks.

The company interacts with customers frequently to help them stay on track, Gutierrez says. Customers even get a phone call before the first payment is due as a reminder. And when a loan is made, a family photograph is taken with the borrower holding the check, to celebrate the occasion and reinforce the importance of receiving credit.

Some observers say the timing of its growth initiative has the potential to work for or against Progress Financial.

With many lenders raising their credit standards, the company might pick up more customers now, says Ron Shevlin, a senior analyst at the Boston consulting firm Aite Group. But it also might have to contend with more defaults because of the troubled economy.

Shevlin says maintaining credit standards as a company grows can be another challenge, but the 32-year-old Gutierrez says a scoring system he built - and continually refines - has kept loan losses at Progress Financial low.

He would not specify the loss amount in dollars. But for the first half of the year the loss rate on its loan portfolio was under 10 percent of the overall dollar volume, even though 55 percent of the borrowers have no credit history, he says.

He says he developed the scoring system using research he did in Latin American countries. Borrowers must provide proof of income, and they are scored based on hundreds of fields of data from an application, including cash flow and characteristics of stability, such as how long they have held a job or lived in a particular area.

Gutierrez says he considers the interest rate to be fair. He pointed out that the Federal Deposit Insurance Corp. set a limit of 36 percent annual interest for lending initiatives it tracks under its Small-Dollar Loan Pilot Program; so Progress Financial, though not part of the program, has a rate that is in line with those guidelines.

Observers say if Progress Financial is successful, it could help get unbanked Hispanics to start using mainstream financial services. But providing borrowers with financial education is necessary to keep the pricey loans from becoming a permanent revolving door, as is common with payday loans, says Francis Calpotura, an immigrants-rights activist and founder of the Transnational Institute for Grassroots Research and Action.

Janie Barrera, the president and chief executive officer of the microfinance lender Accion Texas in San Antonio, agreed. Accion, a certified CDFI that specializes in making small loans to the unbanked and underbanked, charges 12 percent annual interest and has a 95 percent repayment rate.

"The financial literacy piece is very important," Barrera says. "People need to be educated, and what we are talking about here is the immigrant population. They don't know how we work here in the United States. We aren't going to change the system, so we need to teach them how the system works."

Gutierrez says that, unlike a payday lender, his company does not allow an outstanding loan to be rolled into a new one.

It also incorporates financial education into the lending process. Before a loan is funded, the company reviews with the customer a dozen points about financial literacy and explains how the loan amortizes.

Still, Progress Financial has a lot of repeat business. To help keep it that way, Gutierrez says, he intends to introduce new loans at lower interest rates for customers who prove their creditworthiness. Progress Financial also reports loan payments to the credit bureaus to help customers build credit.

"A number of our customers start out with no score and, after the third loan, they have a 640 FICO score," Gutierrez says.


Marissa Fajt is a reporter at American Banker.

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