Affordable Housing Institute : US

[Continued from yesterday’s Part 1 and Part 2 .]

 

So far we’ve seen that American-born microfinance originated, as has global finance, based on shifts in the larger credit markets.  As chronicled in Funding Universe, what became Household Finance Corporation boomed during the good times, suffered a backlash during the Panic of 1907, was under financial and regulatory pressure, and responded by taking the lead in reforming the industry with a strong consumer-protection and consumer-value proposition:

 

Thomas Hulbert had been an aggressive, expansion-minded manager who at times was blinded to the future by short-term goals.  [New 1925 president Leslie] Harbison was equally interested in the growth of Household, but he envisioned this expansion as the natural byproduct of customers’ satisfaction with the company’s activities and style of operation.

 

Why capitalism works: sooner or later, you make more money only by giving better value, whether you like it or not.

 

Better value whether you like it or not!

 

On Harbison’s recommendation, Household was the first loan company to offer an interest rate below the legal limit, dropping its monthly rate to 2.5% in 1928.

 

Market leadership means scale, and lets you slice margins.  Every maturing business does this.

 

Harbison decided that the increased volume of business would offset decreased revenue per loan and that decreasing the charge would help the industry by staving off more repressive legislation. To capitalize such a substantial reduction in rates, HFC offered 140,000 shares of preferred stock, making it the first loan company to be publicly held.  Competitors were not happy with this HFC initiative, but the public expressed its confidence in the company by buying up the entire stock offer almost immediately.

 

That’ll straighten my tie!

 

Scale and strong organizational backbone mean you can expand into new markets:

 

In 1929 Household acquired its first subsidiaries, absorbing three smaller lending firms, and with the 1933 acquisition of Central Finance Corporation of Canada–the first chartered loan company in that country–Household entered the international business arena.

 

Because lending always seems rapacious, it remains critical to state, restate, and reiterate, your business propositions and your ethical principles:

 

Harbison started a public relations department in 1930, and in 1932 established a separate Department of Consumer Education, which published several pamphlets for customers.

 

Give me info, boop-oop-ee-doop

 

The first was “Money Management for Households,” in April 1931. The booklet outlined sample budgets, and presented well-known but not always well-understood information in a clearly written and organized form. Not only was consumer response positive, but the government praised Household for its initiative. The New York Times even ran an editorial applauding the booklet.

 

Back then, that was the Good Housekeeping seal of approval.

 

We’re for Roosevelt

 

Byrd Henderson became president upon Harbison’s death in December 1933. Harbison’s stamp on the company had been to educate consumers; Henderson vigorously continued this practice, but he saw it purely as a method to increase business.  He directed a period of phenomenal growth for HFC that continued after his retirement in 1951. Despite stringent credit controls and economic rationing by President Franklin Roosevelt, HFC’s loan account grew steadily during World War II, then exploded at its end.

 

Henderson’s tactics were aggressive and straightforward. He:

 

Encouraged many more consumer education publications

Held frequent manager-level meetings to discuss company operations openly.

Instituted an aggressive advertising campaign that included dramatized radio spots, increased direct mailings, and as many solicitations of employers as of consumers.

 

Eventually, finally, fifty years after the business was created, the lumbering large banks noticed it:

 

Even bank examiner J. Pinkerton Snoopington saw the potential

 

Many commercial banks entered the personal loan business in 1934. Even though they frequently charged higher rates than HFC and other loan companies, banks had the vital trust of the public. Consequently, loan accounts for banks were 40% higher than that of loan companies by 1946. Nonetheless, Henderson recognized that the increased competition was healthy for the industry, as it created more borrowers.

 

Gradually the practice of consumer disclosure became more precisely defined:

 

It was a difficult time for other reasons, too, though. In 1943 several borrowers in New York, claiming ambiguities in loan contracts such that borrowers were not fully aware of their obligations, sued Household and won. But when one couple expanded the scope of this decision and sued Household for all loan payments received in New York during the previous three years, the judge summarily dismissed the case, although he did warn HFC and other loan companies to show restraint in their collection of laggard loan payments, as some companies had begun to practice strong-arm collection tactics.

 

Shades of today’s jawboning around subprime loans.

 

Henderson’s successor, Harold MacDonald, was hired as executive vice president in 1948.  At the first conference in 1951, he held daily meetings for a month, tirelessly asking managers from across the country what they saw as company strengths and weaknesses. The result was the “Uniform Operations Manual,” which was distributed to all 573 offices. It provided concise directions on all manner of relations with customers and employees and even set guidelines for office layout and organization. He also instituted an employee-training program.

 

By the mid-1950s, in other words, Household Finance had transformed the space permanently.  What had begun as a specialized niche business had evolved into an essential component of the banking ecosystem, focusing on consumer credit below the bank-lending level.

 

Helping finance couture since 1950

 

This led to vertical integration: more products sold to the same core customer group:

 

In 1958 HFC began offering credit life insurance to customers.

It also created Household Flight Credit Corporation in conjunction with United Airlines.  

Education Funds, Inc. was created in 1960 to offer help in paying college tuitions.

 

Finally, nearly a hundred years after its founding, the company married into respectability:

 

Gilbert Ellis became HFC’s fifth president in 1972, and he promptly signed a joint venture agreement with J.P. Morgan & Company, a finance company that had long served wealthy individuals and large corporations.

 

Even hearing it now makes me glare from my grave

 

Diversification and niche expansion continued:

 

In 1976 HFC acquired Keystone Savings and Loan in California and several commercial banks in Colorado.

 

The minnow had swallowed the whale: a non-bank bought a bank.  It continued to move up the income pyramid:

 

HFC also began to offer real estate-secured loans.

 

Household International had started in 1987 to build up a portfolio of credit card operations, mainly through the aforementioned acquisitions from banks, until by mid-1990 the company was already the 10th largest issuer of VISA and MasterCard credit cards in the United States.

 

In the ultimate irony, HFC has since been acquired by one of the world’s most aggressive, ambitious, respectable banks:

 

How to be the world’s local bank? Buy America’s local non-bank

 

Was America the birthplace of microfinance?  Maybe not in the modern sense, but in the sense of pioneering below the bankable lending frontier, and in using the same principles – high interest rate, short tenor, a continuous orientation toward customer value – that now inform the microfinance industry.  What this little periscope into the past shows is that microfinanciers and their non-profit counterparts, savings associations, are micro-businesses, and can grow as such.

 

 

Send post as PDF to