The American middle class is the backbone of the American economy. Since the collapse of the credit markets of the Great Recession of 2008-2011 and the subsequent tightening of credit standards, the American middle class has had diminished access to credit. Yet, America’s ability to grow itself out of the Great Recession is dependent upon the middle class’ credit access.
The Brazilian economy and legal system may offer America a way out of its credit access problem via the Brazilian “Purchasing Pool System.” A purchasing pool may allow the American middle class the ability to access credit to purchase houses, cars and other large consumer goods, in a planned and organized way, without the financial institution incurring the risks associated with, by example, bad mortgages and non-collectable credit card debt.
A purchasing pool is a cooperative group of persons and/or companies that is formed in order to enable the acquisition of goods or services by each of the members, through the establishment of a mutual fund. The Central Bank of Brazil treats this product through regulation 3432/09. The matter is also addressed by Brazilian Federal Law 11.795/08.
Brazil has developed a body of case law jurisprudence regarding the relationships among parties of the purchasing pool. A prominent issue arises in a request for the return of the contribution paid to date by a member of a purchasing pool who exits the pool before the term agreed in the purchasing pool contract.
A purchasing pool is formally established when its membership achieves the requisite number established by the contract sufficient for the pool’s financial viability to be able to meet its stated objective (e.g., purchase a car for each member). Upon the pool’s formal materialization, each member pays an amount each month in favor of the mutual pool fund that will be awarded to a member, selected by a randomized lottery, for the purchase of the pool’s stated objective. Where the pool has excess monthly funds that would allow a second purchase, the pool will also hold an open bid among its members for a second “winner.”
In both cases, the Purchasing Pool Administrator provides the resources by letter of credit drawn on behalf of the Purchase pool to the selected member in order to enable him to acquire the good or service that is the purpose of the purchasing pool.
Beyond the contribution to the mutual fund, the members have to pay a management fee to Purchasing Pool Administrator as well as an amount to form a reserve fund for emergencies and some expenses of the pool. However, the purchase pool does not charge interest. Furthermore, what is not expended of the pool’s reserve fund and its mutual fund returns to the active members at the expiration of the term of the purchasing pool. The Brazilian average pool management fee for cars is 13% and for real estate (such as condominiums) 17%. The reserve fund is 3%. The administrative and reserve charges are levied on the value of the good or service but paid over the term of contract. For example, for a new automobile whose price in Brazil is US$28,400, through a purchasing pool, the monthly payment would be approximately US$411 for 80 months, totaling about US$32,900.
For the sake of brevity, there are some additional issues that I’m not addressing now, like the impact of members exiting the purchase pool before the end of the pool’s life, a member’s non-payment, the purchasing pool’s security interest in the acquired goods, and some aspects of the Brazilian consumer credit system that differ from America’s.
A purchasing pool may provide an effective financing tool for Americans, especially for the middle and lower middle classes that are currently having difficulty obtaining credit because of tightened standards. Besides creating credit capacity in tight credit markets based on the pool’s assets, the purchasing pool mitigates the necessary percentage of upfront cash on many traditional forms of finance. Purchasing pool credit may lead to increased consumption and economic growth arising from the strengthening of the whole value chain – industry, commerce and services, without the same impact on a financial institution’s balance sheet.
From a U.S. policy perspective, a purchasing pool regime may provide a simple and responsible solution to grow economy activity for a country traumatized by a recession caused by easy credit. From a U.S. financial institution’s perspective, it may allow it to become competitive for attracting new clientele segments to grow deposits and fee income, without the corresponding balance sheet risk.
Please send questions or comments to the author, Juliana Molinari, at email@example.com. She is a counsel for a tier 1 Brazilian financial institution.