New lower-cost models emerge to compete with payday lenders
In June, a federal regulator unveiled first-of-their-kind rules for the small -dollar loan industry, following local ordinances that have sought to curb someof the predatory practices of payday and auto title lending.
Soon, these kind of borrowers — typically lowincome with few alternatives—will have amuch cheaper option, if their employers cooperate, and banks step upto help. The newmodel for small-dollar loans is called a community loan center, which can be either a nonprofit or a forprofit company. (There are a few startups in California offering similar services).
The first one in Texas started in Brownsville in 2011, signing up employers who would facilitate loans of less than $1,000 to their employees. Since the loans are repaid through payroll deductions, they become lower risk, allowing the lender to offer an annual percentage rate of 21.8 percent — dramatically less than the 500 percent charged by traditional payday and auto title loans, but still morethan your average credit card.
Since it started five years ago, Texas Community Capital — the network coordinator, which has branches in Brownsville and nine other cities across Texas and Indiana—is responsible for about 13,000 loans. No other state has anything quite as developed, according to the National Community Re investment Coalition, a Washington nonprofit that promotes access to financial services.
Theoretically, if the community loan centers get big enough, it’s possible to imagine them driving payday lenders out of business. Who would take out a loan that costs several times the principal in interest and fees, when a lower-cost option is available?
But there are a couple constraints onthe model’s growth. First, says Texas Community Capital Program Manager Howard Porter, community loan centers have to persuade skeptical employers not only that their employees might need the program— many don’t realize that even people with steady jobs live paycheck to paycheck — but also that it comes without financial risk to the business.
“They’re just not sure about this,” Porter says. “They want to make sure that they’re not going to be on the hook if the employee doesn’t repay the money.”
He’s made sure they aren’t: If borrowers leave jobs before loans are paid back, the lender can debit personal checking accounts.
Theother challenge: Community loan centers need capital to lend, so they also need banks to provide it. Big banks have long propped up the smalldollar loan industry — and made tidy profits—but under pressure by regulators, they’ve started to withdraw from it.
Funding community loan centers would help them fulfill their local lending obligations under the Community Re investment Act, which encourages banks to provide credit in communities in which they operate. So far Citigroup of New York, BB VA Compass of Birmingham, Ala., Wells Fargo& Co. of San Franci so, and Bank of America of Charlotte, N.C. have joined the effort in various ways. The New York bank JP Morgan Chase provided $5 million to get community loan centers in Bryan-College Station and Dallas off the ground.
Still, communityloan centers are not widely understood in the banking industry; a spokeswoman for the Texas Bankers Association said she hadn’t heard anything about them.
“It’s new, so we do have a job of convincing them how it works, to help banks meet their goals,” Porter said. “We’ve got a job to educate banks.”
Houston has a community loan center too, run by the Neighborhood Recovery Community Development Corp ., a nonprofit economic development group. It’s running up against the same challenges of recruiting employer sandbanks to participate — meaning it will take a while before they pose a threat to the high-interest loan industry, which issued $238.8 million in new loans in the Houston area last year.
“We don’ t have enough access to capital to eliminate the number of people going to (payday loan and title loan) businesses,” says N RC DC director Paul Charles, Financial supporters include Citibank, United Way, and Wood forest Bank, but Charles is looking for more. “We’re lining everything up, and then we’ll roll it out, so we can keep on rolling.”
So far, the Houston grouph assigned up employers covering about 25,000workers, and hopes to offer financial counseling as well as loans to all participants.
Charles declined to name the participating employers, and would neither confirm nor deny that the city of Houston, which has about 22,000 onthe payroll, is onboard. (Thecity of Dallas was among the first to sign upfor the program when it came to town in 2014, finding that 42 percent of its 13,000 workers had used payday loans.)
And from the surveys the Neighborhood Recovery Community Development Corp. has done, it looks like the newloan option is providing some relief from payday lenders directly.
Some participants say they’re using the community loan center’s program to pay off old, high-interest loans by taking on debt they can afford to repay.