“Once payday lenders in Texas get a hook on you, the system is designed so that you can never get out of it. Other states have rate caps. We have nothing. It is very much the wild west. For a 14 day $500 loan, the fees in Texas are $115, two times what it is in other states.”
The fee for a $500 payday loan in Michigan is $65. That has done little to curb this type of predatory lending in our state.
Matt Hull, Executive Director of the Texas Association of CDCs (TACDC), went on to say that in 2013, Texas payday lenders extracted $1.49 billion from Texas residents – the ones who make so little they have to rely on a 14 day loan at 400-700% APR to cover emergency costs. In other words, payday lending is massively successful at profiting off the poor.
When the TACDC brought this up with the legislature, payday lenders pushed back by stating they were actually doing a wonderful service for low-to-moderate income people by providing quick cash. Policymakers agreed.
“The legislature is not going to do anything about it,” Matt Hull said.
An Alternative to Predatory Lending
Very well. If low-to-moderate residents need “quick cash,” why not beat predatory lenders at their own game? TACDC and Citi Community Development researched alternatives to payday lending that could be brought to scale. They found one program at a local CDC in Brownsville, Texas, adapted it, used startup funds from Citi and piloted the Community Loan Center Small Dollar Loan Program.
“It’s a market-based approach. There is no storefront. It’s an employer-based loan to workers. They are fairly priced small-dollar loans with reasonable terms. It will offer direct competition to high cost lenders. It’s nonprofit driven; that’s the key component.”
These small loans work as follows: Texas Community Capital, a nonprofit loan fund TACDC started 10 years ago, operates the program and distributes the copyrighted loan software. TACDC then recruits local nonprofits to participate in the program. Each nonprofit is in charge of loan origination, processing and servicing. The nonprofits recruit local companies to participate in the program. Participating employers offer small loans to employees via payroll deduction, which is all done through computer software. Employees can apply online.
- Max $1,000 loan (or up to ½ of borrower’s monthly gross pay)
- One year loan term, with no prepayment penalty
- 18% interest
- $20 origination fee
- Repayments are $23/week or $94/month
- May only take out one loan at a time
- Can’t refinance until six months later
No credit history is required, approvals are quick, there is no collateral and the loan money is placed directly into the employee’s bank account usually within 24 hours. Free financial counseling is available to anyone taking a loan through the program. Counseling is not required, since required education causes people to avoid the program and continue going to predatory lenders. Plus, the Community Loan Center needs to make a large number of loans in order to break even financially.
“This is a volume business. Since margins are thin, volume has to be high. In order to make this work, you need to do about 150 loans a month. You need companies that have 5,000-6,000 employees. Here that’s not hard to do because a single school district can have 10,000 employees.”
The Pilot Yields Positive Results
The three year pilot program in Brownsville, Texas originated 3,600+ loans through 50 employers with 10,000 total employees. During the first year of the pilot they made almost 800 loans without trying; that’s how great the need was. At the end of the second year the program was breaking even. The current default rate is 5%, and the only time default happens is when the employee separates from the employer – they lose their job, for instance.
The Brownsville pilot saved borrowers about $782 per $1,000 loan for a total of $2,000,000 in savings.
Most people in the program take out the $1,000 maximum. In fact, people are taking out loans through the Community Loan Center to pay off payday loans. Though, “We don’t know yet if people are both using this program and payday lenders,” Matt Hull said.
Employers in the program haven’t been wary or resistant to joining, especially since they are already used to getting calls from payday lenders to verify employment. Many employers like the Community Loan Center because it’s online. Employers sign a MOU that they can leave the Community Loan Center program at any time.
TACDC and Citi Community Development are rolling the Community Loan Center out to several new Texas communities and aspiring to grow to other states soon.
“We’re very interested in making a fund to bring this to scale,” Citi’s Community Officer Mark Nerio said. “Even if we can’t fund a particular state for CRA credit, we could attribute it to NACEDA [a national organization], and NACEDA could distribute it to those other states as an intermediary.”
Bringing this model to Michigan would involve:
- Preliminary research on compliance requirements for Michigan. TACDC had to be licensed as a lender, which took about six months.
- $500,000 in loan capital for year one.
- A full time staff person completely dedicated to the project.
- Copies of the licensed loan software.
- Nonprofits that can be local lenders and recruit employers. (CDFIs, for example.)
- For market viability, a statewide reach of about 10,000 employees in order to generate 150 loans a month.
Do you want to see this in Michigan?
This article is made possible by the Great Lakes Capital Fund. Thank you for sponsoring our attendance at the national NACEDA Summit in San Antonio, Texas so we can bring these best practices back to Michigan and our members.