Nick Mitchell-Bennett, Executive Director and Jeremy Stremler, Resource Development and Strategic Planning, Community Development Corp. of Brownsville
The need for quick cash can lead to rash decisions such as accepting a predatory loan. In 2014, Texas payday and auto-title lenders collected $1.5 billion in fees, with an effective annual interest rate of 660 percent. Alternatives to predatory loans are needed.
The Rio Grande Valley MultiBank (RGVMB) was created in 1994 by six financial institutions interested in an alternative financing vehicle to support affordable housing and small business development in Cameron County, with eventual expansion into Hidalgo, Starr and Willacy Counties. The Community Development Corp. of Brownsville (CDCB) manages and operates the bank.
In 2011, CDCB and RGVMB created the Community Loan Center (CLC), an alternative for their many clients who were burdened by predatory auto title and payday loans. The CLC, an employer-based, short-term, small dollar loan program allows employees of participating companies to receive fairly priced small-dollar loans and free financial counseling through CDCB’s La Puerta program.
To give context to the issue of predatory lending in the Rio Grande Valley, there are more than 20 predatory lending businesses within a two-block radius of the CLC and over 56 in the Brownsville metropolitan area. Weak industry oversight in Texas combined with a large working poor population has made the state a profit center for many of the highest-cost loan providers. Some payday lenders charge their mostly lower income borrowers the equivalent of an effective 1,000 percent annual interest rate in fees. The majority of these borrowers are not able to repay these loans on time and incur high refinance fees. According to Pew Charitable Trusts, only 14 percent of borrowers are able to pay off their loan during the standard two-week period. Pew says the average payday loan borrower is indebted for five months, spending a total of $895 for a $375 loan. On average, auto title loan borrowers had to refinance their loans twice in 2014 incurring roughly $600 in fees on loans averaging $960. In 2015 over 15 cars a week were repossessed in the Brownsville area.
Our organization changed this model by offering employees of participating employers’ small loans. Employees may borrow up to $1,000 at 18 percent interest with a $20 administrative fee and have up to 12 months to repay with no prepayment penalty.
The RGVMB franchised this model to other organizations that are committed to combating predatory lending. Currently, there are eight local CLC lenders in Texas serving the markets of the Rio Grande Valley, Brazos Valley, Dallas, Waco, Laredo, Austin, Houston, as well as a franchise that lends in areas between markets and two franchises in Indiana. The program anticipates having a franchise in all 50 states in the near future. Currently the franchises have a combined potential borrower pool of over 47,000 employees.
The CLC’s success is rooted in offering a quality product and service that is easy to access and improves the financial stability of consumers that use it. Since its launch in 2011, the CLC has originated over 12,600 loans, totaling over $10.4 million. The lack of other affordable small-dollar credit options makes this program an important piece of the consumer financing puzzle.
One of the main reasons for the program’s success is the model of working with employers to provide access to CLC loans as part of their benefits package. Consumers must verify they are employed by a participating employer, allowing the franchises to use direct deposit to receive payment from loan holders. This process has helped to keep delinquency low with a loss rate of under five percent, well below industry average.
By franchising out the model and maintaining control of loan processing and servicing through our own online proprietary lending and servicing software, RGVMB created sustainable growth that allows the CLC to expand nationwide and continue to serve consumers in need of small dollar loans. We hope to put predatory lenders out of business and allow low-income Americans the financial freedom they deserve.