Providing Alternatives to Toxic Loans
Many of us can thank credit for benefits we enjoy in life. Credit has allowed us to buy houses, finance education, purchase goods and services, or make it through an emergency situation.
For me personally, access to (relatively) cheap credit has helped me achieve milestones in my life. It helped fund my education at the University of Missouri, which led to buying a car through credit from Commerce Bank, and helped transport me to my first job 12 years ago. Not long after that, credit helped me buy an engagement ring for my wife, and then we used our joint credit to buy our first house in Independence. For me, getting started on my adult life was largely financed by good credit.
Unfortunately, so many people have little or no access to credit. For those not connected to traditional lending sources, or unable to qualify for the good credit that so many of us enjoy, they must often turn to lenders that prey upon their vulnerability. Toxic lending operations rely on the business model of having repeat customers that continue to refinance interest that they are unable to repay from the previous loan. In the State of Missouri, where relatively few laws and regulations exist, customers can pay Annual Percentage Rates north of 1000%. Imagine borrowing a dollar from a friend then being asked to repay that dollar along with 10 dollars for interest.
In my opinion, toxic loans serve one purpose, and that is to keep borrowers heavily indebted and stuck in a cycle of poverty. I sat next to Elliott Clark, who has become a national face for the victims of toxic loans, at a small-dollar loan forum this week, and we discussed how the general public might ask, “Why would someone make such a poor choice and go to a payday lending operation?” Elliott quickly refocused the conversation to say, “most times, for low-income people, it’s their only choice.”
CSL is working hard to provide families access to credit to improve their lives, and get at one of the root problems that keep people in poverty. Two years ago, we partnered with Holy Rosary Credit Union to launch our own small-dollar lending program. Over the last 24 months, we have made 65 loans totaling more than $251,000. We have lent money to refinance toxic loans, purchase vehicles, pay back taxes, and other imperative items. The average client seeking to refinance a loan came to us with an interest rate of more than 200%. No one in our program pays more than 19% interest, even though the average credit score of our participants is less than 600.
How do we do this? We leverage lots of community resources. We have raised money for a loan loss pool of funds that limits Holy Rosary’s exposure, Holy Rosary has received a grant from the Catholic Diocese of Kansas City-St. Joseph to fund a loan officer, and CSL has provided free space to Holy Rosary to open up a branch office of the credit union in our Noland Road office. Holy Rosary’s loan officers and CSL’s Case Managers work with loan recipients to make repaying their loan paramount in their life, knowing that it will help build their credit for future loan opportunities. In the event that a loan recipient is having trouble making ends meet, CSL could pay a rent/utility bill, or provide extra food or other supports to free up the cash to make sure the loan payment is made. By having a strong wrap-around support system, we have only had three defaulted loans out of the 65 we have issued, which is a default rate of less than five percent.
Our future is bright in this arena of work, but we need lots of community help. Here are our challenges, in no particular order:
We need to increase our loan loss pool of funds from several thousand dollars to hundreds of thousands of dollars in the future. This will give Holy Rosary the confidence to continue to proceed with these riskier loans.
To service more loans, we need more loan officers, whether in a professional or volunteer capacity.
We need to raise community awareness about the pitfalls of toxic lending operations, and how they pull communities down.
Consumers must be educated about their options, and they need to know that alternative lending exists. We can all think of parts of town where payday lending or buy-here, pay-here car dealers are the only businesses. If that’s your neighborhood, where else are you going to turn? We need to identify and educate consumers through schools, churches, and employers about good credit options in their community.
Low-income families need access to lines of capital (credit) to invest in themselves and their futures. This vulnerable population needs credit just as much, if not more than their middle- and wealthy-class counterparts. To build a thriving community, we must find solutions to these challenges. I invite you to join our ongoing dialogue. With your continued support of CSL, we’ll work to address societal challenges like this, and build stronger communities.
