Consumer lender Oportun hits pause on debt collections
Oportun Financial said Tuesday that it will cap rates on all its loans at 36% and will largely stop taking legal action against customers who fall behind on their debts.
The San Carlos, Calif.-based consumer lender said it decided to dismiss all pending collections cases and suspend filings of new cases because of the economic toll COVID-19 has taken, particularly on low-income communities. Many of its borrowers are from low-income, underserved communities that have been hit hard by the pandemic.
When it does eventually resume collections, it will file about 60% fewer cases, CEO Raul Vazquez told American Banker in an interview Tuesday. He acknowledged that the decisions to suspend collections and cap rates would pose challenges in the short-term but said they will ultimately build loyalty among Oportun's customer base.
“There’s been a lot of analysis that’s gone into both of these,” he said. “We’ve taken this step forward with the view that these are permanent and sustainable changes for our business — and really good changes for our business.”
Vazquez said that “several thousand” customers would be affected by Oportun’s decision to dismiss pending collections cases. He did not quantify the value of the loans that could be dismissed, but said that a typical loan in collections is for an amount under $3,500.
The lender ultimately ends up dismissing about two-thirds of all the collections cases it files, usually if it’s learned that a borrower has suffered a job loss or other hardship, he said. Emphasizing that collection is a last resort, Vazquez said the company would be developing new tools and approaches to work with borrowers in order to achieve that 60% reduction.
For example, during the pandemic and shelter-in-place orders, the lender came up with a new text campaign targeting customers who hadn’t been in communication for a while. Oportun sent out a text to those customers offering them the option to defer a loan payment simply by texting back the word “defer.”
“We think there’s a lot more of that that we can do to try to deliver that goal,” Vazquez said.
Known as Progreso Financiero until 2015, Oportun has long positioned itself as a consumer-friendly alternative to payday lenders. The firm serves customers online and over the phone in 19 states and has more than 340 retail locations across nine of those states. Oportun went public last year.
On its first quarter earnings conference call in May, Oportun executives said emergency hardship deferrals had peaked at 14.6% in mid-April before falling to 8.6% in mid-May. The 8.9% annualized net charge-off rate for the first quarter was better than expected, they said at that time.
Emergency deferral requests fell to 5% in July, the company said.
Vazquez said that Oportun has wanted to get its interest rate cap under 36% for some time but had to achieve scale, refine its risk models and improve its technology to do so. He also said that while other lenders cap rates but then try to make money off of fees or products like credit insurance, Oportun will not add any ancillary products that would effectively raise the APR.
“For years there has been this idea that if you’re going to serve unbanked or underbanked consumers, you have to do it above 36% or you have to sell ancillary products like credit insurance,” he said. “We feel that the scale we’ve achieved today and the environment that we’re in created an opportunity for us to take this step.”
Oportun’s stock was up 2.6% late Tuesday to $14.80 a share.