With the Consumer Financial Protection Bureau expected soon to roll out a proposal to regulate payday lending, community groups have formed an organization designed to promote alternatives to short-term, small-dollar loans.
The Coalition for Safe Loan Alternatives held a panel discussion Tuesday in Washington announcing its intention to become a peer-to-peer forum for best practices among current alternatives to payday loans.
The group will not advocate for policy changes. Rather, it aims to offer a platform for local organizations to share information and compare ways to offer low-cost access to credit.
"How can we replace a two-week loan model at a better cost?" said David Rothstein, the group's chair and the director of resource development at the nonprofit Neighborhood Housing Services of Greater Cleveland. "There are different ways of giving ample time to pay the loan back. We want to design loans for people in a way that meets their needs."
Because of the short duration of payday loan, many borrowers are forced into what the CFPB calls a "debt trap," in which they have to take out new loans to pay off old ones. A typical $350 payday loan has a fee of $45 and comes due in one lump sum after two weeks. Payday loans have effective annual interest rates of 300% to 500%.
The coalition provided only a few examples of existing alternatives to payday loans. Some nonprofits and roughly 600 credit unions offer such alternatives but there is no national repository for information on what various groups are doing. The coalition plans to offer webinars and technical assistance to its members.
"The goal was to put together groups who represented a diverse set of interests and goals, to share best practices, and to find a road map for communities and groups looking to offer alternatives to payday lending," Rothstein said.
The coalition's members include the $907 million-asset Sunrise Banks in St. Paul, Minn., the nonprofit New Mexico Coalition for Fair Lending, and Employee Loan Solutions, a San Diego firm that offers small loans through employers. No credit unions have yet signed on.
Doug Farry, an executive vice president at Employee Loan Solutions and a former TurboTax executive, said there are alternatives available, but most borrowers do not know they exist.
"There is a substantial portion of the population that is using [payday loans] on a daily basis," Farry said. "The question that inevitably comes up is what are you going to replace it with?"
His company gives companies the option of providing a voluntary service to employees, who can take out loans of up to $3,000 a year. By automating the underwriting and collections process, the company has dramatically lowered the cost of such borrowing, Farry said. The company currently offers loans in California, Ohio, Minnesota and Virginia.
Rothstein's nonprofit, the Neighborhood Housing Services of Greater Cleveland, has a home loan repair program that allows borrowers who need work done on their home to put off payment until the title changes hands. The loans are originated, underwritten and serviced in-house by the nonprofit.
New Mexico State Rep. Javier Martinez said on the panel that the CFPB's outline of its proposal on payday lending, released a year ago, was a "good start" but "nowhere near enough."
Payday lenders have long set up shop in border towns. There are roughly 1,700 payday lenders in New Mexico, many operating on the borders of Navajo lands, Martinez said. He described a borrower who took out a $700 auto title loan that ended up costing $2,600, an effective annual interest rate of 719%.
The only help for many borrowers, he argued, is a local nonprofit, Native Community Finance, a community development financial institution in Laguna, N.M., that has been refinancing predatory loans at interest rates ranging from 9% to 15%.
Martinez blamed politicians for refusing to enact stricter state laws.
"The predatory lending lobby has a stranglehold on our state legislature and it's the reason for the slow pace of reform," said Martinez, a policy director and general counsel of the Partnership for Community Action. "We have been trying for so many years to cap interest rates without success at the state level."
Yet the CFPB is prohibited by the Dodd-Frank Act from regulating interest rates on payday loans. Roughly 20 states, including Arkansas, Montana and New York, have clamped down on payday lending with interest rate caps ranging from 17% to 36%.
Though the CFPB has yet to formally issue its proposal, state regulators and House lawmakers have warned the agency not to override state laws. Some of the most heated discussions have been around whether the CFPB would set a floor or a ceiling with some provisions, such as requiring a 60-day "cooling off" period before a consumer could get another payday loan after hitting a threshold amount.
"There is nothing in the CFPB proposal that I've seen that would be preemptive to the states," Rothstein said. "What they've proposed is a great floor."
The panelists also sought to debunk the industry's claims that as many as 60% of storefront lenders will be shut down if the CFPB enacts its current proposal. Already, payday lenders are moving into installment loans.
"The model is moving toward installment loans and they can also be connected to an auto title loan," Rothstein said. "The overall price is still going to be up to the states, so states still have a significant role to play on interest rates."