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Traditional banks avoid the short-term-credit market because its customers demand a level of customer service that is inconsistent with current models of retail banking, the head of a payday lending group writes.
October 7 -
Borrowers are faced with two terrible choices: take out another exploitative loan because of the shortfall created by the first, or face a range of catastrophic consequences associated with defaulting.
October 5 -
Small installment loans with monthly payments limited to 5% of a borrower's income offer a way for banks to serve low-income customers' credit needs while turning a profit.
September 16 -
It's been nearly a century since reformers and lenders agreed on 36% as a small-dollar loan ceiling. Inflation has since swelled production costs, and lending under this cap is no longer profitable. The result: fewer options for consumers.
August 4
In recent years, the nonprime lending industry has been under a microscope, and for good reason.
According to data from Fair, Isaac and the Corporation for Enterprise Development, there are now nearly 150 million nonprime consumers in the U.S. — a market larger than prime consumers — yet nonprime credit options remain limited and in many ways problematic. Although regulators, consumer groups and industry leaders have debated ways to improve nonprime credit products, so far these efforts to find common ground have fallen short.
I believe we ultimately can and will make progress on the toughest issues facing our industry with solutions that ensure all nonprime consumers are treated fairly. But for a moment, why don’t we take a break and tackle a cause that should be easy for all parties to get behind — eliminating onerous and unnecessary fees. Punitive and add-on fees can drive vulnerable customers deeper into debt, ultimately hurting their long-term financial health. While these types of fees aren’t unique to nonprime lending, their impact on nonprime consumers can be especially devastating and deserves immediate attention.
Understanding the Nonprime Borrower
As nonprime lenders (those serving consumers with FICO scores typically below 700 who are often ineligible for traditional prime credit offerings), we have to think about the distinct challenges facing our customer base and account for this in how we structure and collect on our credit offerings. According to a
It isn’t news that many nonprime consumers will at some point during the course of a loan have trouble making on-time payments, yet legacy nonprime credit products have been notoriously hard on consumers for nonpayment. They typically charge returned payment fees, late fees and in the case of title loans, can even take ownership of the customer’s car. Lending laws in many states often enable and even incentivize these types of lending practices that are used to enhance the effective returns on credit.
Rather than punish consumers who are already facing financial stress, we should focus our efforts on offering products that support the unique financial needs of nonprime consumers. Pricing the product to the risk of the borrower, eliminating fees and rewarding those that demonstrate responsible behavior with progressive rates are just a few things that could help a consumer work towards a brighter financial future.
Not Just a Nonprime Problem
While it is easy to paint all nonprime credit providers with the same brush, it is important to note that the issue of onerous fees is not unique to the nonprime space. Prime borrowers also find themselves paying more than what their APR suggests once the fees are tallied up. In fact,
Raising the Standard
Regulatory action is needed to weed out patently unfair fee structures, but I believe as an industry we should and can do better on our own. If nonprime credit providers need to rely on punitive or add-on fees or repossession of important collateral to achieve target profitability, there is something fundamentally wrong with the business model. It is possible to responsibly and profitably serve nonprime consumers denied by mainstream options, but it requires greater sensitivity to the financial hardships of this customer base and a smarter approach to pricing and underwriting that accounts for the borrower’s unique needs and challenges.
Providing more responsible credit options for nonprime consumers is not going to happen overnight, but I believe it is one of the prevailing challenges of the post-recession era. An ongoing commitment to positive and constructive conversations amongst regulators, industry and consumer advocates will be critical to reshaping nonprime financial services for the better. In the immediate term, we should all be able to agree that there is no place for punitive, deceptive or aggressive tactics for those serving the nonprime market. Nonprime credit providers have to set a higher standard for how we treat our customers. At the end of the day, having happy customers, treated fairly, is not just good business. It’s simply a no-brainer.
Ken Rees is the CEO of Elevate, an installment lender based in Fort Worth, Texas.