New Nonprofit Fund Provides Alternatives to Texas ‘Predatory Lending’ Industry

Andy Posner founded the Capital goods fund in Rhode Island just before the last recession, and he says he saw first-hand how the much-vaunted economic recovery after 2008 left a lot of people behind.

More and more people, even those working full time or more, have found themselves without the ability to make ends meet over the past decade. So, they turned to payday loans and auto titles, pawn shops and other quick money options when faced with an emergency expense or just a higher utility bill. than usual.

“The size of the predatory lending industry has more than doubled, during the period when the economy and the stock market exploded,” he said. “So it’s clear that it didn’t explode the same way. ”

Capital Good Fund is a distinctly non-predatory lender, a Community development financial institution which offers small personal loans on reasonable terms. The fund provides loans and provides financial advice in six states now. Texas is the last.

The fund offers two different types of loans in Lone Star State: One to help cover immigration fees between $ 2,000 and $ 20,000 with an annual percentage rate close to that of a typical credit card (15 , 99% to 24%). The other is a short-term relief loan between $ 300 and $ 1,500, with an interest rate of 5% and a three-month deferment period.

Posner says the coronavirus crisis has caused a lot of people to need a little help making ends meet. The short-term loan is most often used for rent, utilities, Wi-Fi bills, and vehicle repairs.

“A lot of people buy iPads and the like because their kids are going to school on Zoom now,” he said.

Without an alternative like these low-cost loans, Posner said most of his clients would end up taking out a payday or auto title loan and borrowing at rates and terms considered predatory.

Texas has more than 1,900 stores selling payday loans and auto titles, surpassing the number of Whataburgers and Starbucks in the state.

Officially, payday loans and auto titles all carry an interest rate of less than 10% in Texas – the state constitution prohibits higher rates than usury – but with all the added fees. payday loans are like taking out a loan with an interest rate of 500%. That’s 100 times what the Capital Good Fund charges for a small loan.

Payday loans are also often structured in a way that makes them difficult to repay, forcing many borrowers to take out another payday loan to pay off the first one and triggering a spiral of debt that critics say is fundamental to the profitability of these companies.

Auto title loans are cheaper than payday loans in Texas – starting at around 200% APR – but they are risky because the title of a car or truck is used as collateral. Last year, more than one in six Texans who took out a title loan had their car repossessed when they couldn’t repay the loan, according to data from the Texas Officer of the Consumer Credit Commissioner.

Texas cities have tried to curb more predatory lending practices, demanding fairer loan terms or better disclosures. A growing list of states has limited interest rates and fees, but Texas offers almost no consumer protection, allowing the industry to thrive.

Last year, Texans paid more than $ 2 billion in fees for payday loans and auto titles.

“We see our role as part of the rebuttal that if you curb predatory lending people will have nowhere to go because we are one of the alternatives,” Posner said.

Susan Hoff, head of strategy and impact at United Way of Metropolitan Dallas, said more regulations are needed to curb industry excesses, but there must be better options for people who need to borrow money for a crisis or an opportunity. .

“Having a viable alternative with a fair and reasonable interest rate that people can pay off is an incredible opportunity for our community,” Hoff said.

United Way of Metropolitan Dallas helped bring Capital Good Fund to Texas.

Because too many workers earn too little to make ends meet, Hoff said predatory loans filled a need. His organization’s research found that only a quarter of workers aged 24 to 35 in the Dallas area earn a living wage.

“People who use predatory lenders don’t do it that often just for a crisis, it’s often eight to 10 times a year, they come back just to get enough money to survive another month and then they go back. , and so they ‘re-compile these loans (and) this interest is compounding excessively, ”she said.

Capital Good Fund has made approximately 5,900 loans over the past 11 years, lending approximately $ 12.3 million.

Fund loans are also designed to help people improve their credit. Because loan payments are reported to the credit bureaus, the average customer sees a 90 point increase in their credit rating by the time their loans are paid off.

Since payday lenders and auto title lenders typically only report missed payments to credit bureaus, “you can’t win, but you can lose.”

Posner said he was happy to offer a better alternative, but said in an economy that worked well, his fund likely wouldn’t exist.

“No healthy economy should force people to borrow $ 300 to $ 500,” he said. “They should be making enough money, there should be enough affordable housing, there should be bottom-up mobile jobs so people have that liquidity.” The fact that they don’t do this is not a failure on the part of our clients. It is a systemic failure.

Do you have any advice? Christopher Connelly is KERA’s One Crisis Away reporter, exploring life on the financial limit. Send an email to Christophe at [email protected]You can follow Christopher on Twitter @hithisischris.

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