Social change work is hard and frustrating and wonderful and terrible; it is also, at times, funny, quirky and just plain fascinating. With this blog we hope to capture all that goes into what we do at Capital Good Fund, and we invite you to join the conversation!

Sunday, November 10, 2013

Sharks in the Water: The Wild West Of Online Payday Lending

From 'Brick-and-Mortar' To 'Zeros and Ones'
Last week we launched a 'micro branch' in Woonsocket, RI out of which we will be offering an alternative to payday lending (you can see photos here and read, listen to or view some of the press we got from the ribbon cutting).  The reason?  In Rhode Island, payday loan branches can charge up to 260%, trapping low-income Rhode Islanders in a debt cycle from which it can take months or even years to escape.  Funded by United Way of Rhode Island, the goal of the new branch is to divert customers from the predatory lenders to us by:
  • Offering a loan with a far lower interest rate
  • Reporting loan payments to credit bureaus so that borrowers build their credit
  • Delivering free financial coaching to further empower clients
  • Offer a customer service experience--quick, convenient and friendly--comparable to that of the payday lenders
We are confident that the program will be a success: we did five (5) loans in our first week!  Obviously, we have a ways to go (the volume of payday lending in RI is around $70 million--an astronomical number for a small state), but as a recent NPR story makes clear, the predatory loan problem runs far deeper than the Brick-and-Mortar payday loan presence.

The Wild West
The article, I Applied For An Online Payday Loan.  Here's What Happened Nexthighlights how aggressive--and unregulated--online payday lenders are.  In fact, as damaging as physical payday lending can be, at least it is tightly regulated and, by-and-large, run by U.S.-based companies.  Online payday lenders, in contrast, often shield themselves from regulation by hiding behind foreign-based entities or shell companies based on Native American reservations.  For instance, an October 22 article in US News & World Report, The Dangers of Online Lending, noted that "...more and more payday lenders are violating state consumer protection laws least 16 tribes and numerous offshore lenders have launched online operations." And these lenders even make loans in states "in which payday lending is effectively prohibited."  What's more, they claim "to be exempt from basic licensing and consumer protection requirements."

One of the advantages (from the point-of-view of the lender) of skirting regulation and forceful--if not illegal--practices is that online lending can be quite profitable.  Indeed, more than a third of the "$49 billion in high-interest loans [made in 2012]" were made online.  That's over $15 billion in online lending that is largely unregulated, which brings us back to the NPR story.  In it, the author, Pam Fessler, applied for a loan online, via, in the interest of understanding what would happen.  Aside from being immediately approved for a loan of up to $250 more than she had requested--an offer that came with an interest rate of over 1,300%, and one that she declined--she was soon deluged with dozens of calls from companies offering large loans (some up to $5,000) at high interest rates.

The reason for the deluge was that "It turns out there's a huge online bidding for [online] loans.  Apply for one loan, and your data is then sold to over lenders.  And because, as I often point out, you don't have to do much in the way of underwriting when you can charge hundreds (or thousands) of percent in interest, there is an extremely strong incentive for the sharks to circle the water with predatory offers.

What's Next
To be honest, it's disappointing that, even if our Woonsocket branch and payday loan reform efforts are successful, there will still be a wild west that perpetuates poverty and drains money out of low-income communities.  Fortunately, people are taking notice and action.  Here are some examples:

Let me close by reiterating a point I often make about predatory financial services.  So long as billions of dollars are sucked out of the pockets of the poor and into the coffers of the wealthy and the powerful, we cannot possibly end poverty in this country; there are enough barriers to upward mobility as it is.  At the same time, to paraphrase Dr. Muhammad Yunus, access to equitable credit should be a human right; and even if you aren't so dramatic about it, think of your own life and imagine it without car loans, credit cards, mortgages, insurance and so on. In my view, what we need is a three-pronged approach to tackling what I've come to view as a national crisis: smart regulation to protect consumers; the availability of equitable, affordable and accessible alternative products and services; and high-quality consumer protection and empowerment (such as financial coaching) to help Americans navigate the complexity of our financial services landscape.

More Reading On The Topic
Payday Lending in America (The Pew Charitable Trusts)
Payday Loans Harm the Economy, Not Just People (The Shriver Brief)

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