Earlier this month, the Consumer Financial Protection Bureau proposed rules on the massive payday loan industry. CFPB wants to force lenders to test borrowers’ ability to actually pay back loans, and limit re-borrowing, which creates a spiral of debt and exorbitant fees.
Both supporters and critics of the rule agree that it will probably force many payday lenders to close, ending 400 percent annual interest rates and immoral price-gouging. But while lenders might go away, the need for small-dollar loans won’t.
Consider this incredible – and depressing – statistic: According to a Federal Reserve survey, 47 percent of Americans would struggle to come up with $400 in the event of an emergency. Stagnant wages, high medical costs, and soaring inequality have increased financial stress on a large subset of American families. And while we must reverse that, it won’t disappear in the near future. So the question becomes: if CFPB curtails predatory payday lending, what will spring up in its place?
Some experts fear the industry will just slide into high-cost installment loans, with little difference for consumers. Others believe thinning out the payday herd (there are more payday loan storefronts than McDonald’s and Starbucks in America combined) will increase per-store sales and maybe bring down prices. Still others pine for credit unions or payday lenders or even the post office to step in and provide more affordable products.
But there’s another option active in Oakland. At the infamous Fruitvale Station, the mass transit plaza where police tragically killed Oscar Grant on New Year’s Eve 2008, the non-profit Community Check Cashing offers borrowers with credit scores under 650 small-dollar loans and financial services, at a fraction of the normal cost.
It costs $15 to cash a $500 check at a typical check-cashing store. Community Check Cashing charges $6.25. On an initial $300 payday loan, they charge $23, as opposed to $45 from the big boys. A one-year installment loan can be had for one-fifth the going rate. Community Check Cashing can do this because, as a non-profit, they only need to be self-sustaining.
One little storefront in Oakland cannot change the world. Or maybe it can. With enough funding, a non-profit foothold in the small-dollar loan market can ease the burden of perpetual debt on vulnerable communities. And Community Check Cashing’s model of engaging in deep relationships with their customers can do more than just provide ready cash. “In our testimonials, people are saying, our lives are changed now,” said Dan Leibsohn, who opened Community Check Cashing in 2009.
The idea has drawn the attention of Strike Debt Bay Area, an offshoot of the Occupy movement. “It fulfills a need without being exploitive,” said J.P. Massar of Strike Debt Bay Area. “We believe that an operation whose goal is to help people get out of the cycle of debt, while providing a service which is still necessary in our society, is one worth replicating rather than having predatory payday lenders proliferate.”
Leibsohn started Community Development Finance, a 501(c)(3) organization, in 1998, after a career working with low-income neighborhoods. He spent over a decade analyzing non-bank financial services markets, like check cashing and payday lending, eventually creating a business plan for a non-profit alternative.
The operation started slowly, with just check-cashing and wiring money. “We didn’t have the financial capacity to take on the risk,” Leibsohn said. When the lending began, Leibsohn paired them with what he calls financial coaching, requiring it for larger installment loans. “We walk somebody through a detailed budget, to create a cash flow for people to determine payment,” Leibsohn explained. “People say, ‘I never knew what was going on.’” This coaching is built into the underwriting of the loan, meaning that it would likely comply with the new CFPB rules.
While financial literacy courses are often derided as a noble distraction from actually protecting consumers, the Community Check Cashing technique hearkens back to the kinds of banking we had in America decades ago.
Going through a rigorous study of an individual’s finances and making decisions based on personal knowledge is the textbook definition of relationship lending. You sometimes see this at the community bank level but never in small-dollar loans, where speed is the name of the game. Leibsohn said his outfit even loses customers because the application process is significantly longer than his counterparts.
Community Check Cashing decides to issue a loan because they’ve developed trust in the borrower and understand their financial situation. And because of this knowledge, they would rather lose out on business than give people something that could harm their financial future. “We’ve tried to talk people out of loans,” Leibsohn said. “We say, do you need the $300? That’s at our own expense.”
The result of all this work is that, while many customers pay late, the default rate is under 0.75 percent, according to the non-profit. And they claim to have saved customers between $150,000 and $200,000 per year, compared to what they would give a regular payday lender or check cashing store. That money stays in people’s pockets, and in the community.
“One of the things we’ve found is people understand it’s a bargain, and if they mess up they’re not going to have access to it,” Leibsohn said. “It’s not because we’re so wonderful, although I’d love to think so.”
It’s a bit hard to say what kind of impact Community Check Cashing has had in Oakland, because the scale remains small. The store does only around $280,000 in loans per year, as they haven’t raised enough in donations and grants to serve more customers. Turmoil with finding a bank for their business account almost sunk the project last year (Leibsohn says the banking side is now stable). Contracts with tech startups and low-income housing developments to provide various services, and the funding for more loans, have come and gone. Leibsohn has not taken a salary four of the past five years, eating through his savings.
There are ways to scale this up, however, argued J.P. Massar of Strike Debt Bay Area. All lending operations need working capital to make more loans. Municipal, county, or state governments could deliver that investment, which would save state residents money without the government taking on inordinate risk. Public banks would be ideal for this, Massar said. Foundations or philanthropists could set up a demonstration study to prove the concept; Strike Debt has applied for grants on Community Check Cashing’s behalf. The non-profit has also looked at creating a manual for non-predatory small-dollar lending, and distributing it as a turnkey operation to other entities or even franchising the concept.
Even in his most expansive vision, with reloadable debit cards, remote check-cashing through smart phones, and statewide lending in California through storefronts and online, Leibsohn thinks Community Check Cashing could co-opt 10 percent of the market at most. But that might have a salutary effect on other payday lenders. And success could get other community-minded types thinking about the potential of running small-dollar loan operations for community benefit, rather than their bottom line.
So while the non-profit option isn’t built out yet, you can see its possibilities. “We’ve developed some approaches that we can take to scale and really make a difference,” Leibsohn said. “That’s why I’m doing this, to impact people’s lives.”