AABP Award 728x90

Small loans, big plans


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You can see the anger flash in Chris Neubert’s eyes when he talks about how payday lending companies have ensnared many low-income Central Iowans in their webs of ultra-high-interest loans. Many of these people who are surviving paycheck to paycheck have had little choice but to continue to roll these loans over to get by, even though the interest rate may exceed 400 percent.

Neubert, a staff member with Iowa Citizens for Community Improvement (CCI), is among a group of specialists with the nonprofit organization who are working on a multi-pronged strategy to address the issue in Greater Des Moines.

“We knew payday lending is bad, but until you actually sit down with people and hear the devastation this can cause with someone’s life, then you finally get it,” said Neubert, a housing and financial safety organizer with CCI. “It’s not just bad; it’s horrific. It keeps entire communities just trapped in cycles of debt. If you’re paying $55 every two weeks to a payday lender, that’s a significant percentage of your overall income.”

Affordable credit

One of the approaches CCI has taken has been to develop an alternative to payday lending by establishing a small-dollar loan program. CCI partnered with Bankers Trust Co. earlier this year to provide 12 percent loans as small as $250 and up to $1,500. Because of the high demand for that program, which was launched in March, the entire initial pool of $50,000 was committed to 35 borrowers within three months. CCI is now seeking commitments from other Greater Des Moines banks and credit unions to participate.

“This is a CCI invention in partnership with Bankers Trust, and we’re looking to spread it as broadly as possible across the country,” said David Goodner, a CCI community organizer. “Our mission is to make good, affordable credit available in our communities, and we feel our model truly represents what good, affordable credit looks like.”

The nonprofit organization, which has approximately 3,500 dues-paying members in 98 Iowa counties, is funded through foundation grants, member dues, individual donations and federal housing and community development grants.

CCI has in the past called for the legislature to enact limits on payday lenders in Iowa, among them a 36 percent cap on interest and a minimum 90-day repayment period on the loans. The fees charged on most two-week payday loans are typically equivalent to an annual percentage rate of interest of between 300 and 400 percent.

One woman CCI worked with paid more than $1,300 in fees and interest over several years of continually rolling over on an original payday loan of $375, before she paid off her balance with a loan through CCI’s program, Neubert said.

Last month, CCI held a community meeting with officials from the Federal Reserve Bank of Chicago, who met on a Saturday with about 250 CCI members and other concerned residents at Highland Park Presbyterian Church.

At that meeting, Fed officials agreed to take CCI members’ concerns about payday lending and other predatory lending practices back to the Federal Reserve’s board of directors. A Chicago Fed official also agreed to organize a community meeting between CCI representatives and Greater Des Moines bankers in mid-November to provide more information about small-dollar loan programs.

“Essentially what we’ve agreed to do is invite the financial institutions to come and hear about the program,” said Alicia Williams, vice president of consumer and community affairs for the Federal Reserve Bank of Chicago. “Once we do that, we don’t dictate that banks have to participate.”

Williams said she has heard there is a need for such programs throughout the five-state Chicago Fed district, which includes Iowa, but said she doesn’t know how many banks are offering them.

Demand for CCI’s small-dollar loan program has been overwhelming, said Matthew Covington, another CCI community organizer.

“In about three months’ time we received over 700 calls, and a lot of those were from folks inquiring about the small-dollar loans to get out of a payday lending cycle,” he said.

Paul Erickson, senior vice president of the retail division of Bankers Trust, said the financial literacy counseling that CCI provides to potential borrowers has been the key element in making the program work, as the bank doesn’t provide that service.

“We recognize the fact that there are folks in this community that for whatever reason, it’s hard for them to get loans,” he said. “We actually had a small focus group with some of CCI’s members, and then worked up a proposal that went to our senior management at the time that came up with this program.”

The loans have repayment terms of one to three years, depending on the amount borrowed. The minimum monthly payments range from about $35 to $75.

“It’s meant to be a loan to address some kind of emergency situation, whether it’s a payday lending situation or unexpected repairs or collections,” Neubert said. “We’ve seen a wide range, but we wanted to make sure people don’t get back into that situation.

“Our job has basically been getting people in the door, going with them through the intake process. Bankers Trust did all the underwriting; we send them all the documentation, including the budgets we set up for the borrowers. Then on the back end, we follow up to make sure everyone’s on track.”

Two years ago, the Federal Deposit Insurance Corp. (FDIC) launched a two-year pilot program in which 31 banks are participating. No Iowa-based banks are participating in the pilot program.

Low charge-offs

Among the banks in the FDIC pilot program is the National Bank of Kansas City, which began its small-dollar loan program with $50,000. The bank hasn’t had a problem with the program running out of funds, as loan payments have replenished the available pool, said Stacy Nickel, a real estate lender at one of the bank’s Kansas City branches.

“It’s been very successful, I think,” said Nickel, who said most of the borrowers found out about the program through online searches. The program is limited to borrowers in the Kansas City metropolitan area.

In the first quarter of 2009, the bank received 20 applications, accepted eight and loaned $7,750 to those borrowers. The bank has made about 75 loans since it began the program a year and a half ago. The bank charges 20 percent interest on the loans.

At the end of 2008, the bank had charged off a total of eight loans totaling about $4,500, which was “not bad at all,” Nickel said. “That’s right around a 3 percent charge-off rate, and the amounts lost are very small relative to other loans, because we don’t loan anything over $1,000.”

At Bankers Trust, “the loans are acting as we expected,” Erickson said. However, “it’s too early to tell whether it’s successful or not. We’ll take a good hard look at it in about a year to determine whether we’re going to put more money into the program.”

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