Texas’ Scalable Small Dollar Loan Program

This is the first installment of a series of blogs on Innovations in Asset Building.

The Problem
Payday loans are rampant in Texas and payday lenders consider Texas a profit center for their products. Payday lending is a problem in Illinois too as lenders regularly charge up to 400% APR. IABG works to protect consumers from predatory products.

As Payday lending reform in Texas is unlikely to occur in the near future and 50-75% of borrowers were not able pay back the loans on time, consumer advocates wanted to create a new small dollar loan option to balance out the two-sides of the transaction so both lenders and borrowers are successful.  Several key consumer advocacy organizations (RAISE Texas, Texas Appleseed, and the Texas Association of Community Development Corporations) sought to provide Texas communities with access to small dollar loans by expanding an employer-based small dollar loan program created by the Rio Grande Valley Multibank CDFI (RGVMB).

Community Loan Center’s Affordable Small Dollar Loans
The Community Loan Center‘s (CLC) Affordable Small Dollar Loan (SDL) program uses employer-based outreach to issue loans to employees through an online loan origination and servicing software being developed by the RGVMB.  As most operations are online, the reduced overhead means that they are able to provide an SDL at a safe and profitable interest rate, currently 18 percent with a $20 origination fee.

To expand the program statewide, the advocates are recruiting a network of nonprofits that have the capacity to offer the program in their areas. The local non-profits will contact employers in their community, explaining that at no cost to the employer, employees can gain access to safe SDLs. Employers have been responsive because when an employee can’t pay back a payday or auto-title loan, as is most of the time, employers are often contacted by the lender and debt collector to either deduct payments from future paychecks or coerce the employee to pay. Employers often see that through working with CLC their employees are more financially secure. Additionally, employers do not have to deal with the hassle of debt collectors calling about their employees.

Model Innovations

• Scalable: In the financial products world, consumer advocates often find themselves on the side of pilots that would require large investment of funds and commitment by the organizations, community, and political leaders to scale up. Initially funded by Citi to help with startup administration costs, this program grows, community by community, without a lot of investment required to branch out into each new community. CLC employs local sales people to reach out to the major employers in the community; giving a new region access to affordable small dollar loans.
• Sustainable through Low Overhead:  As CLC has no need for a storefront or a large staff to directly interact with borrowers, the costs for running this program are low. Combined with an 18% APR rate on the small dollar loans, the program initially broke even within the first year.  In the 17 months of operation the pilot program issued 1,365 loans through 26 employers that employ a total of 3,135 employees. It is designed so each new community should be able to break even within two years.
• Credit Building Loan: Unlike payday or auto-title loans which only file credit reports on collections on defaults, on-time payments for this loan are reported to the credit bureaus as would a loan at a bank.

Future of Sustainable Small Dollar Loans
“The program can only grow if it’s sustainable,” said Matt Hull, Executive Director of the Texas Association of CDC’s. “Doing the research to find out the kind of model you want to pursue, and focusing on cost containment and generating revenue is how you can make it sustainable.” The CLC continues to gain traction on the ground and will provide more communities in Texas with access to small dollar loans beginning in early 2014. If the initial expansion phase proves sustainable, they plan to expand into smaller communities in Texas and eventually into other states through partnering with statewide asset building organizations and nonprofits. Furthermore, they are investigating how to add asset building components such as voluntary savings to the program over time.