Solution spotlight: Using small-dollar loans to fight predatory lending

NeighborWorks network organizations use a variety of programs to help communities build credit and avoid scams. And they're always looking for more. Martina Guilfoil, CEO of Chattanooga Neighborhood Enterprise, had her eye on a way to cut the number of payday loans city residents were using. These costly loans, with interest rates of more than 300%, are attractive to residents in a financial pinch with no access to traditional credit. The loan renewal fees make their financial woes worse.

 

"I've always been interested in how to disrupt payday lending," Guilfoil says. "When you're working in a community, you just realize the expense and the trap that people can get into."

 

A study by the Chattanooga mayor's office showed predatory loans in 1,200 lending locations across 89 of Tennessee's 95 counties. Many of the residents used the loans for regular expences, not just emergencies.

 

So when NeighborWorks America offered grants to network organizations interested in exploring new lines of business in 2018, CNE decided to tackle small-dollar loans as an alternative to higher interest payday loans.

 

 

CHS followed a franchise model from Come Dream, Come Build, a Texas NeighborWorks network organization, partnering with employers who make the loans available to their employees. When employees borrow money through the program – usually $500 to $1,000 – the monthly payments come out of their paychecks, creating a low default rate. Interest is 18%, on par with credit card fees, Guilfoil explains.

 

CNE hired a part-time employee to run the program. When she left to work on a doctoral degree, they hired another part-timer. Then, the pandemic began and CNE scaled back the program, limiting it to existing customers.  

 

But they relaunched this summer, after the program got a new infusion of funding from the Robert F. Stone Foundation. The nonprofit hopes to make 500 loans this year and double it next year. By year four, their hope is that the program will be self-sustaining.

 

Guilfoil recounts two lessons as they expand small-dollar loans as a line of business:

 

"You can't not be interested in payday lending if you're interested in economic development for communities," Guilfoil says. "Look at the amount of money that's extracted from communities as a result of payday lending. If you look at 1,000 borrowers over 12 months, traditional payday lending extracts over $800,000. Our model is $300,000. Then, look at the costs over 10 years. It's staggering." 

 

According to the NeighborWorks Housing and Financial Capability Survey, adults in the United States have significant interest in guidance concerning saving, budgeting, and building credit. For paying down debt, 48% of those surveyed expressed an interest in guidance. 

 

"Safe, affordable financial products help people stay afloat during a crisis and protect them from a cascade of financial issues down the line," says Molly Barackman-Eder, NeighborWorks America's director of financial capability. "An affordable small-dollar loan to cover an unexpected expense means someone can bounce back faster than they would with a predatory product and get back on track for their long-term financial goals." 
 

Staying out of  a hole
 

In Tennessee, the Chattanooga Area Regional Transportation Authority (CARTA) partnered with CNE early on, and continues to work with them on small-dollar loans. "In 2018, our employees had been taking advantage of payday loans, flex loans – and getting in over their heads," says Lisa Maragnano, CARTA's executive director. "They were paying an outrageous amount of interest." When they couldn't pay, CARTA would have to garnish their paychecks. 
 

"There were enough people that I was concerned about it," Maragnano says. "I tried to find something else that would give them a little more support. When I heard about the program with CNE, we signed up."
 

CNE's finance organization takes payroll deductions for loan repayment. "There's no surprise, no 800% interest," Maragnano says. The small loans help the employees cover bills or vacation or Christmas "without getting into a hole. At least they have this option now. Our partnership with CNE has been phenomenal. They care about the employees and businesses of Chattanooga."
 

CARTA, provides public transit in Chattanooga, has 215 employees. More than a third of the employees, which include operators, mechanics, supervisors, dispatchers and administrators, have used the program. 
 

In Tennessee, Guilfoil sees three main benefits:

Nationwide, NeighborWorks network organizations like CNE work year round to bring awareness to predatory loans and other practices that could harm consumers. Last January, the organization introduced the Stop Home Scams initiative to help individuals keep their homes safe as scams increased during the pandemic.