Liberty bank alden mcdonald.jpg
Alden McDonald Jr., President and CEO of Liberty Bank, stands outside one of its branches that opened at 3002 Gentilly Blvd in August 2006. Liberty Bank is one of several New Orleans lenders offering a loan from a small dollar as an alternative to payday loans.
(Photo by Eliot Kamenitz, NOLA.com | The Times-Picayune)
Payday lenders have pushed back efforts by lawmakers to tighten restrictions on short-term loans in Louisiana.
But the debate in Baton Rouge has rekindled a conversation among traditional lenders about offering small loans and other products tailored to low-income borrowers with limited access to bank branches and bank accounts.
Advocates of tighter scrutiny of payday lenders argue that the short-term, high-interest products they offer are prey to the working class and trap them in a cycle of debt that can ruin their chances of research. credit elsewhere.
Payday lenders and their lobbyists say the new restrictions would bankrupt them and cut off a source of short-term funding for the poor.
The state House and Senate have rejected several proposals to tighten controls on payday loans, although consumer advocates have pledged to continue to pressure lawmakers.
On the sidelines, banks, credit unions and their regulators talk more about the role they play in the service of so-called “under-banked” communities.
Alden McDonald, president and CEO of Liberty Bank & Trust in New Orleans, said he has seen firsthand how high interest products can wreak havoc on the finances of those in desperate need. money to cover unexpected car repairs or to pay a bill.
McDonald’s, which supports stricter payday loan regulations in Louisiana, has spent the last few years on a Federal Deposit Insurance Corp. task force.
“You would be surprised how many people are banking with the bank and also going to do payday loans,” McDonald said.
Liberty Bank began offering loans of $ 500 to $ 2,500 in 2008 as one of 28 banks participating in an FDIC small loan pilot program. The program encouraged lenders to provide short-term, low-cost loans with a streamlined application process and an annual percentage rate of 36% or less.
The goal was to provide a more affordable option for payday loans, which typically charge a renewal fee when the borrower cannot afford to repay the loan after two weeks. The fees do not, however, reduce the amount owed and can trap borrowers in a damaging cycle.
A March report from the Consumer Financial Protection Bureau found that 60% of payday loans are renewed seven or more times in a row, typically adding a 15% fee for each renewal.
A $ 500 loan borrowed at 36% interest costs $ 680 total over a year – although payday lenders point out that their repayment terms are usually much shorter. Banks participating in the FDIC program were able to charge much lower rates, around 18% on average. A $ 500 loan at this rate costs $ 590 after one year of payments.
Liberty Bank has since continued its small loan program, making over 1,200 small short-term loans totaling $ 1 million in 2013. Loans start at an interest rate of 19% and customers can repay the loan. in a month or as long. like a year, depending on what they can handle.
McDonald’s noted that the software, staff, and other basic costs to process a $ 500 loan are roughly the same as a $ 2,500 loan. These expenses resulted in a loss of $ 17,000 to Liberty’s small loan program last year.
McDonald said that figure would stop most bankers in their tracks. But he said the loss rate is lower than Liberty’s credit cards, and the bank is working on ways to further reduce costs.
“It’s not a really profitable account for a financial institution and it’s one of the reasons many financial institutions haven’t taken this route,” McDonald said. “But if you want to be a full-service bank and serve the community, you can devote a portion of your wallet to this type of service.”
An FDIC report following the 2008 pilot program found that most banks do not view small loans as a profitable business.
The report also noted that the small loans offered by banks did not actually save customers money. While interest rates seemed lower, consumers paid interest over a longer period, making the loan as expensive as a payday loan, according to the report.
Bob Taylor, CEO of the Louisiana Bankers Association, said regulators are pushing banks to offer more options to underbanked consumers while enacting stricter lending rules.
The rules make it harder and more expensive to offer low-value loans and other alternative products, he said.
They “push people who would be most likely to go to a payday lender outside of traditional loans,” Taylor said.
Late last year, federal regulators cracked down on short-term products in banks, including deposit advance loans, which are tied to consumer paychecks or other directly deposited income. on their accounts.
Among other limitations, banks are prevented from taking more than one deposit advance during a monthly pay cycle. Banks are also required to ensure that a customer has the ability to repay before granting a loan, which is standard for all other types of loan.
Credit unions, many of which were created to serve members of underserved communities, have a little more flexibility.
Even so, they are subject to restrictions when granting short-term, high-interest loans, including an interest rate cap of 28%. Credit unions also cannot make more than three short-term loans to a single borrower in a six-month period.
Broderick Baggert, spokesperson for Louisiana Together, a statewide network of religious and civic organizations and one of the groups pushing for stricter payday loan regulations, said options for Numerous and varied small loans are an important part in preventing vulnerable people from getting into debt.
Baggert said the only way to get more small loan alternatives on the market is to put payday lenders on a par with traditional lenders.
Baggert noted that a proposal that would limit borrowers to 10 payday loans per year was modeled on similar restrictions on banks and credit unions. The state Senate killed the bill in late April.
“Traditional lenders are rightly prohibited from lending to people who cannot repay them,” Baggert said. “Payday lenders are not.”
Mark Rosa, president and CEO of Metairie-based Jefferson Financial Credit Union, isn’t sure that imposing more restrictions on payday lenders is the answer to better serving under-banked communities.
“People come into these places voluntarily and they feel their needs are being met,” Rosa said of payday lenders. “At the end of the day, people do what they think is best for them.”
Rosa said traditional lenders could do a better job letting people know they can help, even in tough times.
He said he regularly meets clients who are convinced their credit is too low or their finances are too imbalanced to get even a small loan.
“They think ‘I’m not going into a brilliant bank, they’re going to kick me out,’” Rosa said. “A payday lender, on the other hand, isn’t going to give me a hard time on this.”
Rosa said Jefferson Financial has had some success with its Achiever Loan, a small loan designed to help people build or rebuild credit.
Customers make payments at a fixed interest rate and the money becomes available as the payments are made. If they miss a payment, the funds are frozen until they can get back on track.
Rosa said the challenge is getting people through the door to explore such options. He said the credit union publicized its small loans through email newsletters to members and through notice boards.
“It’s about bringing the person in and seeing what the real circumstances are,” Rosa said.
McDonald’s of Liberty Bank said customers are allowed to apply for small loans from the bank online, which has been found to be critical in attracting borrowers who would otherwise be afraid to walk into a bank and apply for a loan.
McDonald’s said Liberty will launch a forced savings product in the coming months to provide more alternatives for borrowers.
For example, if a customer takes out a loan of $ 2,000, the bank will deposit an additional $ 400 into the customer’s savings account, which will only be accessible after the loan is paid off.
The bank is also in the process of designing a financial literacy program that clients will take before being approved for a larger loan.
McDonald’s said helping people get their finances in order can be costly, but it leads to responsible clients who will gradually apply for larger loan products.
McDonald said his goal is to develop a small loan that can make money and serve as a model for the rest of the industry.
“The unknown at this point is: can you make a small loan profitable? Because of what we do in the community and the people we serve, we think we need to take leadership and try to find a way to make this happen in a way that is sustainable ”, McDonald said. “We are not here to give money.”