The Progressive Populist: Hope for Those in Debt: Can a Non-Profit Help Put Predatory Payday Lenders Out of Business?

The following is an excellent article written by David Dayen on the Salon.com website on June 22, 2016 which was published in the August 1, 2016 issue of The Progressive Populist on page 9 titled “Hope for Those in Debt: Can a Non-Profit Help Put Predatory Payday Lenders Out of Business?” and I quote:

“Hope for those in debt: Can a non-profit help put predatory payday lenders out of business?”

An experimental solution to the problem perpetual debt is underway in Oakland

Topics: check cashing stores, Debt, payday lenders, Predatory lending,

Hope for those in debt: Can a non-profit help put predatory payday lenders out of business?(Credit: AP/Elaine Thompson)

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.

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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.

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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.”

David Dayen

David Dayen is a contributing writer for Salon. His first book, “Chain of Title,” is out now. Follow him on Twitter at @ddayen.”
(DAVID DAYEN WROTE AN INTERESTING ARTICLE ABOUT A CALIFORNIA BANKER, DAVID LEIBSOHN, WHO OPERATES HIS BANK AS A NON-PROFIT LIKE A CREDIT UNION DOES.  HE OPERATES WITH A STRICT SET OF RULES SOMEWHAT LIKE HE HAS A TWO-TIERED SYSTEM IN AN EFFORT TO SCREEN OUT THE CUSTOMERS SO HE DOESN’T GET BAD LOANS PULLING THE BANK DOWN.  IT MUST BE SUCCESSFUL, OTHERWISE, HE WOULDN’T BE LOOKING FOR GOVERNMENT MONEY TO PUT INTO HIS BUSINESS SO IT CAN GROW MORE.  THE PROBLEM WE HAVE NOW WITH BANKING IS THAT WE HAVE TOO MANY BANKRUPTCIES BECAUSE WE HAVE BANKS WITH VIRTUALLY NO REGULATIONS WHERE YOU CAN BUY A HOUSE OR A CAR WITH NO MONEY DOWN AND THEY WILL EVEN ADVERTISE TO THAT FACT, SUCKERING IN MORE CUSTOMERS THAT SHOULD BE RIDING MASS TRANSIT RATHER THAN BUYING A CAR THAT THEY COULD EVENTUALLY LOSE.  HILLARY CLINTON SHOULD HIRE BERNIE SANDERS AS TREASURY SECRETARY TO SET UP SOMETHING LIKE THIS IF SHE GETS ELECTED BECAUSE WHEN BERNIE RAN, HE REALLY STRESSED THE FACT THAT THE FIVE BIG INVESTMENT BANKS AND WALL STREET WERE REALLY EXPLOITING THEIR CUSTOMERS FOR THE BENEFIT OF THEIR CEOs WHO WERE MAKING HUGE PROFITS AND SALARIES AT A COST TO THE CUSTOMER AND TAXPAYER WHO BAILED THEM OUT JUST BEFORE GEORGE W BUSH LEFT OFFICE, TO KEEP THE COUNTRY FROM GOING BANKRUPT, THAT PRESIDENT OBAMA IS STILL TRYING TO GET STRAIGHTENED OUT.  MAYBE DAVID LEIBSOHN SHOULD GO TO WASHINGTON, D.C. AND HELP BERNIE SANDERS OUT BECAUSE WE REALLY NEED AN HONEST BANKING SYSTEM THAT HELPS THE CUSTOMER.
LaVern Isely, Progressive, Overtaxed, Independent Middle class Taxpayer and Public Citizen Member and USAF VETERAN
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About tim074

I'm a retired dairy farmer that was a member of the National Farmer's Organization (NFO). Before going farming, I spent 4 years in the United States Air Force where I saved up enough money to get my down payment to go farming. I also enjoy writing and reading biographies and I write about myself as well as articles and excerpts I find interesting. I'm specifically interested in finances, particularly in the banking industry because if it wasn't for help from my local Community Bank, I never could have started farming which I was successful at. So, I'm real interested in the Small Business Administration and I know they are the ones creating jobs. I have been a member of Common Cause and am now a member of Public Citizen as well as AARP. I have, in the past, written over 150 articles on the Obama Blog (my.barackobama.com) and I'd like to tie these two sites together. I'm also on Twitter, MySpace and Facebook and find these outlets terrifically interesting particularly what many of these people did concerning the uprising in the Arab world. I believe this is a smaller world than we think it is and my goal is to try to bring people together to live in peace because management needs labor like labor needs management. Up to now, that hasn't been so easy to find.
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