Hope Credit Union is part of a growing movement of CDFIs providing alternatives to predatory small-dollar loans.
By Connie Aitcheson
Payday loans were a hassle for Tanya Sims. The mid-50s Memphis resident’s only source of income is her monthly Social Security check. Sometimes when she tried to repay a loan before the due date, the payday lender withdrew the funds from her account without giving her any notice. She was then caught in a lot of back and forth with the lender in hopes of having the funds returned to her account.
The high-cost loan industry serves to fill a gap, not generally fulfilled by banks, by providing small loan sums usually of less than $1,000 to consumers. People are often in a financial bind or emergency crisis and need cash quickly.
In recent years, many CDFIs and other credit unions are trying to fill that same gap with non-predatory small loan programs that won’t saddle borrowers with increasing amounts of debt. So in 2014, the Hope Credit Union in Memphis entered this space with the establishment of its Borrow and Save Loan Program.
“The aim of the bank is to meet people where they are,” says Felicia Lyles, Senior Vice President of Retail Operations. “Clients who don’t have great credit or might even owe another bank money can receive a loan through this program.”
Initially, Lyles says, the program was just focused on providing an alternative to predatory lending. However, they quickly saw other benefits for their clients — in part because they had clients open a savings account when applying for small loans.
“This was a product that not only gave an alternative, but it was a credit building product and really a entrée level product to get into the credit union and then to start growing their financial situation,” she says.
The program partners with civic or religious groups to offer financial education to their members or employees. Borrowers can request a loan for either $500 or $1,000. However, they only receive half of that amount in a loan. The other half is deposited into a newly created savings account which can only be accessed once the first half of the loan is repaid. If a borrower asked for $500, for example, they would get $250 in cash. Once they repaid the initial $250, they could access their savings account with the other $250. Lyles said the interest rates are determined based on credit score but never exceed 18%.
In establishing the program, Hope responded to a big need in the credit union’s own backyard. A 2018 report by the Metro Ideas Project “found that Tennessee has the most predatory lenders in the country.”
The small loan industry has been fighting stricter regulations for years. The Consumer Financial Protection Bureau (CFPB), which oversees the industry, was recently taken before the Supreme Court by a collection of payday loan companies on the constitutionality of the agency’s funding.
In March 2022, the Hope Policy Institute and the Black Clergy Collaborative of Memphis issued a report, High-Cost Debt Traps Widen Racial Wealth Gap in Memphis, on the high-cost lending industry in Memphis. The organization intends to follow that up with a state-wide report on the industry.
Kiyadh Burt, the Director of the Hope Policy Institute (a division of the Hope Credit Union), wrote in the report on the intersection of these loans on industry regulation, the immediate and long-term damage to a person’s financial health, and the impacts to communities of color.
The report noted that in Memphis, “there are 114 high-cost loan storefronts in the city … more than twice the number of Starbucks and McDonalds combined. Two out-of-state corporations own nearly half of all of the storefronts.” It also said the negative effects of these loans are mainly in Memphis’s communities of color.
“We generally talk about this in the frame of consumer protections because we believe in order to have wealth, you must be able to keep wealth,” Burt says. “And when you have predatory products in place, [they’re] literally extracting not just the wealth you’ve created thus far, but also earned income in future revenue opportunities. So it’s gonna take money you have yet to make. That’s a dangerous place to be in.”
In 2020, the Memphis City Council voted 13-0 on a resolution to ban payday lending and revoke business licenses. But Burt says stiffer consumer protection needs to come from the state. “The city has done all it can do to increase consumer protections,” he says. “The real challenge lies at the state level.”
One of the policy recommendations of the Hope Policy Institute is to cap interest rates at 36% state-wide; currently, payday lenders offer rates as high as 400%. Under the Military Lending Act, active service personnel, guard, reserve, their spouses and some dependents can already be charged no more than 36% on specific consumer loans.
However, Burt says banks are using “rent-a-bank schemes” to evade state usuary laws and charge customers much higher amounts. “Rent-a-bank schemes are when a lender originates a loan with a bank outside of that jurisdiction, usually a state with much looser usuary laws,” he says.
The details of loans can sometimes be buried in the fine print and borrowers have to be wise to know the difference between the many types of high-cost loan products, which are often called things other than payday loans: deferred presentment loans, flex loans, pawn loans, thrift loans and more.
“We find that most clients do not necessarily know the ‘type’ of loan they are in,” Burt says. “Loan contracts are long and confusing and borrowers are searching for quick access to capital. The distinction between the loans are usually to high-cost lenders who must comply with their state regulators’ requirements. In Tennessee, aside from data provided by the TN Department of Financial Institutions, there is no state database to ensure that companies are following the law.”
“Financial education is so key,” Lyles adds. “That’s one thing that we’ve learned. The credit union works with organizations and teaches their members about creating budgets, on-time repayment, factors affecting a credit score and the resources they offer.
“That’s why they … [citizens] do tend to go to predatory lenders because they don’t realize that they have Hope as a resource,” Lyles says.
Sims says working with the Borrow and Save Loan Program has been “a good experience.” “I advise anybody to go through them because they’re flexible, no hassle, they’re reasonable and it helps you right at the same time,” she says.
She says she’s become more financially aware, has seen her credit score increase, and even manages her bills better.
“I ran into a little issue [last] year. I got behind, I think a month, because my rent jumped from $824 to $1,215 so I got behind, but I’m caught up, I’m back on track.
“They called, asked what was going on. I explained my situation. They worked with me, they were like ‘when can you pay this and how much can you pay to try to pay it off?’ It was awesome. As long as you communicate with them they will work with you.”
This story is part of our series, CDFI Futures, which explores the community development finance industry through the lenses of equity, public policy and inclusive community development. The series is developed in partnership with Next City.