A profitable industry naturally attracts competition. One previously shadowy corner of personal finance, payday loans, is starting to feel the heat from some unexpected sources. The frustration of industry critics over regulators’ inability thus far to rein in what they view as the predatory products has attracted Silicon Valley entrepreneurs and faith-based organizations chasing something beyond profits.
Payday loans are structured to be paid off when a borrower receives his or her next paycheck. If they can’t make that balloon payment, which is typically the case for all but 14 percent of borrowers according to a 2012 study by Pew Research, a monthly interest charge is collected while the debt remains outstanding. The annualized interest on the loans typically exceeds 300 percent. Twelve million consumers borrowed an average of $375 and paid $520 in interest and fees over a five-month loan life producing $7 billion in revenue, Pew estimated.
Industry researchers have noted that the 23,000 storefront payday lenders nationwide exceed the number of McDonald’s, Burger King, J.C. Penney, Sears and Target stores combined. That does not begin to address the online payday lenders, both licensed and illegal operating throughout the U.S.
The industry experienced rapid growth after the Great Recession. In Minnesota, the number of legal payday loans taken through licensed lenders more than doubled between 2006 and 2012 to 371,000, according to a study of Department of Commerce data by the Joint Religious Legislative Coalition. They estimated that Minnesota borrowers took an average of 10 loans per year, paying an effective annual interest rate between 391 percent and more than 1,000 percent.
Market-based competition is starting to emerge. St. Paul-based Sunrise Banks working with a California company’s proprietary software, introduced TrueConnect payroll deduction loans modeled after similar programs in Latin America. This enables employers to offer 12-month loans repaid through payroll deductions as an optional employee benefit. And similar programs are popping up around the country.
In addition, LendUp, a Silicon Valley start-up focused on serving the credit needs of subprime borrowers raised $150 million from venture funds last year to compete directly with payday lenders, offering lower-cost installment loans, financial education and the ability of borrowers to build a credit history.
It’s not just business entrepreneurs seeking to do well while doing good things. Faith-based organizations are starting to enter the market, in a very different way.
When Tammi Fullman broke her neck in a car crash in 2011, putting her out of work for a year, her husband, Brian, unexpectedly became the sole breadwinner. “All the bills depended on me. It got kind of strenuous,” he recalled. Newly burdened with additional medical expenses and without Tammi’s income from the Minneapolis Public Schools, Brian’s earnings as manager of a Brooklyn Park barber shop could not cover all the couple’s bills. Lacking the credit rating or means to borrow from a traditional bank, he took out his first payday loan for $200.
Unable to pay off the entire loan amount with his paycheck, each month he paid the 2.75 percent interest, beginning a familiar journey that payday loan critics term a “debt trap.” Over the next year and a half, he estimates he paid nearly $400 in fees and monthly interest payments as he took three or four additional loans, each to pay off the previous loan.
Eventually, he “felt so disrespected once I understood the [lender’s] predatorial intention” he sought help from his pastor at New Creation Church in north Minneapolis.
That led him to Exodus Lending at Holy Trinity Lutheran Church in south Minneapolis. Exodus paid off the Fullmans’ outstanding loan of $350, allowing the couple to pay monthly installments interest-free over the next 12 months.
Finally paying off the loan this year, the couple’s escape from their payday loan debt cycle took longer than Tammi’s recuperation from the crash.
Exodus grew out of discussions after a payday lender opened a new storefront on the same block as the church in 2012 and the congregation sought to offset the impact on the community, said executive director Sara Nelson-Pallmeyer. Starting with an initial $50,000 in funding, including a small grant from Colonial Church in Edina as well as individual donations, Exodus made its first refinance loans in April of last year. Since then it has helped 86 families like the Fullmans get out from under payday loans, averaging $678 per family.
Given the size of the industry, Exodus’ effort is “just a molecule — not even a drop — in the bucket,” Nelson-Pallmeyer acknowledged. But she said payday lending is a natural issue for the congregation to address. “Communities of faith have long been concerned about usury, back to the Old Testament.”
Reflecting on his experience, Brian Fullman said money problems “bring lots of shame and embarrassment to people.” Now a part-time barber and full-time community organizer for ISAIAH, a multicongregation community action coalition, he is eager to talk about his own payday loan experiences. “I want people to understand there is nothing to be ashamed of.”
Brad Allen is a freelance journalist and former investor relations executive for companies including Imation Corp. and Cray Research. His e-mail is firstname.lastname@example.org.