New Model Breaks From Payday Lender Pack
The Consumer Financial Protection Bureau is considering regulation of payday lenders.
Progreso Financiero is a new model for payday lending that charges lower interst rates across a longer term.
At the Mi Pueblo Food Center in San Jose, Calif., a customer headed to buy juicy mangos dulces grandes on sale, two for a dollar, can stop first at a small kiosk and take out a loan to pay for a car repair or other unexpected bill.
The kiosk is one of the 74 Progreso Financiero outlets in California and Texas, often tucked into Hispanic supermarkets, where its agents offer unsecured loans to working people with thin credit histories.
The venture-backed private company charges interest rates up to 36 percent on a yearly basis — much more costly than a bank loan. But it lends to customers that banks often don't serve, said James Duran, chair of the Hispanic Chamber of Commerce Silicon Valley, which wants to preserve credit options for those consumers. It has even opposed local ordinances to restrict payday lenders whose interest rates, on an annual basis, can reach 500 percent or more.
"Some people don't have a choice,'' Duran said. "The alternatives are not very good.''
Hispanic business leaders are trying to slow a nationwide drive toward stricter regulation of payday lenders, which typically make loans of a few hundred dollars, to be repaid in a few weeks on the borrower's next payday. Critics say the payday industry lures cash-poor borrowers into loans they can’t repay and must repeatedly renew for additional fees, snaring them in a so-called “debt trap.’’
In 17 states and the District of Columbia, payday lending is inhibited by laws that cap interest rates at 36 percent or less, said Uriah King of the Center for Responsible Lending. Cities and counties are increasingly considering their own restrictions. A new federal agency, the Consumer Financial Protection Bureau, may also exercise its regulatory authority over payday lenders after evaluating recent testimony.
Progreso Financiero sees itself as a home-grown remedy for the credit drought in Hispanic communities, and a service so distinct from typical payday lending that it shouldn't be subjected to the same regulations, said company spokesman Pete Hillan. The Menlo Park, Calif.-based company offers interest rates at or below the strictest state caps, and loan terms averaging nine or 10 months rather than weeks. Some of Progreso Financiero's clients use their personal loans for business purposes, such as buying tools for a carpentry side business. But the firm estimates that only 3 percent to 5 percent of its customers do this.
The main benefit of lenders such as Progreso Financiero: They keep money in the community, and people spending in local businesses, Hispanic business leaders say.
Progeso Financiero's tweaks on the payday loan model arose from a Stanford business school project by MBA student James Gutierrez. Progreso Financiero turns down about half of applicants, when its proprietary tests of creditworthiness indicate they'd be taking on debts they can't repay, said Hillan. The result is a default rate in the single digits. Progreso Financiero has explained its model to the Consumer Financial Protection Bureau, which was formed to protect consumers after the banking industry meltdown of 2008.
The United States Hispanic Chamber of Commerce is asking all payday lenders to lower their rates, said Jesse Salazar, director of government relations for the group. It would rather see people opt for bank loans if they qualify. But many don't, and payday lenders are often the only credit source for the customers of Hispanic businesses, said Salazar. Their loans facilitate purchases in the community, just as credit cards do among middle class consumers, he said.
“There’s a very clear link between consumer access to credit and retail sales,’’ Salazar said. The Hispanic Chamber recently challenged studies concluding that payday loans are major causes of severe consequences such as personal bankruptcies, and called for further research on community impacts before new curbs are imposed.
Salazar said payday loans might be an important option not only for consumers, but also for Hispanic small businessowners who lack credit access elsewhere.
Critics of payday lending, however, say the industry does significant harm.
Jeff Patterson, executive director of the Texas Catholic Conference, said payday loans actually drain money from low-income business communities. Borrowers often can’t repay a payday loan within weeks, and keep renewing the loan for additional fees. The total debt escalates rapidly, he said.
“Whatever money he earns in subsequent paydays is going to interest,’’ Patterson said. “He’s not paying the local grocery store or the local toy store for his kids.’’
Regional Catholic charities spent $1 million to clear borrowers’ debts to payday lenders in a single year, Patterson said.
Such loans aren’t designed for terms as long as a year, said Amy Cantu, a spokeswoman for the Community Financial Services Association of America (CFSA), a trade group. The short-term advances can help borrowers avoid costly consequences of a temporary cash flow crunch, like late payment fees or overdraft charges, CFSA says. Cantu calls the loans “a safe, reliable credit option for asset-constrained Americans.’’
Small business mentor Jim Lewis, chairman of the Fort Worth, Texas chapter of the Small Business Administration program SCORE, said clients occasionally ask about payday loans. But Lewis said small business owners are easily steered toward cheaper options, such as loans repaid from their accounts receivable. This mechanism, known as "factoring,'' has become a more popular option since banks have raised their loan eligibility standards.
Progreso Financiero hopes to prove that it can make unsecured loans at rates as low as 28 percent and still make a profit. The company is asking regulators to treat it differently from payday lenders.
"Regulators have to be careful that they don't throw the baby out with the bath water,'' Hillan said.