Communities United for Fair Lending (CUFL) is a non-profit organization started by members of United Christian Church and supported by others in the Austin community. CUFL is an emergency loan development program created to confront the exploitation of many existing emergency lending programs, primarily Payday and Auto Title lending.
In Texas, as in many other states, Payday loans are short-term (usually 2 week) loans that tend to exploit low-income working people by charging exorbitant fees for short-term credit. These organizations are registered as Credit Access Businesses (CAB’s) in the state of Texas through laws established for the purpose of helping people with few resources and questionable or poor credit to receive emergency loans. A CAB never actually lends, but instead acts as a guarantor for the loan to the lender of record. In return for essentially acting as a co-signer, a CAB usually charges the borrower a fee on top of the interest charged by the lender. While the lender’s interest rates are limited by federal and state regulations, the CAB fees are for the most part unregulated. These loans are meant to be short-term, which in practice means that the loans are typically “rolled-over” – extended for another pay period, which results in another fee charge.
If you need $500 to pay the rent this month, what are the chances that you will have $625 in two weeks to pay back the loan? Many borrowers will pay the $125 fee and borrow the $500 for another two weeks, at which point they will owe another $625. (Many lenders have policies that discourage or disallow gradual principle reduction.)
It is not unusual for a borrower to find herself trapped in a cycle of debt, where the fee is paid every two weeks and the principle is untouched. CAB programs are typically set up specifically to result in this cycle, and it is not unusual for borrowers to eventually pay 500%-1000% in fees and interest for a loan. More information on the demographics and financial fallout can be found in the Texas Appleseed publication, “Short-term Cash, Long-term Debt: The Effect of Unregulated Lending in Texas”
Many people in Austin’s faith community have joined together to work for laws that limit or eliminate this parasitic lending practice, an effort that has had some success. However, as important as this legislative work is, it does not address the underlying injustice – that people who work for marginal incomes are at extremely high risk of financial catastrophe due to emergencies. In Texas, which is a right-to-work and at-will state, a person’s employment might be dependent on his transportation, and in some cases a flat tire can mean the difference between supporting a family and unemployment. The programs that are in place to help working poor people are primarily charitable, and do nothing to challenge this financial injustice – an injustice which the CAB laws were created to partially address.
Those of us in CUFL believe there must be a better way. Our faith tells us so, but we also believe this to be true because the data tells us so. We have looked at numerous loan programs around the country and the world, and we have observed several facts:
- People who are working for a better life – especially family caregivers – tend to be very responsible about repaying loans
- Community accountability tends to be more powerful than legal threats in terms of loan repayment
- Lending programs can be sustainable at reasonable interest rates, even to so-called “high-risk” demographics
- Lending programs can be structured in such a way as to encourage saving and other behaviors that reduce the need for loans going forward.
The models we have looked at – ranging from Grameen to GracePeriod to various credit union offerings – have all demonstrated success and do wonderful work. These are our models. However, for various reasons, many of them are not easy to copy by smaller organizations wishing to make a difference.
At CUFL, our goal is to learn from these programs and to develop lending models using the CAB approach – without the exploitative fees – specifically for the purpose of replication, to test and modify these models until they demonstrate sustainability, and then to advocate for their small-scale adoption across the community. We do not want to make 1000 loans – we want to prove to other churches, organizations, and civic leaders that they can make 20 loans and not lose money. The loans made by CUFL are always “pilot loans” – data that can be used to either tweak the model or prove the success of the model to others.
The lending model created by CUFL has the following design criteria:
- The models shall be community-oriented
- The models shall work toward reducing the need for future loans
- The models shall be sustainable
- Each model must have a break-even, profitless implementation
- The models shall address profitability, should a commercial entity wish to implement one of these models.
This community-based effort has several goals:
- First, it seeks to provide an emergency loan resource to working families in a given community.
- This program respects the dignity of the borrower by respecting her agency and assuming repayment
- Unlike charity, any given implementation of the program can be shown to not lose money over a given time period, so it minimizes the investment of the implementing group
- Second, it encourages savings and financial literacy. The program involves a rebate – that is, when the loan and fees are repaid, a portion of the fee returns to the borrower in the form of an emergency fund.
- Third, it proves that the parasitic model is unnecessary and unacceptable. This will help with legislative efforts.
- Fourth, it puts economic pressure on bad actors. In the spirit of non-violent direct action, the ideal outcome of this process would be for those who are currently exploiting the community to repent and change to provide reasonable rates for real service. Since money seems to be their only guiding principle, if enough groups offer these alternatives, it would affect their bottom line, which would get their attention. With enough implementation and economic pressure, they would have to either evolve and become partners with the community or go under.
- Fifth, if the bad actors choose to remain parasitic to an ever-decreasing market (i.e., the market unserved by the various communities in which a healthy model is provided), it is likely that potential competitors in the marketplace would recognize the profitable opportunity that is non-parasitic lending. Just actors would have the data to encourage them to provide services, putting yet another squeeze on unrepentant exploitative CAB’s.
CUFL is not about charity – it is about bottom-up, non-violent, market-driven social justice. As a market approach in a very capitalist-friendly state, it is a model that has the potential to transcend political and religious boundaries.
In the broader scheme, this effort serves to point the way for other non-violent, bottoms-up social justice efforts.
Current Status, Future Direction, and Needs
Currently, we have achieved the following:
- Developed a prototype model for our initial implementation (see “Prototype Model”)
- Secured back-end lending from Amplify Credit Union
- Amplify has also agreed to analyze ROI so that models can be modified to ensure back-end profitability to lenders
- Secured pro bono legal hours and general advisement from local partners
- Talked with other faith-based and community groups (with positive feedback) about the model
- Procured $6500 in funding
- Acquired 501(c)3 certification
- Registered as a Texas CSO
- Made multiple loans in a local school community
In working with partners and looking at other programs, we have developed this model as our pilot effort. It is important to note that we do not expect this to be the final implementation – we expect to have to modify this model to meet the goals of the program. In particular, both for simplicity’s sake and for purposes of adoption, this pilot model is not sustainable – CUFL is providing what is effectively an interest-free loan (and paying the interest in addition to acting as guarantor). After the pilot, we will use the data accumulated to adjust the model for sustainability.
When a person requests a loan, the following steps will happen:
- Loan Request
- The CUFL representative makes sure that the amount requested is within the constraints of the caller’s stated income. If it is not, the volunteer refers the caller to appropriate social services
- The CUFL representative also verifies that the amount requested is actually needed; that is, this is not just a request for an interest free loan by someone who could pay back all bills without hardship.
- The CUFL representative sets up an appointment.
- Loan Initiation
- The borrower meets the CUFL representative, and both go over verification materials of income and expenses.
- Both review and sign the CUFL agreement.
- Both go to the back-end lender and sign all necessary documents to instantiate the loan.
- The lender creates three accounts:
- A $25 savings account (necessary for membership in credit union)
- A loan amount for 2x the amount of the required disbursement (e.g., $600 for a $300 disbursement)
- A deposit account controlled by CUFL in the name of the borrower for the disbursement amount less $25 (e.g., $275 for a $300 loan)
- The lender disburses the money via ACH or check, or in the case of cash, CUFL acts as an intermediary
- Loan Repayment
- The borrower repays the loan in 12 bi-weekly installments. Thus, for a $300 request, which requires a $600 loan, the borrower would pay $50 every two weeks.
- The loan is collected by Amplify using traditional means, such as direct deposit, etc.
- In case of default, the savings account is forfeit
- In cases of late payments, an extra fee payment of is added to the end of the loan (in addition to the missed principle and fee payment)
- Loan Completion
- Upon repayment, the full amount of the loan is released from the deposit account into the ex-borrower’s savings account. The saver now has an emergency fund equal to the size of their most recent emergency.
- There is a celebration and recognition of this person’s success.
There are a number of factors that we expect will need modification – these include elements such as:
- Fees -Eventually we will need to charge some level of fee to pay for the program
- Community transparency and accountability – how much information is shared?
- Promotional/adoption issues – how to make people aware that this is better not only in the long-term, but also in the short term compared to payday loans?
- Repayment options – direct withdrawal?
There are also a number of things that we know we don’t know. Issues will come up, but that is the value that CUFL provides. When we have run a given model through several implementations and can predict with a high degree of accuracy the outcome of implementation for a given community (or sets of similar communities), other organizations can implement the model in community-centric small scale implementations with very little risk. Each of these implementations will act as additional verification for what we expect to be a snowball effect – an effect that will put economic pressure on those choosing to engage in parasitic lending while providing a healthy and just alternative to local working communities.
We hope that you will join us in this effort!
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