Goodbye, payday loans; Hello, useful tech startups and other options for “borrowers in distress”
Today in America, millions of consumers are considered “distressed borrowers”. These are the people who cannot qualify for a credit card, get a mortgage to buy a house, or take out an affordable personal loan to cover an emergency expense. And because the options available (usually payday or auto title loans) are beyond the control of the major credit bureaus, these borrowers have no way of improving their financial situation by building a positive credit history. Instead, they remain excluded from traditional credit products, with no way to escape predatory lenders or the debt traps they set up.
Like most problems rooted in systemic poverty, the plight of distressed borrowers is more than just an economic issue. It is deeply influenced by social and cultural factors including race, ethnicity and, in this case, a tacit acceptance of lender biases. It’s no secret that these challenges disproportionately plague communities of color. The home mortgage industry is a prime example, plagued for decades by discriminatory policies that impose higher interest rates and fees on African Americans and other people of color than their white peers and exclude certain neighborhoods through redlining.
Too many families of color, subjected to sustained discriminatory practices and unable to retain their wealth, have been pushed into downward spirals leading to financial ruin. Once there, it is difficult to escape. The payday loan industry has been known to trap vulnerable borrowers in high-cost debt cycles, and these companies have been shown to actively target communities of color.
In a recent analysis of payday loans in Florida, it was found that African American and Latino neighborhoods were more than twice as likely to have payday lenders as white neighborhoods in the state. Nationally, research from Pew Trusts shows that the share of consumers who have used a payday loan is three times higher for African Americans than for whites.
So what can we do? On the mortgage front, the Department of Justice and the Bureau of Consumer Financial Protection recently took joint action against Bancorp South for its alleged engagement in discriminatory practices, and the CFPB introduced new rules to curb l predatory industry of wages. Civil rights and advocacy groups also do important work, efforts to which I had the opportunity to contribute during my time at the NAACP. I’m especially proud of the progress we’ve made to end predatory payday loan products in Arizona, sue big banks that targeted people of color with predatory loan products, and launch a financial freedom center focused on literacy. financial.
In my role as an investor, I have come to realize that the private sector — and Silicon Valley in particular — has an equally important role to play. CFPB Director Richard Cordray himself noted the “big promises” of fintech companies in increasing financial inclusion, something I’ve seen firsthand in several of the promising startups in which my fund has invested.
To take To lend, a startup focused on providing socially responsible alternatives to payday loans that, in addition to eliminating high cost renewals and hidden fees, makes credit building, access to lending rates of increasingly beneficial and free financial education a central part of its lending model. In two short years, LendUp has shifted clients with credit scores in their 300s from high annual percentage rate single payment loans to personal installment loans below 36%, and in many case, to a credit card with a 0 percent APR if they pay off the balance at the end of each month.
Another startup in which my company has invested, LendStreet, helps families get out of debt, then repair and rebuild their credit scores. Another, called Earn up to, helps consumers manage their debt by automatically withholding money in their bank accounts and paying monthly loans directly. A new company called eCredit Hero is not in our portfolio but also does an exciting job in credit repair.
These are just a few examples of the power technology can have to augment and advance the groundwork posed by nonprofits and policy makers. They disrupt subprime loans for the better and outdo entrenched predatory players.
If we are serious about improving the options available to struggling borrowers, then we need to bring private sector innovators with market-based solutions to the table of nonprofits and governments to collaborate on meaningful change. Reversing decades of predatory and discriminatory practices will take time, but with a holistic approach that combines advocacy, smart policy and market-driven solutions, I know we can make great strides.
The root aims to foster and advance conversations on issues relevant to the Black Diaspora by presenting a variety of opinions from all perspectives, whether or not those opinions are shared by our editorial team.
Benjamin Todd Jealous is a partner at Kapor Capital and former President and CEO of the NAACP.