By STEVE SOUTHWELL
The Lewisville City Council heard a presentation in workshop session last Monday night about the proposal for creating a Community Loan Center (CLC). A CLC would team up employers in the city with a non-profit organization to provide lower-interest loans up to $1,000, paid back via payroll deductions.
The council has looked at regulating the payday lending industry. But when they asked for alternatives before proceeding into regulation, Assistant City Manager Claire Swann positioned the CLC idea as an alternative to payday lending that would not cost the city anything to get started.
Payday loans are short-term emergency loans of up to $1,000 with annual percentage rates ranging from 300 to 800 percent. Consumers often give the lenders access to their checking accounts so that they can be repaid.
Critics of payday lending point out that consumers often roll over the balance to extend the loans by paying only the interest and fees. Borrowers can end up paying back much more than the original amount of the loan, and can end up in worse financial position. The industry and its proponents point out that the loans may be the only alternative for borrowers with poor credit, and that regulating them out of existence could harm those borrowers.
“Before we came forward with an ordinance to regulate payday lending, [the council] wanted to have alternatives,” said Swann. “We didn’t want to take away a resource that was needed in our community without having something else that could replace that.”
Swann said there was no specific timeline to come back to council with payday lending regulations, but that the council was interested in revisiting it. Mayor Pro Tem TJ Gilmore, who along with Deputy Mayor Pro Tem Leroy Vaughn, has pushed for payday lending regulation, said he favored a model ordinance being put forward by the Texas Municipal League(TML). Gilmore said the TML ordinance would provide “consistent regulation across the state, [making] the regulatory environment consistent.”
“Basically TML is recommending trying to enact a state-wide ordinance city by city since the state won’t act,” said Gilmore
With a CLC, employees of participating employers in the county could access loans of up to $1,000 at an interest rate capped at 18%, for terms of up to 12 months. The origination fee is $20, and payments are made by automatic payroll deduction by the employer. No credit checks or collateral are required, and there is no prepayment penalty for borrowers who want to pay off their loans early.
The Community Loan Center would report the payments to credit bureaus, which could boost the borrower’s credit score, and help them access more conventional lending in the future.
The program would be free for employers, who offer access to the CLC as a benefit to their employees. The employer’s only obligations would be to verify employment when an employee applies for a CLC loan, and to set up automatic payroll deductions according to the repayment schedule that CLC provides.
Business and Community Lenders of Texas (BCL) operates the CLC of Dallas, as well as one in Austin. “The Community Loan Center is kind of a franchise model for non-profit organizations to become local lenders in local markets throughout Texas,” explained Raquel Valdez, the organization’s chief operating officer.
“What we’re doing is just visiting to share our experience with working in North Texas in Dallas County with the Community Loan Center,” said Valdez. She said that the organization had been in talks with Lewisville, Denton, and the United Way of Denton County.
“When we first launched in Dallas County, we had employers who reached out to us immediately,” said Valdez. “Technically they were doing it already in their offices; they were providing advances on paychecks. When they realized there was another agency that could work with them to do that, they said ‘sign us up.’”
Everything is handled online, according to Valdez. She said the organization would not have to set up any storefronts.
Borrowers who are employees of participating employers apply for the loans online.Then their employers typically verify employment within a day. Loans close and borrowers sign the notes online. Borrowers must have a bank account and be able to access the internet and email.
Valdez said that the in the 15 months they have operated, less than 1 percent of borrowers had defaulted. “With more than 90 percent of our borrowers on payroll deductions, we really don’t see any defaults unless they are terminated,” she said. She explained that a borrower who loses the job would be switched to electronic payment transfers.
For borrowers who cannot pay due to hardships, the organization offers the ability to do work-out plans, deferments, and modifications. The organization can also provide financial counseling.
Getting a CLC in Lewisville is not a done deal. According to Swann, there would need to be enough local employers participating in order to make it worth their while for the nonprofits to provide the service. The City of Lewisville itself would likely be a participating employer.
“There’s not a champion just yet,” said Swann about the idea of a CLC in Denton County. “Perhaps we want to be the ones who throw our hat in the ring for that.”
Texas Community Capital is the non-profit umbrella organization for all eight CLCs in Texas, and approves the franchises for them. BCL is submitting a business plan to TCC for Denton County.
“We still have to be approved to be able to have franchise rights for Denton [County], and so at this time, that’s what we’re working on,” said Valdez.
Local banks could provide the approximately $500,000 to $1 million in initial capital funding for the CLC. Swann told the council that banks are “chomping at the bit” to fund a project like this. The Community Reinvestment Act is a federal law that encourages banks to invest in meeting the credit needs of low-income borrowers in the communities in which they operate.
For its part, BCL seems confident in its capital funding.
“We actually already have capital available, sitting there and waiting that we could earmark for Denton [County], so that’s part of our business plan,” Valdez said. “Also, we’re showing the ability to raise additional lending capital for the Denton area.”
In the future, the city council could take a vote on a resolution of support, or approval of agreements if TCC requires that.
“I think it’s going to be a really good opportunity for our city – actually for our region,” said Swann, who is sending a letter of support on behalf of the City of Lewisville for BCL’s business plan. “Staff is prepared to go out and reach out to all the different governmental entities as well as businesses who might be interested in this.”
Gilmore supports the idea and thinks it will catch on with employers.
“The model has already proven out in southern Texas, and employers at all levels are trying to find innovative ways to retain and gain employees in a very competitive job market,” he said.