Thwarting Payday Lenders At the Texas Border

Nick Mitchell-Bennett Community Loan CenterNick Mitchell-Bennett of the Community Development Corporation of Brownsville, Texas developed an alternative to payday lending that's going national.

   April 27, 2015


Payday loans had long been a financial sinkhole for the working poor of the Rio Grande Valley.

But in the mid-2000s, storefront lenders with names like EZ Money, Speedy Cash and Advance America suddenly seemed everywhere — in strip malls next to the beauty supply store, off the highway exit ramp across from the Burger King.

One enterprising lender in Brownsville, Texas even converted an old Shell gas station into a loan center with a drive-up window so patrons could reach for their cash without even leaving their cars, says Nick Mitchell-Bennett, executive director of the Community Development Corporation of Brownsville. "It's got neon lights and looks like an old 50's drive-in. It's amazing."

One Wednesday morning in 2006, Mitchell-Bennett was sitting in a conference room at Chase Bank in Brownsville, drinking coffee from paper cups with a group of other community-minded professionals. The group included the assistant general manager of a public utility board, a professor from the University of Brownsville, two bank vice presidents and the United Way program officer who had organized what they jokingly called their monthly "kaffeeklatsch."

Conversation focused on why life seemed to be getting worse for the poor in the valley, even in a thriving economy, recalls Mitchell-Bennett, who was then the development corporation's deputy director. Among the reasons, he says, "Payday lending quickly rose to the top."

That morning, someone mentioned a $25,000 grant available from Freddie Mac for anti-predatory lending campaign called, "Don't Borrow Trouble."

Mitchell-Bennett ran with the idea, and in late 2006, the development corporation won the grant. But several months later, when the kaffeeklatsch gathered to finalize the campaign's billboard designs or newspaper ads – someone in the conference room, he doesn't remember whom, startled everyone with a simple question, "'What do folks do then, if we tell them not to go and borrow trouble? They wouldn't borrow it if they didn't need it.'"

"There was, 'Yeah, you're right. What do they do?'"

On the verge of launching the campaign, they mailed the money back to Freddie Mac and set out to create a payday loan alternative.

"We had no idea what we were doing," says Mitchell-Bennett.

Home-grown alternative

But the model that emerged after several years of "bumping around making mistakes," he says, is possibly the first of its kind in the country. To date, the Community Loan Center has issued over 4,000 loans of up to $1,000, and is set to double that number within the year as the franchise goes statewide.

"I want to put the payday lending world out of business," quips Mitchell-Bennett, who became the executive director of the Community Development Corporation of Brownsville in 2008.

The development corporation is one of the largest non-profit producers of single-family housing for homeownership in the state of Texas. It serves all of the Rio Grande Valley, which covers four counties and 400 flat square miles of the state's southernmost edge.

One of its projects is to manage the Community Loan Center for the Rio Grande Valley Multi-Bank, the joint venture of eight banks. (Several members of the kaffeeklatsch sit on its board.)

The multi-bank supports community development in the valley, which is actually a floodplain and one the country's poorest regions. Between its small metro areas lie dozens of unincorporated colonias that in some cases are little more than a group of trailer homes without running water or a sewage system.

One of the multi-bank's most innovative projects, the brainchild of Mitchell-Bennett's predecessor, was a home loan product for low-income families that kept rates low by combining funds from banks and non-profits.

The challenge of coming up with another innovate product, the payday loan alternative, got everyone' juices flowing, he recalls.

Their first step was to search the country for a model. Mitchell-Bennett remembers the kaffeeklatsch on a conference call with a non-profit in Appalachia. "We asked them a ton of questions."

But without exception, the enterprises they uncovered, whether run by churches or non-profits, were small-scale operations. "Most were being subsidized because they had a high default rate or because it cost too much to originate the loans. They were trying to do to the right thing, but it was never going to get to scale."

To figure out how to make their product both sustainable and affordable, staff at the development corporation interviewed potential clients, mainly those employed but earning under $30,000 a year. "'Could you afford $25 a week coming out of your paycheck?'" they asked. "We scaled it to where they could afford it."

Employer-based solution

The product they invented allows clients to borrow up to $1,000, and never more than half their gross monthly income, he says. "We don't let people get in over their heads."

The initial fee is $20 and the interest rate 18 percent, but it's amortized over 12 months so that borrowers only pay interest on the remainder of the loan. Borrowers can renew, but only once half the loan is paid off. The fee is waived for renewals within the first eight months. (By contrast, Speedy Cash offers an APR of 729.8 percent to Texas borrowers, according to its website.)

To keep default rates low, the Community Loan Center collects directly from the borrower's employer through a payroll deduction.

"So we're not marketing to borrowers — we're marketing to employers," Mitchell-Bennett explains. "We sell it to them as an employee benefit at no cost to the company."

Their pitch: financial stress can dampen employee productivity while calls to employers from payday lenders can eat up company time. "And here's our product that can help that situation."

Mitchell-Bennett, hired his retired predecessor to write the business plan, and in 2009, the multi-bank won a $600,000 grant from the U.S. Treasury to launch the project and seed the loan pool. That was the easy part.

A loophole in the state law makes it a snap for lenders outside the state to set up payday loan sites through storefront middleman. But earning a lending license in-state required 18 months worth of bureaucratic hurdles, he says, while they went "through cash like water." It also took months of unsuccessful hunting for the right software product, since keeping interest rates low required a completely automated on-line system for loans and loan payments. Finally, they had one custom made.

When on October 3, 2011, a text message delivered news of the first $1,000 loan he felt, "like I had a baby," says the father of three. "Later, it's going to keep you up worrying, but at that moment, it's exhilarating."

The loan center's first year-and-a-half was rocky. With a default rate of 10 percent it lost $120,000.

What they hadn't considered, Mitchell-Bennett says, was the employment volatility of one of Brownsville's major industries — ship breaking. Five of the six companies in the U.S. that reduce a decommissioned ship to scrap metal are located in Brownsville. Between jobs, everyone is laid off.

"But instead of cutting all those guys loose we decided to bring on some more stable employees to balance those that were unstable," he explains.

Public sector employees with modest incomes seemed like the perfect counterbalance. Fledgling school teachers in the Rio Grande Valley, for instance, earn only about $35,000 annually and are paid only 10 months a year. Over the next two years, several school districts signed on as did 11 city governments, two housing authorities and Cameron County. Seventeen Catholic dioceses also signed up.

Other enrolled employers include restaurants, construction companies, oil rig manufacturers, car dealerships, locally-owned supermarkets. They're still figuring out how to make the model work for national chains, which typically manage payroll out-of-state, Mitchell-Bennett reports.

Going national

In 2013, he began to talk with a contact at a small statewide lender about how to take the model statewide. With a Citibank grant, Texas Community Capital began to recruit non-profits to start Community Loan Centers, either as a subsidiary or out of their own shop, to fund their own loan pool and to recruit new employers.

To keep costs low, none have storefronts. Once an employer signs up, all of the financial transactions are handled centrally by Mitchell-Bennett's staff and an automated on-line system, on behalf of the multi-bank's loan center.

Community Loan Centers were just launched in Houston, Austin, the Brazos Valley and Dallas. In March, the City of Dallas signed-up and its employees borrowed $400,000 within the first four weeks.

Now Mitchell-Bennett is gearing up to go national, and is already talking with groups in New York City, Georgia, Tennessee, Alaska and Utah.

Even where payday lending isn't a problem, such as in New York where it's illegal, he notes, low-income families still lack access to short-term cash.

"Our goal is to take a healthy, healthy chunk of the short-term lending market," he says. "But we also have an ulterior motive. We hope that our product gets payday lenders to behave better because we're competition to them."

Asked whether he ever regretted returning the $25,000 “Don’t Borrow Trouble” grant, Mitchell-Bennett says, “it’s the best $25,000 we never spent.”

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