Over the past year and a half, Doug Farry has met with city councils, chambers of commerce and corporate human resources managers, telling them the hard truth: Many workers live on paychecks and sometimes look to payday lenders to get by.
He is not trying to shame employers into raising wages. Instead, he tries to convince them to register with his company, Employee Loan Solutions, a San Diego start-up that works with a Minnesota bank to offer short-term loans – high-interest loans but always cheaper than normal. payday loans.
Some employers already know that their employees can be short and every now and then loan money or paychecks early. But for others, he said, it’s something they never considered.
“Some business leaders mistakenly think this is sort of a problem of the unemployed or the homeless,” said Farry, one of the founders of Employee Loan Solutions. “If you’re a CEO and earn a seven-figure salary, this concept may not appeal to you. ”
The employee loan program, called TrueConnect, allows workers from participating employers to apply online and get a loan of $ 1,000 to $ 3,000. The loans are approved or refused almost instantly and are available even for borrowers with terrible credit.
The company, which began operations in 2013, is one of several loan programs in addition to employee benefit programs.
Other companies, such as Ziero from San Francisco and Kashable from New York, have different business models – at Ziero, for example, borrowers pay no interest, but participating employers pay fees – but they all basically operate on the same premise: Employers are uniquely positioned to help workers find more affordable credit.
The fact that there are several companies in the market illustrates the scale of the opportunity and the severe financial difficulties many workers face. An estimated 12 million Americans use payday loans, borrowing tens of billions of dollars a year.
The loans have caught the attention of consumer groups and the Federal Bureau of Consumer Financial Protection, which have called payday loans and other high-interest loans debt traps. The CFPB this month released proposed rules that would hold back lenders, requiring more underwriting to ensure borrowers don’t stay in debt for months at a time.
Employee Employee has structured its products so that they are not affected by the new rules, which would apply to loans with an interest rate of 36% or more or which must be repaid in less than two months. All loans arranged by Employee Loan Solutions are billed at an annual rate of 24.9% and can be repaid over one year.
Farry said his company was able to offer a lower interest rate while still making the product available to employees with even bad credit due to a lower cost structure.
For example, since loans are offered as benefits, advertising is primarily handled by the human resources department of a participating employer. Payments are taken directly from employee paychecks, reducing the costs of collecting and processing payments.
Sunrise Banks, the loan financing institution in St. Paul, was the first company to offer TrueConnect loans to its own employees. It conducted a one-year trial starting in late 2013 at the request of federal bank regulators, who ultimately approved the program.
Although the bank was keen to participate, its executives were not convinced that any of their employees would need an emergency loan.
“Like any employer, we think we pay our employees well, so why would they need this product? Bank chairman Nichol Beckstrand said. “What we have found is that a lot of people need it.”
In the first year, nearly a quarter of Sunrise employees, including some of the bank’s biggest employees, took out a loan, she said. One worker even used a loan to buy wood for a new deck, she said.
So far, a few dozen other employers have subscribed to Employee Loan Solutions. Many of them are public agencies, which are attractive targets for the company as they tend to have stable and long-term employees.
The city of Anaheim offers it to municipal workers, as does the Eastern Municipal Water District, a water agency serving parts of Riverside and San Diego counties, and the city of Cuyahoga Falls, a suburb of Akron. , Ohio.
There are also private sector employers. Martin Gilberstadt, director of business development at Los Alamitos payroll company TelePayroll, said his company plans to start offering TrueConnect loans to employees in the coming weeks – and as an option for its salaried customers in the coming months.
“We have had employees come and ask us for an advance on their wages,” Gilberstadt said. “The owner doesn’t want to step into their financial life, and the employees don’t want to go to the CEO to ask for an advance. ”
While TrueConnect’s loan terms are better than those available from most payday lenders, the loans do not come with the type of underwriting that some consumer advocates would like to see.
The Center for Responsible Lending, among other groups, believes that lenders should determine a borrower’s ability to repay any loan, and that these loans should be no exception, said Graciela Aponte-Diaz, group policy director for California.
Even with TrueConnect’s relatively low rates and its promise to limit loan payments to no more than 8% of a borrower’s salary, payments could still prove unaffordable if borrowers have too many other debts, such as rent. high or other obligations, she said.
“You should have to show your income, your housing costs and what’s on your credit report,” Aponte-Diaz said. “There is a lack of solid underwriting.
Farry said writing such checks would make employees – even those who can afford the payments – less likely to take these loans and more likely to turn to a payday lender. He argues that borrowers see quick underwriting and no credit checks as advantages, not disadvantages, of the payday loan industry.
“It has to meet the needs of the borrower,” he said. “We’ve talked to borrowers, and what they’re saying is, ‘We need to find out fast. If I have to wait two weeks for an underwriting decision, I’m screwed.
In addition, additional underwriting would reduce the already meager profit margins of small loans. A $ 1,000 loan with an interest rate of 24.9% repaid over one year only generates about $ 130 in interest, of which service and other charges must be paid before generating any profit.
Currently, underwriting costs are kept low through an automated process with simple criteria. Employee loans verify that potential borrowers have been employed by their current employer for at least six months and cap all loans at 8% of annual salary – a figure intended to ensure loans are affordable.
“We are trying to reduce the costs of making these loans,” Farry said.
Jide Macey, for her part, is grateful that she was able to secure a TrueConnect loan.
Shortly after her husband left her, Macey, 50, borrowed $ 1,500 to cover rent, groceries and other necessities at an interest rate of 150%. The lender demanded the title of his 10-year Subaru Tribeca as collateral.
It was a desperate move that got her out of a short-term traffic jam, but quickly turned into a long-term struggle.
For seven months, Macey struggled to make minimum monthly payments, although the loan balance never seemed to budge. She was worried that the lender would soon take her car, which she needs for work.
“I thought they would come in the middle of the night,” she said. “These loans, they consume you.”
In January, her employer, a home care provider, added TrueConnect to her benefits. Macey borrowed an additional $ 1,500, most of the amount she needed to finally pay off her title loan.
Now, instead of paying $ 225 per month and not knowing when she will be deleveraged, she pays around $ 130 per month and knows she will make her last payment in January.
“I don’t have that stress anymore,” she said. “It was the best thing I have ever done. The best by far.