Texas Community Capital (TCC), a nonprofit loan fund managed by the Texas Association of Community Development Corporations (TACDC), an NLIHC State Coalition Partner, is promoting an innovative alternative small-dollar loan program. The Community Loan Center (CLC) program, offered by the Rio Grande Valley Multibank, is a market solution for low income borrowers.
As access to conventional credit continues to be limited for low income people throughout the nation, more people in financial distress are turning to payday and auto title lenders for short-term cash assistance. In Texas, these lenders charge fees each time a borrower has to extend a loan, sometimes resulting in annual percentage rates well beyond 700%. In many cases, the long-term burden of repaying short-term loans can bring greater financial catastrophe such as eviction, auto repossession, or bankruptcy.
The Texas payday and auto title lending business has grown to a $5.9 billion dollar industry, relying on a customer base that is disproportionately low income; 43% of customers in Texas have income less than $20,000, and 83% have income less than $40,000. Annual percentage rates as high as 782% make payday and auto title loans harder to pay back. As a result, low income borrowers are forced to extend their loans, paying a fee in 2012 of up to $300 for the first 14 days plus $300 each time the loan is renewed. Auto title loans in particular have led to an extremely high incidence of repossessions, 650 per week throughout the state.
“The financial pressure placed on households who borrow from high-cost lenders threatens the ability to pay for basic necessities such as rent and food,” said Matt Hull, Administrator of TCC and Executive Director of TACDC. “It has become clear that we cannot properly address the needs of families in Texas communities without addressing this key issue.”
In past years, Texas advocates had little success in convincing the legislature to curb the practices of payday loan services. This spurred the Rio Grande Valley Multibank to create its Community Loan Center (CLC) program. Operating in the Rio Grande Valley, CLC entities provide small-dollar loans at an annual percentage rate of 21.8% over a 12-month term that can be repaid through automatic payroll deductions at no cost to an employer. CLCs charge a one-time $20 administration fee, but do not charge the exorbitant financing fees that payday lenders charge each time a borrower needs to extend a loan. TCC coordinates CLC programs.
In its first year of operation, CLC served 3,210 people and partnered with 24 employers. Employers participate because they benefit from their employees’ reduced financial stress. CLC also partners with budget counselors who help borrowers who frequently need small-dollar loans or who are in periods of extraordinary financial need. The program had only a 3% loan loss rate and broke even financially.
TCC is now campaigning to expand beyond the Rio Grande Valley by establishing CLC branches in seven other Texas cities and eventually cover the entire state.