This Guest Column originally ran in the Albuquerque Journal on October 22, 2018.
Recently, U.S. Bank announced a small-dollar loan product known as Simple Loan. The announcement generated fanfare in New Mexico and beyond. The product is a three-month installment loan of up to $1,000. While the Simple Loan APR of 70 percent is concerning, the offering marks a positive change in the industry landscape: the return of banks to the short-term, high-interest loan market.
Unlike the 136 storefront lenders currently offering high-interest loans in Albuquerque, U.S. Bank is governed by federal law, and its products are not subject to N.M. state laws around interest rates and other consumer protections. Banks largely discontinued making payday and other high-cost loans in 2013. But last year the federal Office of the Comptroller of the Currency rescinded the previous guidance in an effort to give consumers alternative options to storefront lending.
We are pleased to see the financial industry working to address the issue of triple-digit, predatory, small-dollar loan products, but Simple Loan is a far cry from our goal of making fair loans accessible to all New Mexicans. In addition to a high interest rate and short-repayment term, the product is available only to current U.S. Bank account holders. More than one-third of all New Mexicans are unbanked or underbanked, meaning they have limited or no access to mainstream financial institutions. Our percentage of unbanked households is on par with Alabama and only slightly better than Georgia, Louisiana, Mississippi, and Oklahoma. Eleven percent of households in the Albuquerque metro area have no members with a bank account.
We know that small-dollar loans can be made at lower rates and still be profitable. This year, Oportun and True Connect entered the New Mexico market and quickly showed that small-dollar loans made at fair rates with clear terms can have a real impact in our communities. Oportun is a lending company that began with a focus on serving the Latino community by providing loans not based on credit scores, but on data such as how long a person has had the same job or home address. Oportun’s loans are still more costly than credit cards, with an average APR around 35 percent, but experts say that’s a reasonable hedge. And there’s a bonus benefit for borrowers who meet Oportun’s guidelines: successful payments are reported to credit bureaus. So far that has helped more than 600,000 customers across the country establish credit scores, opening options for future borrowing.
True Connect is an employer-based lending product. Employees at participating employers can quickly and anonymously apply online for a loan up to $3,000. Loan repayments are made via an automatic payroll deduction over the course of 12 months, and the payment will never exceed 8 percent of the employee’s paycheck Like a loan from Oportun, successful repayment is reported to credit bureaus. Several local employers have signed on for this program including Bernalillo and Doña Ana counties, the cities of Albuquerque and Las Cruces, and Santa Fe Public Schools. All in all, more than 12,800 New Mexico employees now have access to this fair-lending product, and we’re bringing new employers into the program all the time.
New Mexico needs small-dollar loans with fair rates, affordable payments and clearly understandable terms. New, innovative products are demonstrating that high rates on loans made to financially vulnerable consumers cannot be justified as “everyday risk-based pricing.” We must continue to work toward comprehensive financial inclusion by working together to demand fair rates from industry and identify and create stronger and more accessible financial products for all New Mexicans.