Federal Player of the Week
Helping the poor avoid predatory lenders and a cycle of debt
Payday lenders prey on the disadvantaged, pushing easy credit, charging exorbitant interest rates for short term loans and then trapping individuals in an endless debt spiral.
Joan Lok, a community affairs specialist with the Federal Deposit Insurance Corp. (FDIC), is trying to make a small dent in this very large problem with an innovative pilot program that provides small dollar, low interest loans to those in need through a coalition of financial institutions, local community-based organization and other partners.
Lok said the goal of the Borrow and Save Loan Program is to help low and moderate-income borrowers break the perpetual payday borrowing cycle, establish healthy banking relationships, gain personal money management skills, and learn the benefits of saving and asset building.
"We are trying to fill a void," Lok said. "Our program not only helps solve emergency loan needs of individuals, but can cause people to look at their personal finances and change their behavior."
The Baltimore-based pilot program provides loans between $300 and $1,000 with a repayment term of up to one year at an interest rate of 7.99 percent, compared to cash advance brokers that charge interest rates of 30 percent or more for two week loans.
Borrowers who currently do not have a banking relationship are required to open a bank or credit union account to receive the loan. The program includes a simplified application, a financial education component, and a $5 per month savings option with a one-to-one match payable to the borrower at the full repayment of the loan.
Lok said loans have gone to such recipients as a grandmother who needed money to purchase school supplies and clothes for her grandchildren, and to individuals who had to make emergency repairs to their roofs and heating systems. One borrower, she said, needed help to pay utility bills after losing a paycheck because of a furlough from work, while other borrowers have been day laborers whose incomes were adversely impacted by last winter's snow storms.
The program currently has a $142,500 loan pool funded by eight financial institutions and three community organizations. The interest earned is set aside to provide the saving match, and the principal repayments are placed back into the loan pool to lend.
Since last August, the program has provided more than 80 loans with a value of more than $60,000 to recipients with have had little or no relationships with a financial institution. The average annual income of the borrowers has been about $30,000. Neighborhood Housing Services (NHS) of Baltimore serves as the loan underwriter and servicer, and charitable grants have supplemented the operating expenses and technical assistance.
Charles Martin, a regional community reinvestment officer for M&T Bank, said Lok has been the "driving force behind the program and in making sure it works."
The bank executive said Lok saw the pressing need to combat payday lending, gathered the data, generated interest among local financial institutions, brought community groups together and got buy-in from her federal agency.
"It was like herding cats, but Joan has shown persistence and demonstrated that this would be a good thing to do," said Martin.
Felix Torres Colon, the executive director of Neighborhood Housing Services of Baltimore, said Lok has been both the "catalyst" and the "taskmaster."
"Without her, none of this could have happened," said Colon. "She has kept everyone engaged and working."
Lok said the program has made a number of adjustments since last summer to improve loan performance after experiencing some delinquencies, and is preparing for a second year of service. She said she hopes the program will be expanded over time, and will serve as a national model. So far, the program has received interest from groups in Missouri and Washington State, and from the Federal Reserve Bank of Chicago.
Lok also said that the predatory cash advance industry continually bombards the airwaves with promises of easy money, and finds fertile ground among those who are struggling financially. With the economic downturn, and the lack of alternatives to these fast cash lenders, she said the need for responsible loan programs is greater than ever.
This article was jointly prepared by the Partnership for Public Service, a group seeking to enhance the performance of the federal government, andd washingtonpost.com. Visit www.ourpublicservice.org for more about the organization's work to recognize the men and women who serve our nation.