Social Enterprise Essential to Combat Predatory Lending

With select state legislatures moving to ban Payday Loans via interest rate caps and the Federal Government looking to put its hat in the ring with a 36% federal interest rate cap, it begs the question “is government regulation enough to help consumers avoid predatory lending?” Surely setting caps at 36% will prevent the unscrupulous payday loan model that creates long term debt traps at 400% APR interest. Compare that to the APR for a 30-year fixed Home Loan which is only 5.225%. Payday Loans are unsecured – they have extremely high costs of borrowing and short term limits—thus they are dangerous product for chronic borrowers. With only 14 days to repay, payday loans create massive pressure for loan rollovers which incur more fees and increase the debt burden. This is supported by a study of practices in Indiana before new laws went into effect, that saw an average rollover rate of 10 times. This usurious practice is unsustainable for the borrowers. So banning payday lending via an interest rate cap is a good thing because these products will no longer exist, right?

Not so fast. There is a reason people are taking out payday loans. It is because they are either consciously rejecting mainstream banking products or more likely, unable to gain access to mainstream credit products that charge reasonable interest rates. So if the borrowers were so desperate to use a payday lender in the first place, how will they fair? Many will bounce checks or incur overdraft protection fees as their main source of credit. This practice can be just as exploitative as payday loans4. Credit cards can perpetuate a cycle of debt, as available credit on cards often exceeds one’s realistic ability pay down principal balances. Just as often, credit cards are typically inaccessible to many in this population population. More than 100 million Americans are considered “unbanked”, “underbanked”, or credit underserved5. So what options are left for this population if governments essentially ban short term small dollar loans? Pawnshops or black market loan sharking? The answer is that tough choices will have to be made by consumers until mainstream banks and credit unions can develop credit tools and risk models that address the needs of the underbanked.

Fortunately, there are a handful of organizations working on payday lending alternatives including community development credit unions and social venture funds. This is a perfect opportunity for social enterprise and innovative solutions. Social Enterprise can step in to prove the market, as early stage venture philanthropy will be needed to cover the initial costs of research and development and subsidize the development of risk models and new technologies to reach these consumers. To serve the underbanked, there is an immediate need to have a socially minded business model that is more focused on educating and serving the consumer for the long haul; rather than continuing a practice of short term economic exploitation. Furthermore, innovation is essential to create new financial products that are economically sustainable and viable. In the long run, for any loan product to reach scale and have a significant social and economic impact it will have to be financially profitable in order to reinvest revenues back into more loans and more social benefit. Innovation in terms of technology, risk-modeling, private-public-nonprofit partnerships, and education have the potential to reduce costs and develop a loan portfolio with risk profiles that can compete with mainstreamed personal loan products. Together social enterprise and innovation can address Payday lending properly.

It would be much easier if the problem of predatory lending could be solved via a legislative fiat. Unfortunately, this problem is a complex one that governmental regulation alone cannot fix, and worse yet, traditional business structures have neglected to substantially address. Which is why Rubicon National Social Innovations is stepping up to the challenge: to serve the poor by filling the gaps between the abilities of government, traditional charity, and for-profit businesses (see Table Below). Whether one is concerned about predatory lending’s impact upon the working poor or worried about government regulation into the market, it can be agreed that social enterprise solutions can address this issue. To learn more about the work of Emerge, our product in this area visit http://rubiconnational.org/our-projects/emerge-loan-program/

by Jeff O.
Bain Fellow

Sources:

Center for Responsible Lending http://www.responsiblelending.org/payday-lending/

Chase Home Fixed APR 30 year rate checked on Nov 5th 2009 at http://mortgage.chase.com/pages/shared/gateway.jsp

http://www.reallifedebt.com/payday-loan-cash-advance-money.html

Center for Responsible Lending, http://www.responsiblelending.org/overdraft-loans/

Reuters, July 30th, 2008, http://www.reuters.com/article/pressRelease/idUS175151+30-Jul-2008+BW20080730

Last Thursday representatives from RNSI attended the West Coast Green 2009 Conference. West Coast Green is a conference focused on environmental innovation in the building industry. Along with the usual tradeshow floor offerings, the conference hosted an overabundance of classes and seminars focused on education of eco-friendly construction practices. The conference was chock-full of interesting organizations vying for face time and growth in the green building sector. These organizations ran the gamut from traditional construction companies reforming their practices to disruptive technology producers aiming to save the world. Some of my personal favorites were Ideabuilders, North Cal Wood Products,and Driptech.

The ability to network with and learn from these organizations is what drew RNSI to this conference. Environmental protection is currently the vehicle of two of our enterprises (Mattress Recycling and Energy Efficiency Retrofit). While at the show we were able to connect with other organizations in the green space and develop our network. We are excited that at least one of these connections will blossom into a customer for our recycling program. But not only did we meet potential business partners, we also learned of exciting new trends in the industry. It is impressive the speed with which companies are adopting green practices. It took a while for the snowball to get going but it is truly picking up speed.

The West Coast Green experience was valuable for Rubicon National Social Innovations. The success is obviously manifested in the partnership we came away with, but other wins occurred as well. The conference was a valuable opportunity to make contacts with the visionaries who are changing the building industry. Additionally, it laid the seeds for future innovations and projects. Disruptive innovations could provide us with excellent opportunities to fulfill our mission, to employ the hardest to employ populations. West Coast Green was also an excellent chance to update ourselves with the technological advances that are changing construction. Our presence at the conference heightened the importance of being in the bay area, a great hub for environmental and social enterprise work. The connections and collaborations here are great for incubating ideas that we can then scale nationally.

Plugging Away

For the past year Rubicon National has been working to get mattress recycling off the ground as a social enterprise diverting waste and employing the hardest to employ workers. Now, with a facility open (and at last report covering all direct costs!) in San Jose and a facility close to launch in Philadelphia (check out the article on page 17 of Grid Magazine below), we are working to identify the remaining U.S. markets where mattress recycling is likely to be a viable social enterprise.



Key to making the market is a governmental presence committed to environmental sustainability and consumers that value waste diversion and recycling of resources enough to demand it of the businesses from which they buy their new products. We've talked to several retailers who don't think their customers value waste stream diversion enough to pay an extra $10 at the time of purchase to guarantee their mattress is recycled. We don't think that's a valid assumption. Only time will tell, but we will continue to develop the business infrastructure that will allow the opportunity to recycle mattresses to exist. When every mattress store offers a recycling option, we will know we've been successful.



Mattress recycling coming to Philly! Check out page 17: http://issuu.com/redflagmedia/docs/grid_2009.09