AB 237 Expands Access to Capital for Hard Working Families
While every working family aspires to achieve financial stability and freedom, not all have the equal footing, education, or access to the tools to do that. The fact is achieving the American Dream requires capital. Being able to access capital is typically only possible by having good credit. Far too many families across California lack a basic and good credit score, and along with that, access to capital that’s affordable.
The state has a new opportunity with Bill AB 237 – sponsored by Lorena Gonzalez Fletcher – to expand access to larger loans that help borrowers succeed at repayment and build good credit. To help establish responsible alternatives to payday loans in underbanked communities, the Legislature unanimously established the Pilot Program under the California Finance Law (CFL) in 2010 for loans between $300 and $2,500. To date, the Pilot Program has become an essential tool for hundreds of thousands of lower-income consumers to access needed loans and build credit in a regulated process that includes interest rate caps, strict underwriting standards, and mandatory credit reporting.
But consumers have signaled a desperate need for better alternatives for larger loans above $2,500 to $10,000 loan category. According to the Department of Business Oversight reports, demand for larger consumer loans of $2,500 to $10,000 has skyrocketed by 500% since 2009 to $3.0B in 2017. In particular, entrepreneurs in lower-income and under-banked communities need access to more capital for micro-business purposes, which directly translates to job growth. Yet, almost half of these loans in 2017 have APRs over 100%. Even worse, these triple-digit APR loans have grown by almost 40 times since 2009 to 350,000 loans in 2016. In one notable example reported by the Los Angeles Times, a borrower took out a $5,125 loan at an APR of 116%, and had to repay $42,000.
AB 237 addresses this demand for higher loan amounts through a proven and successful model: California’s Pilot Program. The Pilot Program has many built in consumer protections including a rate cap of 35% on larger loans, and AB 237 extends all of these important protections to larger loans above $2,500. Other important protections include requirements to verify income and an affordability test to ensure that borrowers do not over extend themselves with loans they cannot afford to replay, especially larger loans.
Raising the upper limit to $7,500 in the Pilot Program helps families avoid having to piece-meal an affordable small loan with a 130% large loan to meet their needs, which is the first part of the problem. AB 237 also helps to expand access to these loans through technology and new models like those that our company INSIKT employs.
INSIKT is a US-Treasury certified Community Development Financial Institution (CDFI) that provides Pilot Program loans through over 350 supermarkets, credit unions, and money transfer stores in California. We knew that opening our own brick-and-mortar stores to compete with over 12,000 payday loan stores would be too costly and take too long to make a difference. Instead, we partner with highly regulated financial service companies and use technology to administer applicants. We make loans through these trusted partners in familiar retail locations. In just three years, we have made over 200,000 loans and grown to 700 stores across four states, and with a positive social impact. Sixty-seven percent of our borrowers who have taken out two loans and earned a credit score by the time of their 2nd loan, improved their score by over 300 points on average.
Access to responsible, affordable and fairly priced loans is a straightforward opportunity, one that needs the legislature’s help to flourish. The objective of the Pilot Program has always been to reach as many underserved individuals as possible and get them on the path to personal financial empowerment. AB 237 will remove barriers to access and expand the ability of responsible lenders to reach hard working families left behind by traditional financial services.
Oscar Gonzales, a former member of the Obama Administration where he served as the USDA’s Executive Director in California, overseeing the Farm Service Agency (FSA) programs across 58 counties. Currently, he is the Vice President for Community and Government Relations at INSIKT.