Transcription:
Penny Crosman (00:03):
Welcome to the American Banker Podcast. I'm Penny Crosman. What are the best options out there for people who are living paycheck to paycheck who have an emergency expense they need to meet? The Global Black Economic Forum and the Center for Business and Economic Research recently completed a study called The 2023 Cash Poor Report that dives into this question. I'm here today with Alfonso David, president and CEO of the Black Economic Forum. He's also a civil rights lawyer, and he has helped draft legislation on everything from minimum wage law to financial credit checks, and Alfonso can walk us through some of the things that they found and what this means. Alfonso, thank you for joining.
Alphonso David (00:46):
Thank you so much for having me.
Penny Crosman (00:48):
Can you tell us a little bit about this research that you did and why you did it?
Alphonso David (00:52):
Sure. So the Global Black Economic Forum and solo funds released a report called the 2023 Cash Poor Report, and the goal was to really identify the impact of unplanned expenses on consumers nationwide as well as identify potential policy recommendations. So we conducted a survey of about 2000 US adults who are living paycheck to paycheck and have experienced at least one unplanned expense in the past 12 months. That survey resulted in some really key findings, notable findings, I should say. We found that 30% of the US adult population reports living paycheck to paycheck and having experienced a cash emergency in the past 12 months, we also found that 50% of the respondents to the survey with $500 or less in savings relied on family or friends to cover an unplanned expense. And importantly, we found that one in 10 cash poor households have an annual household income of at least a hundred thousand dollars.
(02:05)
So often when we think about cash, poor people equate that to someone living under the poverty line, but that's actually not the case. The survey found again that one in 10 cash for households have an annual household income of at least a hundred thousand dollars. Our objective was to amplify this concern that we have of an infrastructure that absolutely does not support people that may confront unplanned expenses and also expose, I think an infrastructure that has been legitimized and legalized within the United States where people who are living in the cash poor category are being exploited by certain institutions around the country.
Penny Crosman (02:53):
So one of the things that you did in this research that I found enlightening was you did an analysis of the total cost of a few different methods that people turn to get this emergency cash, like buy now, pay later loans, payday loans, and subprime cards. What were some of the things that you found in this analysis?
Alphonso David (03:18):
Well, we found that the products that are currently on the market really are a disservice to many people that are in need of 'em. We found that, for example, what you often hear are the A P R, which is the annual percentage rates that's assigned to say credit cards or loans, is really dramatically different for subprime credit cards as opposed to say a product like solar funds and what they're providing. Subprime credit cards are used most often and are most expensive. They're about four to five times more expensive. So we're talking about an interest rate of about 60% as opposed to an interest rate of about 13%, which is what institutions like solo funds provide. We also found that, and this is really disturbing, 77% of users actually resort to crime because they have difficulty in actually getting access to loans and grants when they're in need of it the most, they're not able to actually get, in some cases, subprime credit cards or payday loans.
(04:27)
And when they do, they are exploited. The default rate is actually substantially high for those about 33% versus say a solo fund says about 6%. So we, again, going back to this idea that we have in this country, legitimized predatory practices and those predatory practices are operating at the disadvantage of people that need it the most, is what we really wanted to highlight. Yes, we've all heard about subprime loans. Yes, we all heard about predatory practices, but we assume that those practices are illegal or we assume that those practices have not been sanctioned in some way, but that's actually not the case. We have many states that have legitimized traditional payday lenders as well as subprime credit cards, and one of our goals is to make sure we expose that fact and make sure that ordinary citizens understand that states offer licenses and allow these institutions to charge exorbitant fees to people who are not in a position to actually pay them.
Penny Crosman (05:33):
What makes the subprime card so expensive? Is it the A P R or other factors?
Alphonso David (05:39):
There are a number of other factors, but the A P R is certainly one. Another factor is what they call the default rate or the junk fees that are attached to being a few days late or being a day late on repayment. Those are in some cases exorbitant. And if you are day late in paying back a loan or a grant, well be a loan, I should say. You may be in a position where you owe more than the actual loan than you are taking out. So that's a huge problem. But really this is being driven to a large extent by the annual percentage rates and it's principle plus everything that a consumer plays.
Penny Crosman (06:26):
And some of that is true for payday lenders too, right? Because they've got those rollover fees. Often the loan term is really short, and if you don't pay back in two weeks, you've got to pay a really huge rollover fee.
Alphonso David (06:41):
Yes, yes, exactly. Exactly. So if I'm working paycheck to paycheck and I'm hit with an emergency, a family member is sick, my car broke down, there's been a break in into my home and I don't have home insurance and I have to cover those expenses, but I don't have anything in savings, and I certainly have very little in checking if I even have a bank account. So I then try to find a loan and I go to these institutions to try to get a loan, and I am hit with a very high annual percentage rate. And if I'm not in a position to pay it back when the loan is due, whether it be a day or a few hours, then hit with a high default rate, that then puts me in a worse position to actually repay the loan. Now, we're not suggesting that people shouldn't be responsible for paying back their loans. That's not the argument. The argument here is if you are going to allow institutions to charge very high interest rates, meaning the APRs that are exorbitant, you shouldn't also allow them to charge very high fees for default rates. I don't think either should be allowed, frankly, because we have, or institutions such as solo funds or others that actually provide lower interest rates and they have lower defaults than the predatory lending or subprime credit cards and loans.
Penny Crosman (08:19):
It seems like a lot of states look at this in terms of rate caps. A lot of states have a 36% rate cap. What do you think of that policy and what are the shortcomings of that policy?
Alphonso David (08:34):
The recap issue is interesting, and I've decided in many cases not to engage in that debate because I think it deflects from the actual concern that we have, which is why do we allow predatory practices in the first place by debating the 30% rate? We are essentially legitimizing the practice of predatory practices or predatory loans or predatory credit cards, and I want to have a different conversation about why we actually allow these practices in the first place. When you talk to policy makers who arguably should be concerned about the most marginalized members of our communities, we should be raising the concern, why do you allow these practices in the first place? Not why are we allowing a 36% rate or 30% rate or 40% rate? Because we should arguably be focused on those that are most marginalized and putting them in a position to succeed.
(09:36)
Because if we don't, we are basically ballooning the safety net that we're all responsible for, right? We've all paid taxes, arguably, or most of us do, and those taxes should be used to support all of our communities. And if we have more people that can support themselves and more people that are not living paycheck to paycheck and more people that can respond to unplanned expenses, then we have a smaller safety net. We may have smaller taxes which benefits all of our communities. That is the conversation, the policy conversation I think we should be having. But unfortunately, I think in many states, in many policy rooms, there's this debate about what is the appropriate rate as opposed to having a different conversation about why are we allowing subprime loans and predatory practices.
Penny Crosman (10:24):
So what kinds of predatory practices would you like to see banned or restricted? What might the kind of legislation or rules you're talking about look like?
Alphonso David (10:38):
Well, I think what we're looking to propose is to end the use of annual percentage rates as a true cost of a loan. So many lenders adopt hidden junk fees, as I mentioned before, and they're not really accounted for in the cost of loans. So this takes advantage of less informed consumers while also looking to create a state and the regulatory framework that accounts for a consumer's need for short-term capital. Right now, the existing legal framework that we have in many states around the country do not really account for the need of consumers to accrue short-term capital for unplanned expenses. We're also looking to ensure that state and federal regulators uniformly enforced, maybe innovative and effective and flexible regulatory frameworks. Most of the frameworks that we have now have existed for decades, and we're really not modernizing them in a way to reflect the current environment and enforcement actions are really used against new lending models as opposed to looking at the existing models and determining whether or not those models are exploiting consumers. So those are just a few of the policy recommendations that we're looking to advance both at the state and the federal level. We certainly recognize state sovereignty, but we think it's important to have a federal regulatory framework that provides some guidance in states with respect to what's acceptable and what's not acceptable.
Penny Crosman (12:10):
So you would like to see all lenders calculate the total cost of a loan, I'm guessing, and make sure it's under a certain percentage or a certain total cost threshold?
Alphonso David (12:27):
Absolutely. Absolutely. And not to interrupt you, but just to put a finer point on this, let's just assume I'm taking out a loan for a hundred dollars and the a p R for that loan is 30%. The loan that I'm taking out is not a hundred dollars, is a hundred dollars plus 30%, and depending on the repayment terms and when the loan is actually due, I'm going to be paying a much higher return on that a hundred dollars. If we were to adopt a framework where we are accounting for the full cost of loans, consumers who are not as informed will understand what they're actually taking out. And again, I don't want to be paternalistic here, but certainly most of these institutions are issuing loans and they're giving you paperwork that's extensive, very difficult to understand legal. Many people are not lawyers. I'm a lawyer and in some cases I have to spend a lot of time reading the documents that are being provided to people. Again, not being paternalistic, but we have to think about whether or not we're lifting all of members of our community or we are actually advancing predatory practices and looking the other way.
Penny Crosman (13:45):
Now, you also mentioned consideration for newer models of lending. Now, one type of newer model that we've been seeing over the last probably eight years or so, is the use of tipping models like tips that are either voluntary or sort of semi voluntary, where instead of being charged a set amount, the borrower sort of decides how much they are going to pay. And these have been kind of controversial, but what do you think of that overall idea of a tipping model?
Alphonso David (14:23):
Look, I think it's an interesting model, right? We have a tipping model within the retail industry that has existed for a while, certainly has some problems with respect to gender parity. It certainly has some problems that we've seen across the country with respect to race and ethnicity, with respect to where employees are working back of house or front of house, and who's actually responsible for collecting the tips and how those tips are distributed. So I don't want to suggest a tipping model is an ideal one, but I do think that we have to have a much broader comprehensive conversation about what are the new models, what are the more innovative models that we should be exploring? And a tipping model is certainly something that people are familiar with within the retail, retail and the hospitality context. Is this a model that we should be adopting in the financial services context?
(15:16)
Some would argue yes, others would argue no, but that is the policy debate that we should be having that we're not having. I think we have gotten to the point culturally that we don't have these policy discussions. We don't have these debates about what is the ultimate goal, what are we trying to achieve, what are the different tools and innovative strategies that we should be considering? And to what end? I think that benefits all of us. Unfortunately, we now live in an environment where I'm right, you are wrong. You are right, I'm wrong. And there's very little room to actually have a policy debate about what makes sense and what's driving that, right? Well, what's our ultimate goal? What are we trying to achieve? I don't know that we're actually having that conversation in the context of short-term capital needs in the context of emergency loans, in the context of unplanned expenses. What's our goal? And that's I think what we are trying to advance both on the federal and the state level. Let's take a step back. We understand that there are all of these existing models and new models that are coming onto the market every day. Let's take a step back, do an inventory and determine what's our goal, what are we trying to achieve? What are the pitfalls, what are the objectives? And then make a sound determination as to what we think makes sense and what we think doesn't make sense.
Penny Crosman (16:38):
That makes sense. And are there other types of newer lending models for short-term loans, especially that intrigue you?
Alphonso David (16:49):
Well, solo funds, and we partnered with solo funds, so I'm somewhat biased here because I know a lot about their model. They designed a product for short-term loans because people were living paycheck to paycheck and people sign up without a credit check, which is unique, certainly, I shouldn't say unique, certainly not traditional. And they're able to sign up based on 24 months of their banking history, which they believe is a more accurate measure of them paying back their loans. Now, this is not just hyperbole because they've been able to determine that the default rate is four times better. So the regular default rate is about 33%. The default rate for solo funds is 6%. So a credit check doesn't really reflect whether you have a job. In some cases it does, but not in all cases. Solo funds can verify whether you have a job now based on your banking history.
(17:54)
So that is one model that we could consider when we think about people, certainly with criminal histories or others that are living paycheck to paycheck that have difficulty establishing a sound, credit history, and we're looking to see if you're granting a loan, we're really looking to see, do you have the capacity and the capability to pay back this loan? That's one of the key questions. If that's what we're trying to determine, why don't we look at your banking history as opposed to your credit history? Because your credit history is not going to reflect whether or not you have a job today. And whether or not you're going to have a job in a few months looking at your banking history is going to be a much better determining factor. And that is once again, another model that we could look at as opposed to the existing models that we think that certainly been used for decades, but have unfortunate collateral consequences for people who are living paycheck to paycheck and certainly racial minorities.
Penny Crosman (18:55):
No, that makes sense. Maybe we could bring you back on for a debate with someone at FICO over that idea, but that's definitely a point of view that other people have as well. And I'm seeing more and more of FinTech, younger FinTech companies using bank account data as kind of the basis for underwriting decisions. So it's definitely, and some banks have started looking at that too, not necessarily getting rid of the credit score, but using that in conjunction with the credit score. Great. Alright. Is there anything we didn't touch on that you think is a really important takeaway from this research that you did?
Alphonso David (19:39):
I don't think I mentioned this, but I think it's an important statistic, and we highlighted it in the report that 43% of American surveyed are living paycheck to paycheck, and the 43% have a long-term health condition, a disability, or an impairment that has lasted over a year. So let's put that in context. 43% of Americans living paycheck to paycheck have a long-term health condition, have a disability, or an impairment that have lasted more than a year. If we think about that, those populations and think about the predatory practices that we currently allow and have legitimized, we are making our culture, we're not advancing our culture in a way that we should be, I should say. We're not actually amplifying and elevating those that need the elevation and amplification, people that are living with disabilities, people that have impairments, that are living paycheck to paycheck, that are going to be subject predatory lending practices. Those are the communities that we should be concerned about the most, and that is something that we wanted to also highlight in this report. It's not simply about race, it's also about people that are living paycheck to paycheck that in many cases, maybe white or maybe Latino or maybe some other ethnicity, we want to make sure that policymakers are concerned about those communities as well.
Penny Crosman (21:13):
Yeah, that's a very high percentage for those long-term healthcare health conditions. So that is a sobering thought, for sure. Well, Alfonso David, thank you so much for joining us today. It was really interesting discussion and for all of you, thank you for listening to the American Banker Podcast. I produced this episode with audio production by Kellie Malone. Special thanks this week to Alfonso David at the Global Black Economic Forum. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crosman and thanks for listening.