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Payday lending: Reforming a broken Industry

While our economy continues to improve for some, millions of Americans are financially unprepared to deal with unexpected expenses. A child unexpectedly becomes ill, requiring an emergency room visit. A heater breaks down in the middle of winter, leaving a family in the cold. A car needs a new engine in order to get someone to work each day. In these emergencies, people often draw on savings or ask a friend or family member for help. Others are not as fortunate.
 
The need to cover these kinds of expenses and the lack of alternatives forces many families to turn to a payday loan, car title loan, or similar credit product. These loans are high-interest, high-risk, and often result in a downward spiral of debt for borrowers. A typical loan must be repaid after two weeks and charges an annual percentage rate of around 400 percent. Instead of helping families, this kind of high-cost lending can take advantage of Americans in difficult and unexpected circumstances.
 
{mosads}Some wonder how they can legally make loans at 400% APR. Until now, their practices have largely been governed at the state level – and the industry has successfully carved out a legal exception for themselves. However, that is about to change. Last year, the Consumer Financial Protection Bureau (CFPB) issued a new framework for regulations that will be issued in full detail later this spring. These regulations are designed to rein in reckless predatory lending and ensure borrowers get a fair shake when they need a loan.

But new regulations are only one piece of this puzzle. Americans with limited or poor credit need another option when faced with a financial emergency. That’s why my colleagues and I developed the TrueConnect lending program.
 
TrueConnect is a voluntary employee benefit program that allows employees to access a federally regulated bank loan up to $3,000 to those in need. No employee can borrow more than they can afford to repay comfortably. We partner with the borrower’s employer to deduct the repayment of the loans through small payroll deductions spread out over a year. TrueConnect is offered at no cost or risk to employers, and is easy to administer. Our mission is for TrueConnect to change how small loans can be made affordably and sustainably.

Too many people who desperately need a loan are turned down because of poor credit history. That denial of credit because of poor credit history hurts their credit even more – creating a vicious cycle that prevents that person from rebuilding their finances.
 
That’s why TrueConnect has another goal: to help rebuild credit. Repayments through payroll deduction are reported to credit agencies, allowing borrowers to build a credit history that will undoubtedly help them later in life.
 
We believe there needs to be a team effort to tackle this problem. That’s why just this week we joined the Coalition for Safe Loan Alternatives, a nationwide partnership between local banks and credit unions, community organizations, and religious institutions to encourage fair and secure lending practices. As industry leaders, we have a responsibility to not just settle for the status quo, but to change it.
 
We invite those who share our goals of providing safe loans to those in need to join this Coalition. Together, we can share information about innovative solutions to reform our industry and provide help to those seeking it. We can help people develop strong credit history who otherwise would be left helpless.

We can make sure the stories of people struggling to come up with the money to pay their child’s hospital bill, fix the heater, or replace the engine become less common. After years of being at the mercy of predatory lenders, it is time to make a change.


Farry is the co-founder of Employee Loan Solutions, a San Diego-based financial services company offering TrueConnect.

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