A report released this week by Texas Appleseed, “Reshaping the Future of Small Dollar Lending,” makes the policy case for small dollar loans, and then profiles six market newcomers offering affordable alternatives to high-cost payday and auto title loans in Texas. They conclude with a number of suggestions for how Texas policy makers and financial institutions can nurture a non-predatory small dollar credit market.
Like many states, Texas has a bundle of legislation aimed to reduce predatory lending. However, payday and title lenders have found ways around the laws, and have in fact exploded their business. In Texas alone, 2,000 new storefront lenders opened in the last six years alone. While mainstream financial institutions have not kept pace, a handful have explored this product, for which there is high consumer demand and tremendous opportunity within unbanked and underbanked communities.
For their report, Texas Appleseed studied four institutions. They also drew information on two other institutions from recent reports on national small-dollar lending programs, the FDIC Small-Dollar Loan Pilot Program and the National Credit Union Foundation’s REAL Solutions program.
For each institution, they identify strengths and challenges to the program, though they do not discuss profitability in detail. Overall, the report issued these recommendations to promote a more robust small dollar lending industry in Texas:
- Texas needs basic standards for affordable credit to support fair competition in the small-dollar lending market.
- Texas banks and credit unions should consider investing in positive lending models to promote the availability of affordable small-dollar loans in Texas.
- Explore affordable small-dollar loan products offered by or in partnership with nonprofits as a strategy to serve nonprofit clients and other consumers who may otherwise fall through the cracks.
- Texas would benefit from enhanced outreach and education about affordable small- dollar lending that targets both financial institutions and consumers.
The IABG recently studied a Chicago credit union’s small dollar loan program. We will be providing insights from that study and other research in the form of a toolkit for Illinois lenders interested in offering these important products.
Learn more about the Chicago Appleseed Fund for Justice, an IABG Partner.