DIEGO — For the past year and a half, Doug Farry has
met with city councils, chambers of commerce and
corporate human resources managers, telling them a hard
truth: Many workers live paycheck to paycheck and
sometimes turn to payday lenders to get by.
isn’t trying to shame employers into boosting wages.
He’s trying to persuade them to sign up with his
company, Employee Loan Solutions, a San Diego startup
that works with a Minnesota bank to offer short-term
loans — ones that carry a high interest rate but are
still cheaper than typical payday loans.
employers already know that their workers can come up
short and from time to time lend cash or advance
paychecks. But for others, he said, it’s something
they’ve never considered.
a misperception among some business leaders that this is
somehow a problem of the unemployed or homeless,"
said Farry, one of Employee Loan Solutions’ founders.
"If you’re a CEO, making a seven-figure salary,
this concept may not register with you."
Loan Solutions’ program, called TrueConnect, enables
workers at participating employers to apply online and
get loans of $1,000 to $3,000. The loans are approved or
denied almost instantly and are available even to
borrowers with terrible credit.
company, which opened in 2013, is one of several
offering lending programs as add-ons to employee
firms, such as San Francisco’s Zerio and New York’s
Kashable, have different business models — at Zerio,
for example, borrowers pay no interest but participating
employers pay a fee — but they all operate on
basically the same premise: Employers are uniquely
positioned to help workers find more affordable credit.
there are multiple firms in the market illustrates the
size of the opportunity and the dire financial straits
many workers experience. An estimated 12 million
Americans use payday loans, borrowing tens of billions
of dollars annually.
loans have drawn the attention of consumer advocacy
groups and the federal Consumer Financial Protection
Bureau, which have called payday and other high-interest
loans debt traps. The CFPB this month released proposed
rules that would rein in the lenders, requiring more
underwriting to ensure that borrowers don’t stay in
debt for months at a time.
Loan Solutions structured its products so that they
shouldn’t be affected by the new rules, which would
apply to loans with interest rates of 36 percent or
higher or that must be repaid in less than two months.
All loans arranged by Employee Loan Solutions charge an
annual rate of 24.9 percent and can be repaid over the
course of a year.
said his company is able to offer a lower interest rate
and still make the product available to employees with
even bad credit because of a lower cost structure.
example, because the loans are offered as an employee
benefit, advertising is essentially handled by a
participating employer’s human resources department.
Payments are taken directly out of employees’
paychecks, cutting down on payment collection and
Banks, the St. Paul, Minn., institution funding the
loans, was the first company to offer TrueConnect loans
to its own employees. It conducted a yearlong trial
starting in late 2013 at the request of federal bank
regulators, who then approved the program.
the bank wanted to participate, its executives weren’t
convinced that any of their employees would need
any employer, we think we pay our employees well, so why
would they need this product?" bank President
Nichol Beckstrand said. "What we found is a lot of
people need it."
the first year, nearly one-quarter of Sunrise employees,
including some of the bank’s bigger earners, took out
loans, she said.
far, a few dozen other employers have signed up with
Employee Loan Solutions. Many are public agencies, which
make attractive targets for the company because they
tend to have stable, long-term employees.
city of Anaheim, Calif., offers it to municipal workers,
as does the city of Cuyahoga Falls, a suburb of Akron,
TrueConnect’s loan terms are better than what’s
available at most payday lenders, the loans don’t come
with the kind of underwriting some consumer advocates
would like to see.
Center for Responsible Lending, among other groups,
believes that lenders should determine a borrower’s
ability to repay any loan, and these loans should not be
an exception, said Graciela Aponte-Diaz, the group’s
policy director for California.
with TrueConnect’s relatively low rates and its pledge
to limit loan payments to no more than 8 percent of a
borrower’s paycheck, payments could still prove
unaffordable if borrowers have too much other debt, high
rent or other obligations, she said.
should have to show your income, your housing costs and
what’s on your credit report," Aponte-Diaz said.
"There’s a lack of strong underwriting."
said that making such checks would make employees —
even ones who can afford the payments — less likely to
take out these loans and more likely to turn to a payday
lender. He contends that borrowers see quick
underwriting and the lack of a credit check as benefits,
not downsides, of the payday lending industry.
has to meet the needs of the borrower," he said.
"We’ve talked to borrowers, and what they say is,
‘We need to know quickly. If I need to wait two weeks
for an underwriting decision, I’m screwed.’"
more, additional underwriting would cut into the already
skinny profit margins of small loans. A $1,000 loan with
a 24.9 percent interest rate paid off over one year
generates only about $130 in interest, out of which
servicing and other expenses must be paid before there
is any profit.
costs are kept low through an automated process with
simple criteria. Employee Loan Solutions checks to make
sure that potential borrowers have been employed with
their current employer for at least six months and caps
all loans at 8 percent of annual pay — a figure aimed
at ensuring that the loans are affordable.
trying to squeeze out the costs of making these
loans," Farry said.