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Startup pitches employee loans as job benefit

McClatchy-Tribune Information Services

July 11, 2016


SAN 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.

Farry 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.

Some 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.

"There’s 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."

Employee 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.

The company, which opened in 2013, is one of several offering lending programs as add-ons to employee benefits packages.

Other 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.

That 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.

The 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.

Employee 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.

Farry 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.

For 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 processing costs.

Sunrise 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.

Though the bank wanted to participate, its executives weren’t convinced that any of their employees would need emergency loans.

"Like 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."

Over the first year, nearly one-quarter of Sunrise employees, including some of the bank’s bigger earners, took out loans, she said.

So 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.

The city of Anaheim, Calif., offers it to municipal workers, as does the city of Cuyahoga Falls, a suburb of Akron, Ohio.

Although 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.

The 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.

Even 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.

"You 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."

Farry 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.

"It 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.’"

What’s 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.

Underwriting 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.

"We’re trying to squeeze out the costs of making these loans," Farry said.

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