The Baltimore Sun (Maryland)
By: Eileen Ambrose
November 9, 2010
Borrow and save program aims to break cycle of payday loans
When Roy Miller couldn't afford to pay cash for furniture for his new Belair-Edison home last year, he didn't have to resort to a credit card or some other pricey form of borrowing.
Instead, the 50-year-old housing counselor took advantage of a pilot lending program that provided a low-interest $1,000 loan and even paid him for salting away a little money in a separate account.
"It's a good program. It's helping people to borrow and save," says Miller, who has repaid his loan.
In fact, "Borrow and Save" is the name of the program. It was launched by the Federal Deposit Insurance Corp., the nonprofit Neighborhood Housing Services of Baltimore Inc. and eight area lenders a little more than a year ago, initially to serve residents in East Baltimore. Over time, the program added more neighborhoods, and it recently became available to all low- to moderate-income residents in the city.
The Baltimore program has $90,000 available to lend, says Cassandra Robb, the program's lending manager. Most of the 90 loans made so far have been for medical emergencies or to cover utility or car repair bills, she says.
It used to be that consumers needing a small loan could go to a credit union or community bank, but "credit cards took over," says Leslie Parrish, a senior researcher with the Center for Responsible Lending. And those who didn't qualify for credit cards often turned to payday loans that charge stiff fees for an advance on a paycheck.
Programs similar to Baltimore's Borrow and Save program have sprung up across the country in recent years, Parrish says. What's unique about these small-dollar loan programs, she says, is the component where borrowers are offered incentives to save. The idea is to turn people into savers, so that they may not need to borrow in the future if an emergency expense pops up.
With Borrow and Save, consumers can get a loan for $300 to $1,000 at a rate of 7.99 percent, far cheaper than payday loans or most credit cards. The money must be repaid in installments over six months to one year.
Borrowers setting aside at least $5 a month in an account will be eligible for a $5 monthly match when they repay the loan. So, if you save $5 a month for a year, the program will match that with $60.
The first year of Borrow and Save has been an education for program officials.
"We are dealing with a lot of customers who don't have a sense of budgeting and saving their money and are just [living] one paycheck to another," Robb says.
Defaults have been high, with about 20 percent of loans behind in payments by more than 90 days, she says. As a result, the program that's managed by Neighborhood Housing Services made changes during the summer to lower defaults.
Borrowers, for example, now must complete a financial literacy course before they get the money. Previously, they had to take the class within a month of getting the loan and a few didn't bother to go, says Joan Lok, an FDIC senior community affairs specialist who helped launch the Baltimore program.
Also, the program looks at a prospective borrower's credit report and won't lend to people with past due accounts, judgments against them or in the midst of a bankruptcy. "Since that happened, loan performance has truly improved," Lok says.
Money that's repaid goes back into making new loans, which is why the program takes defaults seriously. It has garnisheed the wages of a few borrowers who had the means to repay but didn't, Lok says.
Long term, program officials can see Borrow and Save expanding further.
"I would like to see the program replicated in other places in Maryland," particularly rural areas, says Charles Martin, regional community reinvestment officer with participant M&T Bank, which contributed $15,000 to the program.
FDIC's Lok says the program could someday offer different forms of credit or small business loans for, say, $5,000.