In my role on the City Council in Cuyahoga Falls, I hear all the time from constituents who are struggling with personal financial issues. Too many of our friends and neighbors are financially unprepared to deal with unexpected expenses, such as an emergency room visit or a car repair. In these situations, some people can tap into savings or ask a friend or family member for help. Others are not as fortunate.
Too many have credit cards that are already maxed out, or have been turned down for traditional credit because of a poor repayment history. In desperation, they 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 carries an annual percentage rate of around 400 percent. For example, I worked with a young mother in Akron, whose husband had left her with five children and plenty of debt. She was working three jobs but an unexpected expense caused her to be $900 short for her rent.
In desperation, she used her car as collateral for a car title loan to pay the rent, but was charged a fee of nearly 50 percent of the principal — with an annual interest rate of 371 percent. She continued to make payments, but was charged a new fee each pay period, until the amount owed was more than the amount originally borrowed.
The impact of these credit products extends to some of our neighborhoods, where there is a payday loan shop, cash advance store or car title lender on almost every corner and in every strip mall. While this shows the demand for small loans, it also signals to other businesses and home buyers that this is a community in decline. Who wants to move their small business or family into a neighborhood with these businesses on every corner?
The state of Ohio enacted legislation about six years ago that was supposed to address this problem. It set an interest rate cap of 28 percent for consumer loans, but the industry exploited a loophole to continue business as usual. Now, the federal government is getting involved. Last year, the Consumer Financial Protection Bureau issued a 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 more choices when faced with a financial emergency. That is why the city of Cuyahoga Falls is offering our municipal employees another choice, TrueConnect.
TrueConnect is a voluntary employee benefit program that allows employees in need to access a federally regulated bank loan up to $3,000. No employee can borrow more than he or she can afford to repay comfortably. Repayments are made in small payroll deductions spread out over a year.
TrueConnect is offered at no cost or risk to the city, and is easy to administer. Our goal is to see other employers in our region do the same — 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. TrueConnect can rebuild credit, because repayments through payroll deduction are reported to credit agencies, allowing borrowers to build a credit history that will help them later.
The program has been offered for about six months in the Falls, and by year-end, almost 10 percent of city employees will have taken advantage of the benefit. The feedback has been extremely positive. Those employees got the help they needed without resorting to a payday loan or car title loan.
Solving this problem requires a team effort. That’s why just recently I joined the Coalition for Safe Loan Alternatives, a nationwide partnership among local banks and credit unions, community organizations and religious institutions to encourage fair and secure lending practices.
I want others to learn about our success with TrueConnect, but I also want to learn about successful strategies in other communities. The coalition is led by one of our own in Northeast Ohio, David Rothstein of the Neighborhood Housing Service of Greater Cleveland. You can get more information at http://safeloancoalition.com.
Together, we can share information about innovative solutions to rethink how we help people in financial need. 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.
Pallotta is a member of the Cuyahoga Falls City Council.