New workplace advantage: low-income employee loans

More and more US employers are partnering with financial institutions such as credit unions to offer small personal loans to their employees, offering employees a way to overcome financial crises without resorting to high-cost personal loans.

The wages of low-income workers are stagnant, supporting the demand for small consumer loans. A Federal Reserve poll last year found that 44% of Americans had difficulty covering $ 400 emergency spending. Many low-income workers have no credit history and do not have access to credit cards or bank loans.

A new federal regulation cracking down on payday lenders is likely to create additional needs for alternative forms of credit, but it’s unclear who can close the gap.

There are no formal statistics to show how many employers offer such programs, but several community-based networks with participating local employers have emerged across the country in recent years. One program in Savannah, Georgia, for example, started in 2015 and one in Geauga County, Ohio, in 2014.

Rhino Foods Inc., a Burlington, Vt. Company that makes ice cream ingredients, has partnered with a local credit union to provide same-day loans of up to $ 1,000 with no credit checks and no questions asked to any employee who has worked in the company for at least one year. The current annual interest rate on the loans is 16.99%, a fraction of the rates for payday credit, small consumer loans used by millions of Americans each year, which can go up to 400%.

“If you could help an employee whose car breaks down or the water heater is broken, you will have an employee who will come to work in better conditions,” said Ted Castle, managing director of Rhino, which has 140 employees. Mr. Castle said the loan program helped the company increase employee retention rates.

Ted Castle, CEO of Rhino Foods in Burlington, Vermont.


Photo:

Jacob Hannah for the Wall Street Journal

Rhino employee Justin Charron, a 32-year-old line operator, recently used the program to buy a car, which allowed him to finish his daily three-kilometer walk to work. He took out a loan earlier to pay off an unexpectedly large heating bill in 2015. The company’s human resources department arranged a loan with the local lender, the NorthCountry Federal Credit Union. At the end of the day, he had a $ 1,000 loan, which he paid off within several months through weekly deductions of $ 50 on his payroll.

“Things happen. I know it really helped keep me on track,” said Mr. Charron.

Employer-sponsored loans aren’t a great source of income, but nonprofit financial institutions, including credit unions, have recently found ways to make them work. They keep costs down by skipping the underwriting, with the company essentially guaranteeing an employee’s ability to repay the loan. Automatic payroll deductions mean your repayment rates are high. The biggest challenge occurs when the employee leaves the employer.

The Finra Investor Education Foundation, a non-profit branch of the Financial Industry Regulatory Authority, a private regulator, recently completed an 18-month market test of an employer-sponsored loan program that included 13 financial institutions and 48 employers of work. The Finra foundation, along with the nonprofit Filene Research Institute, will soon begin offering free resources to help businesses and financial institutions launch such efforts. “This has the potential to really make a difference in the short-term liquidity needs of low-income workers,” said Gerri Walsh, president of the Finra foundation.

While the human resources departments of companies process payroll deductions, loans are kept confidential by borrowers’ managers and company officials. Unlike paycheck advance loans, employer-based loans help borrowers build a credit history. Some programs also encourage employees to build rainy day funds by continuing payroll deductions even after the loans have been paid.

“Part of what credit unions are founded to do is provide small loans to people with limited means,” said Jeff Smith, director of credit administration at NorthCountry, who works with more than 30 employers in Vermont with a total of 4,700 employees. “We are also breaking with this program. It certainly accomplishes part of what we are founded for ”.

Justin Charron took advantage of a loan program from his employer, Rhino Foods, in Burlington, Vermont, to help him purchase a new vehicle.


Photo:

Jacob Hannah for the Wall Street Journal

Texas-based Rio Grande Valley Multibank Corp., a credit community made up of several large banks as part of their low-income lending efforts, began offering small-dollar employer-based loans in 2011 and now operates through its subsidiary in four states. It works with local nonprofit lenders as a franchise covering 150 employers with 74,000 employees, ranging from a three-employee hairdresser to the Houston Municipal Government with over 20,000 employees.

Nick Mitchell-Bennett, executive director of Rio Grande Valley, said the biggest challenge was finding the right mix of employers to minimize the default rate while serving as many low-income borrowers as possible. In 2013, the Rio Grande Valley’s default rate rose to an unsustainable level of 13% after a large employer, a ship wrecker, fired many workers, who then stopped repayments. The group now keeps the loan cancellation rate below 4% by working with a number of public sector employers with fewer layoffs, as well as private companies.

“No one has ever done this before,” he said. “There was no instruction manual for us to do this.”

This year, the group is on track to make 13,000 loans, more than double the amount in 2015, for a total sum of around $ 10 million. Within three to five years, it wants to offer 50,000 loans a year by recruiting more local community development financial institutions, which raise low-cost funds from the federal government and banks as part of their community loan programs.

Justin Charron spends time with his fiancée, Stephanie Alexandrovich, in their Burlington apartment after his shift at Rhino Foods ends.


Photo:

Jacob Hannah for the Wall Street Journal

Write to Yuka Hayashi at [email protected]

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