Practices of the Online Lending Industry

Testimony of National Federation of Community Development Credit Unions Before the

  • Senate Standing Committee on Banks
  • Senate Standing Committee on Consumer Protection
  • Assembly Standing Committee on Banks
  • Assembly Standing Committee on Consumer Affairs & Protection
  • Assembly Standing Committee on Small Busines

MAY 22, 2017

OF SUBJECT: Practices of the Online Lending IndustryIMG_0061

PURPOSE: To gain insight on the online lending industry and determine whether legislative action is necessary to protect consumers and small businesses from predatory lending practices.

On behalf of the National Federation of Community Development Credit Unions (the Federation), thank you for this timely opportunity to discuss on-line lending and financial inclusion. Safe and inclusive access to capital is critical to strengthening communities, especially for small businesses and people of modest means. According to the FDIC’s 2015 National Survey, nearly 32% of New York households are eitherunbanked or underbanked. These households are disproportionately comprised of low and moderate-income households. How might we increase the financial health of New Yorkers? How might we strengthen safe and inclusive economic resources for our communities? These matters are complex and these questions must be asked. New York, one of fifteen no-payday loan states, is a national leader in protecting consumer interests. Having one of the highest concentration of CDFIs (community development financial institutions), New York has the framework in which to invest and strengthen resources for our communities.

The Federation is a non-profit organization and dynamic, growth-oriented association of credit unions that provide safe and responsible financial services to underserved communities. Since 1974, the Federation has been promoting financial inclusion by organizing, supporting, and investing in community development credit unions (CDCUs), which specialize in serving populations with limited access to affordable financial services, including low-income wage earners, families, new immigrants, young people and the growing number of Americans seeking financial independence through credit unions.

Our network represents over 200 diverse CDCUs with over $60 billion in community controlled assets. They provide financial and development services to more than 6 million people of modest means across the country. We also partner with other non –profit, community organizations, banks, foundations, religious institutions and socially responsible trusts to invest in innovative means to scale the impact of CDCUs.

CDCUs are not for profit financial cooperatives that have safe and affordable products and services designed to meet the needs of low- and moderate-income consumers such as low or no minimum balance deposit accounts, auto loans and small dollar loans. They help create homeowners and build assets through affordable home mortgages. CDCUs help create jobs by financing micro-enterprise and small business loans, and partnering in wheels to work programs. They provide not only loans but pathways to financial empowerment through credit builder programs and financial counseling. They are social enterprises that meet the double bottom line of a shared mission to help low and moderate-income communities achieve financial independence, and as regulated financial institutions, provide safe and sustainable lending and financial services. Last year, our New York CDCUs provided financial services to more than 185,000 households and more than $565 million in capital and loans.

We are also the leading network of CDFI credit unions. CDFI designation is given by the US Department of Treasury’s CDFI Fund to institutions that provide financial services in low-income communities and to people who lack access to financing. CDFIs include regulated institutions such as community development banks and credit unions, and non-regulated institutions like loan and venture capital funds. In order to be designated as a CDFI, an organization must:

  • be a legal entity
  • have the primary mission of promoting community development;
  • be a financing entity;
  • primarily serve one or more target markets1;
  • provides development services in conjunction with its financing activities;
  • maintains accountability to its defined target market; and
  • be a non-government entity and not under the control of any government entity (excluding tribal governments).

New York has a strong CDFI network. With 80 CDFIs providing access to capital, technical and development services in nearly every county, we have the second strongest network in the entire country. In 2016, New York’s CDFIs provided more than $50 million in capital to more than 300 local businesses, creating or sustaining more than 1,000 jobs. CDFIs bridge gaps left by mainstream financial institutions by meeting small business capital needs, typically at lower rates, and including the financing of loan applications for a couple of thousand dollars, and by providing capacity building services such as business planning and counseling services. The impact of these CDFIs and the small businesses and enterprises they support ripple throughout our communities. We need to support and grow these capital and technical resources that currently exist.

CDFIs are innovative and mission driven financial institutions that define success in terms of mission and margin. In 2007, the Senate passed S.3575 creating the New York State CDFI Fund. New York has tools already in place to better connect local businesses to safe and affordable access to capital. Convenience and accessibility are two of the main reasons potential borrowers have turned to online lenders. In response to this and with partial support from the State, we launched the New York State CDFI Business Lending Network. The NYS CDFI Business Lending Network is an on-line platform and referral system to connect small businesses seeking capital to local certified CDFIs. The process is simple- an applicant logs onto, completes a few lines regarding their business profile, and then a local CDFI contacts the prospective borrower.

For the period November 2016-March 2017, there were more than 7,000 visits to website. 197 small businesses used the site to find a CDFI; with 120 completing forms and request to be connected to a CDFI. Additional support for these pre-existing resources in which the State has already invested, and appropriations for the New York State CDFI Fund, will help small businesses connect to safe and affordable access to capital.

Given the financial state of New York households, developing scalable solutions for financial inclusion is important. Based on our experience working with financial institutions, the need to also address backend technology systems are critical to their ability to provide these services. The Federation is working on developing a new core banking platform that will make it easier for NY CDCUs such as Lower East Side Peoples’ Federal Credit Union to take their small dollar and consumer loans offerings online and enhance their mobile banking services.

While the issue of access to financial services is important, the larger and related concerns of economic empowerment and financial health cannot be limited to looking at credit to solve issues of financial instability and emergency needs. We must invest in innovative approaches that integrate safe and sustainable business practices and financial health. Responsible lenders connect credit applicants and borrowers with financial counseling and coaching. There is a growing field of non-profits that are building technology solutions to promote financial inclusion in positive, productive ways. The Federation participates in an initiative known as nLIFT (Nonprofit Leaders in Financial Technology), a convening by the Aspen Institute, a nonpartisan forum for values-based leadership and the exchange of ideas. We encourage the State to find ways to work with these innovative leaders to meet the capital gaps in responsible ways.

As the FinTech industry grows with online lending and other areas to make credit more affordable, it is critical for NY State to continue to lead the nation in monitoring and enforcing strong usury and consumer protection laws. According to the hearing notice, the purpose of today’s convening is “…to explore the current state of online lending, the impact of online lending on consumers and small businesses in New York State, predatory online lending practices which need to be mitigated, and potential regulatory or legislative action which may be needed to address predatory online lending practices.”

As an organization dedicated to strengthening under-resourced communities and as a member of New Yorkers for Responsible Lending2 we are concerned about S.5771/A.6511 (The Credit Creation Pilot Program Act of New York) that is pending before both the Assembly and Senate. We are opposed to this bill and urge legislators to oppose it as well. Its provisions weaken our strong and important consumer protections. The bill would violate our current state usury laws as the interest rates set out in the pilot program exceed the criminal cap of 25%. S.5771/A.6511 includes exceptions for a single business venture from an out-of-state lender rather than one based on the organic needs and opportunities from local communities. Further, access to responsible credit exists in New York through its strong network of CDFIs and CDCUs.

Fintech is an emerging space, in the coming years public officials will be finding new ways to monitor this activity while still enabling innovation. New York has the opportunity to provide leadership at the national level in formulating how technology may be harnessed to promote financial inclusion by engaging with thought leaders, practitioners and community based financial institutions such as nLIFT and CDFIs.

On behalf of the Federation, thank you once again for this opportunity and dialogue on how we might improve financial inclusion. We look forward to continuing this discussion and developing successful and scalable solutions to strengthen safe and inclusive financial resources for all New Yorkers, local businesses and our communities

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