Borrowing a little cash for an emergency expense or to start a business should be easy today, right? National banks are reportedly now offering small installment loans or lines of credit to customers—even those with low or no credit scores.
Southwest Public Policy Institute President, Patrick M. Brenner, put that theory to the test and exposed the harsh reality of obtaining loans from national banks. If a customer can’t access financial resources from his bank when his credit and financial situations are good, what about those with bad credit and the least means?
Brenner discusses his experience with Patrice Onwuka in this pop-up podcast episode and how it informs the conversation about small-dollar lending and other financial services that often get a bad rap. (Also, read Patrice’s review of a report by Brenner here.)
TRANSCRIPT
Patrice Onwuka:
Hello, everybody. Welcome to this pop-up edition of She Thinks. I’m Patrice Onwuka, the director of the Center for Economic Opportunity at Independent Women’s Forum. Now I’ve got a question for you. If you needed a thousand bucks for an emergency and you know didn’t have it in your savings and you couldn’t borrow it from family or friends, where would you go? We know life happens and for many households that live paycheck to paycheck, $1,000 can be like a million bucks. And not surprisingly people look for those short-term loans. Maybe they just need a couple of months before they get their IRS tax return money. But if you have a bank account, you might assume you can just go and borrow it from your bank. But will it be as easy as simply going online, applying, and getting that cash as quickly as 1, 2, 3?
I actually don’t think so, and I am… My guest today is Patrick Brenner. He is the president of Southwest Public Policy Institute. He’s going to tell me about his own experience putting that question to the test. He’s tried it, and it didn’t quite work out. So he’s here to share his, I call it, depressing experience as a banked American, not an unbanked, but a banked American, trying to secure a short-term loan from a traditional bank account. And he had all of the questions checked yes, everything was, on paper he was great. So for all the criticism of online lending and small-dollar lending, aka payday loans, he can explain why there actually is a place for them in our society today. Patrick, welcome to She Thinks.
Patrick Brenner:
Patrice, thank you so much for having me on today. I appreciate all the work that you and the Independent Women’s Forum do for the cause. I appreciate it very much, and thank you for having me today.
Patrice Onwuka:
Of course, of course. So we want to hear all about your experience because it’s really interesting. But before we do that, I would love for you to tell us a little bit about yourself and what you do.
Patrick Brenner:
I’m the president of the Southwest Public Policy Institute. We’re a relatively new think tank in the right-of-center liberty space, free-market space. I founded the institute in July of last year. We got our (c)(3) status pretty quickly thereafter, and we’ve been going gangbusters ever since. I’m really excited about some of the work that we’re doing here at the institute, which involves a lot of data acquisitions in non-traditional formats. I’m really excited about the potential for our reach in New Mexico and across the entire American Southwest. I am coming to you today from Scenic Rio Rancho, New Mexico, just north of Albuquerque. And while Albuquerque in New Mexico is our base of operations, we anticipate being able to reach out into other states like Texas and Arizona very soon.
Patrice Onwuka:
Terrific. Well, you talked about data acquisition and some untraditional methods or means. So I think let’s jump right into it. You decided to put the question to the test of whether it would be easy for a person with a bank account to simply get a short-term loan. Tell us about your experience.
Patrick Brenner:
Sure. It originally started in January when New Mexico’s interest rate cap on short-term lending went into effect. They capped interest rates for lenders at 36% APR, and in this space, I really don’t like the term APR. APR, annual percentage rate, is typically applied for products that are lent for periods of at least 365 days. And from the industry on specialized emergency lending, from the industry experts themselves, the average time of holding one of these short-term small-dollar loans is about 111 days. How can you apply an APR to a loan that is held for less than a third of a year? The argument is absurd on its face. Regardless, the problem was that the interest rate caps went into effect, and a lot of small-dollar lenders evacuated the state of New Mexico and left a lot of borrowers without alternative options. Now, New Mexico is unique in that we have a large unbanked and underbanked population. I am not —
Patrice Onwuka:
Just explain what that is for our audience. I’m sorry, Patrick.
Patrick Brenner:
Sure. Unbanked, these are people that for whatever reason, whether they fear traditional banking, whether they fear banks, whether they’re distrustful of banks, or whether they just don’t like the idea of using banks and they do their business in cash or they use services like check cashing services — for whatever reason, whether they’re unqualified borrowers, whether they’re unqualified consumers, they don’t have access to traditional checking and savings accounts, or they don’t want access to traditional checking and savings accounts or any other traditional banking products like credit cards and personal loans and mortgages and auto loans, things of that nature. So unbanked or underbanked is… Can fit any of those criteria of just not having access to traditional banking products.
Patrice Onwuka:
So talk about your experience now. You are a banked individual…
Patrick Brenner:
Very [inaudible 00:05:31].
Patrice Onwuka:
What did you decide to do? What did you decide to put to the test?
Patrick Brenner:
Well, last year the Pew Charitable Trust came out with a study that stu… Or that… The announcement was that six of the large national banks in the United States were going to start offering these specialized emergency loans in lieu of the traditional small-dollar lenders. I use traditional because small-dollar lending does not fit the criteria of a traditional financial product.
So in January, the Pew Charitable… I’m sorry, the Pew Charitable Trust came out with a report announcing that these six big banks were going to start offering these loans. Now —
Patrice Onwuka:
So problem solved, right?
Patrick Brenner:
According to the Pew Charitable Trust, yes, a problem solved, the banks are coming in to save the day. I never thought that the Pew Charitable Trust would be shills for the big banks, but here we are.
So in January, we started looking into what we could do about that. There were three banks that had branches in New Mexico: the U.S. Bank, Bank of America, and my favorite, Wells Fargo. We applied for a non-traditional, short-term, small-dollar specialized emergency loan from each of these banks.
Now, the problem with what these banks are offering is that in lieu of a traditional credit application, they had other overly excessive criteria, or what I have personally determined overly excessive. One of the requirements is that you have a checking account. So the first step in applying for any of these short-term, small-dollar loans from any of these banks is to apply for a checking account. As many of us know, there are minimum deposit requirements. So I had to go out, take out cash. I took out $25 increments for the three banks. I actually went out and put $60 in each of the accounts, so I wouldn’t be charged overdraft fees because we’re going to let these checking accounts sit for the period of about a year before we try again, and we’re going to try applying to these short-term lending or short-term loans again.
So you apply for the checking account, and then once you’ve got the checking account opened, which was a process in and of itself, especially at Wells Fargo — I had to go back to that branch twice. The first time was to schedule an appointment with a banker that I didn’t know I needed just to open a checking account. Now there’s some good stories here. U.S. Bank and Bank of America were pretty easy to fulfill the requirements for opening a checking account. But Wells Fargo, I went to the Wells Fargo branch. I asked to open a checking account. They said that I needed to come back after I made an appointment. I made an appointment for the following morning, drove back to the location, which that’s already an hour of my time wasted, just getting to the branch. Once I had the appointment, I opened the checking account. Somebody actually walked in and stole my appointment. I was five minutes early.
Patrice Onwuka:
Oh, no.
Patrick Brenner:
So I had to wait an additional 20 minutes before I saw the banker that I already had an appointment to meet with and then open the checking account. Once these checking accounts are open, they establish online banking. So they give you a username, they give you a password, you get access to the mobile app. They will not accept an application in the branch for one of these short-term loans. You have to apply online. And my understanding of this situation is that if the bank has a banker or an employee interfacing with a borrower on one of these short-term loans, the bank immediately loses money because the margins are already so thin on…
Patrice Onwuka:
Oh, wow.
Patrick Brenner:
… non-traditional products. So I was forced to apply for the small-dollar loan online, and I did, at all three banks with all three checking accounts, and I was denied at each one of them, because I hadn’t had a checking account open for a minimum of 12 months.
Again, because these products are designed for non-traditional borrowers, many of whom don’t have a credit score or have a very bad credit score. I don’t fit that criteria. I just checked my credit score this morning on Experian. It is 751 points. So I’m a qualified borrower. I have a mortgage, I have a vehicle loan, I have a personal loan, not, it’s a home equity line of credit that we did for the backyard. So I’m not unbanked, I’m well qualified, I’m not overextended. I meet all of my monthly payments on time, yet still at each of these banks, U.S. Bank, Bank of America, and Wells Fargo, I was denied for a simple $500 loan.
Patrice Onwuka:
And now here is, so you’ve tested the experiment and you’ve proven that someone who is well qualified, you check all of the boxes, you’re still not going to get access to it because of… You didn’t hold a bank account for long enough with that lender. And I think it speaks to the larger point — and the big point here is that a policy that may have been well-intentioned to cap interest rates drove options out of the business, out of the state. And now what’s left was… There’s a vacuum of opportunity. The banks are supposed to have stepped in, and yet what they offered still does not meet the needs of someone who is unbanked.
As you said, they have many reasons. Maybe they’re distrustful of banks or they just would not, do not want to have a bank. They would have to break their own conscience to get a bank account and then wait a whole year when an emergency that may need cash in a week… That just would not fit the timeline. I mean, I think that’s a really smart experiment that you ran, and you wrote a report about it, which I love the title: “No Loan for You,” thinking of the [inaudible 00:11:39].
Patrick Brenner:
You got the Seinfeld reference?
Patrice Onwuka:
Yes, I did. That Seinfeld reference is classic. But talk to us about the big picture, because we hear a lot of criticism about the lending industry. People call it pejoratively payday loans, you’d think of title loans, whatever —
Patrick Brenner:
Predatory.
Patrice Onwuka:
— predatory. Debunk that myth for us. Are they really predatory? And you got into it when you talked about the idea of APR being… Attaching a year APR to something that is repaid within a matter of weeks or maybe a couple of months. But why is it that there really is a need for these types of lending in the market?
Patrick Brenner:
Sure. I will admit that I would have used a payday loan during my time in college. There were times where I needed some additional cash and I couldn’t get access to a traditional loan from a bank because I was 20, I didn’t have a credit score, I didn’t have a credit card at the time, and I most likely would have been able to do that. What I did instead was a cash advance back when Wells Fargo was doing cash advances on checking accounts, and I was just a dumb college kid. I didn’t know any better. But college kids are stretched thin. They’re on very fixed incomes. They’re certainly a criteria… They fit the criteria for a potential borrower in the circumstance where they can’t necessarily afford an unexpected expense.
Let’s say their car breaks down and they need repairs done to the vehicle in order to be able to make it to class. And they can’t put that repair on their student loans because the loans have already been dispersed. What are they supposed to do in a situation like that if they don’t have access to parental help? If they don’t have access to traditional credit? Like most college students don’t have access to traditional credit when they’re younger and they’re first getting started in school. What do you do then? So I’m not just talking about traditional unbanked, underbanked folk that are distrustful of banks and that opt into not using traditional banking services. There are tons of people out there that might be in need of a specialized emergency loan that now they can’t get it because they have to wait 12 months with no overdraft fees and no overdraft penalties with their Wells Fargo checking account before Wells Fargo will even consider lending them $500.
Patrice Onwuka:
So-
Patrick Brenner:
And 12 months is not… I mean, does not constitute being able to lend in an emergency.
Patrice Onwuka:
Yeah, it does not. That emergency is already done and expired. So I think we’ve seen these kind of rate caps in different states. They’ve been implemented before.
Patrick Brenner:
Yes.
Patrice Onwuka:
And talk to us about what happens when the rate cap causes these lenders to go out of business. Because it’s just… When you think about it, you’re lending to someone who’s considered high risk. You don’t know if they’re going to repay it. You don’t have any sort of capital to borrow… They don’t have anything to borrow against. So you’re taking a big risk, which is why you have a higher interest rate. But when those options disappear, where do people turn to?
Patrick Brenner:
Well, they’re certainly not going to turn to Wells Fargo, U.S. Bank, or Bank of America. They can’t. Instead of being able to turn to traditional financial institutions like those big banks, you end up seeing folks using title shops. They’ll go turn over their title to a vehicle and use that as collateral to borrow money, or you’ll see them entering pawn shops, putting up a collateral for access to that cash.
Now, these specialized emergency loans are typically non-collateralized loans. There is no collateral that is obligated to be put up by the borrower in order to get access to that cash. But when you remove that as an option, what other choice do they have? And pawn shops or… I don’t want to disparage any particular industry, but you are left with the only option of having to put up what could be priceless family heirlooms to a pawn shop in order to be able to get access to that cash. Now [inaudible 00:16:10].
Patrice Onwuka:
I’ve also [inaudible 00:16:11] stories of even loan sharks… People turning to loan sharks and illegal sources of cash in a pinch.
Patrick Brenner:
Sure, absolutely. That’s entirely an option. I mean, I hail from Maryland in the east, and you see a lot of loan sharking in illegal activity like the Mafia. I love The Sopranos. That’s a great show, but it’s hardly an optimal experience when you’re having to borrow money from somebody like Tony Soprano.
You mentioned something specifically earlier that I want to go back and touch on. It’s the concept of these short-term and payday… I don’t like the term payday lender. It is a specialized emergency loan. These are not payday lenders. Payday lenders lend for two weeks, one week — as short as one week or up to four weeks for that typical payday period. We are specifically addressing specialized emergency lending here where the payment period is beyond that 30-day period. So typically these loans are borrowed for about 111 days. And that’s directly from these industry experts. They refer to it as predatory lending.
And my comment… There’s a great Thomas Sowell quote here, Thomas Sowell said that, “Applying APR in the case of a specialized emergency loan is like saying, ‘I’m going to go rent a hotel for two days at the rate of $36,000 a year.'” Nobody rents hotel rooms at $36,000 a year; they’ll rent room for $100 a night. So why is a hotel able to charge $100 a night, but a specialized emergency lender does not get afforded that same opportunity to lend money for less than a year. Why is that APR applied?
That’s the predation right there, is these regulatory bodies coming in and applying APR to something that it should not apply to. And you mentioned it already. This is the worst case of the road to hell being paved with good intentions. This is well-intentioned, it sounds good. “Oh, yay. We dismantled predatory lending in New Mexico.” It makes for flashy headlines. But in reality, you’re putting people that don’t have access to traditional credit in a situation where now they don’t have access to any credit. You have made it illegal for a specific class of citizen to borrow money.
Patrice Onwuka:
I think that’s… I’m glad you expounded on that. And that’s exactly where I had hoped you would go. And I think it’s a great way to round up our conversation because this is a policy issue. And as we’ve both said here, the intention of protecting people, particularly those who are disadvantaged, and I’ve looked at some of the demographic data and individuals who, they tend to be on the younger side, they tend to be… I think maybe statistically white women tend to take out these loans most commonly. But minorities are also… They tend to borrow at a very high rate.
So you’re talking about people who may not be high-income earners, they may not have a huge nest egg or a big save emergency savings to pad themselves, which is why in that pinch they’re looking for those emergency loans in whatever form, however length of time they’re willing to take it out for.
And they need access. They need choices and options. And by the government coming in and putting its thumb on the scale of saying, “We like these, but we don’t like those.” That is removing options, that is distorting the market. And frankly, that’s not helping. And I love the Thomas Sowell quote; it’s hurting. It’s huurting the people that it’s intended to help.
So in any case, Patrick, I love this experiment. I want you to come back in a year from now or sooner, whenever you have hit year one and seen how the banking application goes the next time around, because this issue is not going to go away in your state or frankly across the country and federal… The Congress under certain one-party rule would love to try and institute something like this as federal policy. And so we need as much ammunition as possible to push back when we hear people bring forward these ideas. So Patrick, thank you so much for joining us today on She Thinks.
Patrick Brenner:
Patrice, thank you so much for having me. I appreciate it very much.
Patrice Onwuka:
Terrific. And to our audience, thank you so much for tuning in today. Please stay tuned. Follow us wherever you listen to your podcasts. Absolutely download, like, share, and spread the word about She Thinks. I’m Patrice Onwuka with the Independent Women’s Forum, and I will see you next time.
