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Pro Bono Effort Results in Innovative Alternative to Payday Loans

Summary

For many years the payday lending industry has been the scourge of low income neighborhoods. With exorbitant interest rates, often in excess of 400% APR, borrowers are caught in a trap where they are forced to repay their original loan many times over. Although the default rate on these loans is about relatively low, traditional major banks have not offered competitive alternatives and efforts to find a legislative solution to the problem in Missouri have failed.

It was clear that low income Kansas Citians deserved an alternative. Spencer Fane Partner Adam LaBoda along with two other attorneys from Legal Aid of Western Missouri’s Volunteer Attorney Project, began working with local banks, credit unions, the United Way, social service agencies, faith groups, and foundations to form a new nonprofit corporation, Fair Community Credit.

Fair Community Credit’s mandate is to provide low income individuals access to credit. Fair Community Credit entered into an agreement with the Central Bank of Kansas City, raised a collateral pool to back the loans, navigated complex banking regulations, and engaged two social agencies and a church to act as referral agents. The aim is to start small and add new banks, credit unions and referral agents as the effort progresses.

Eligible borrowers will get small bank loans at an annual percentage rate not to exceed 36% APR, many times lower than a typical payday loan. Loan recipients will have the opportunity for financial education to allow them to gain access to even lower interest loans in the future.

Access to manageable loans and good credit is an enormous benefit to working low-income families and Fair Community Credit will be a powerful force in driving out the predatory payday lending industry. Fair Community Credit is already garnering national attention as other communities are looking to model this innovative approach and create similar programs.