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April 12, 2011 Filling the Gap for Workplace-Based Loan Solutions Fifty million workers in the United States live paycheck to paycheck and do not have access to savings in an emergency. As a result, full-time workers are borrowing against their 401Ks or making hardship withdrawals at the highest rate in a decade. These loans and withdrawals come with risks that employees may not know or fully understand, including potential penalties and/or endangerment of retirement savings. 1 Compounding financial stress in the workplace is the use of payroll advance and predatory short term loan providers. More than 60% of hourly employees rely on payroll advances regularly to help them through emergencies. These workers lost $100 billion in fees to predatory payday lenders last year, which computes to predatory interest rates of 400% or more. Payday loans often lead employees to future financial troubles, with one recent study finding that people who took out payday loans almost doubled their chances of filing for bankruptcy as compared to similarly situated applicants who did not use payday loans. 2 Since 1980, the number of employers that offer internal payroll advances has plummeted to record lows, due in part to lack of administrative and processing capacity coupled with legal implications—as a result most workers don’t have their employer to rely on when emergencies arise. As employer payroll advance options decrease, payday lending has increased; the number of payday loan branches in the U.S. rose from approximately 200 in the 1990s to approximately 26,000 in mid-2009. 3 Many employees turn to payday loans because they don’t have alternative, affordable sources of credit. 4 However, there are new and innovative voluntary benefit programs in the marketplace that are helping employees who find themselves in a pinch. When employers think about adding a new financial wellness program for employees, it should do more than provide emergency funds until the next paycheck. Socially responsible workplace lending programs should: 1. Build Credit. A workplace loan solution with a third party provider must work with accredited mainstream banks and financial institutions that report employee repayments to the major credit bureaus. Every time a payment is made, the employee is taking a step towards building positive credit. Socially responsible loans not only benefit employees but also allow banks and financial institutions to build relationships with new and existing customers while supporting the local community. 5 2. Increase Financial Stability. The National Credit Union Administration’s lending rules state that small dollar lending programs are more successful and beneficial for borrowers when they include savings and financial education features. 6 In order for employees to truly improve their financial well-being, loan programs should be complemented by a suite of products including financial counseling, debt management assistance, and credit resources, encouraging employees to transition into mainstream banking relationships with savings programs. 3. Be Easy and Fair. Loans should have fair payment periods, be affordable, and be provided by reputable banks and credit unions. According to the National Consumer Law Center (NCLC), features of a fair small dollar loan include an APR of 36% or less, a term of at least 90 days and the use of multiple installment payments instead of a single balloon payment. 7 The NCLC also states that alternatives to payday loans must not force repayment by paper or electronic check holding. 8 Careful consideration of a borrower’s ability to repay a loan prior to lending coupled with the ease of direct deposit repayment can provide benefits to the borrower, including lower interest rates. 9 Features like next day loan processing, integrated direct deposit to ensure timely loan repayments and a secure online application process are all key parts of making workplace borrowing a truly viable alternative for busy workers. 4. Financial Wellness Products That Benefit the Whole Company. There are many definitions of ‘emergencies’ facing the average worker; medical bills, child care bills, car repairs, utility turn-offs, and possible eviction –-all of these life emergencies are realities that can affect employees every month—even employees with higher incomes. The availability of fair, short-term loans can dramatically improve employee financial stability, which results in higher employee retention, lower rates of absenteeism, and better job performance—in turn benefitting all employees and business’ bottom line. Similarly, employers who provide workplace financial education may see lower levels of financial distress and absenteeism by employees. 10 Most employers don’t have the capacity to provide their workers with paycheck advances or workplace loans. There are, however, social companies which provide employers with employee benefit packages that couple convenient, affordable and fair loans with free unlimited financial counseling by phone and financial wellness products. Some of these social companies, including Emerge Financial Wellness (www.emergefinancialwellness.com), give employers the ability to offer employees a fair, low interest personal loan from an accredited bank or credit union with no risk to or accountability for employers. In addition, at the time of the loan approval, Emerge will set up unbanked employees with a savings account, and offer them easy ways to start a small savings for future financial emergencies. Choosing to offer a workplace personal loan solution to your employees will help workers cope with a short-term financial crisis without turning to predatory lenders, and reduce stress by improving their financial well-being. This leads to higher job satisfaction, with more time in the workplace spent working, not worrying. For more information on how social loan and financial assistance companies are working with businesses in your industry to help employees keep more of their hard-earned paycheck, please visit www.emergefinancialwellness.com or email firstname.lastname@example.org. Emerge Financial Wellness 901 Mission Street San Francisco, CA 94103 emergefinancialwellness.com 1 “Fidelity’s 401(K) Data Show Steady Savings Pattern By Majority, But Loans and Hardship Withdrawals on The Rise.” Fidelity.com. August 20, 2010. <http://www.fidelity.com/inside-fidelity/employer- services/fidelity-q2-401k-data>. 2 “Payday Loans Put Families in the Red.” Center for Responsible Lending. February 20, 2009. <http://www.responsiblelending.org/payday-lending/research-analysis/payday-loans-put-families-in-the- red.html>. 3 Caskey, John P. “The Economics of Payday Lending.” Credit Union Association of New York. 2002. <https://www.cuany.org/access_files/outreach/Filene_-_The_Economics_of_Pay_Day_Lending.pdf.>. 4 Ibid. 5 See Burhouse, Susan, Miller, Rae-Ann and Aileen G. Sampson. “The FDIC’s Small-Dollar Loan Pilot Program: A Case Study after One Year.” Federal Deposit Insurance Corporation. 2009. <http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_2/SmallDollar.pdf>. 6 12 CFR Part 701, available at <http://www.ncua.gov/resources/RegulationsOpinionsLaws/final/12CFR701ShortTermSmallAmountLoans .pdf>. 7 Carter, Carolyn, Plunkett, Leah A. and Lauren K. Saunders. “Stopping the Payday Loan Trap.” National Consumer Law Center. June 2010. <http://www.nclc.org/images/pdf/high_cost_small_loans/payday_loans/report-stopping-payday-trap.pdf>. 8 Ibid. 9 Ibid. 10 Prawitz, Aimee D. et al. “Employee Financial Distress, Emotional Health Risk, and Absenteeism.” Personal Finance Employee Education Foundation. <http://pfeef.org/research/efd/EFERMA_2010_Employee_Financial_Distress.pdf>.