 Hello, thank you for watching our online briefing. My name is Vanessa. I'm a senior program associate with new America, Chicago. And along with my director Megan, we'll be sharing some findings as well as policy and practice considerations from our latest report designing better small dollar loans behavioral insights from community design sessions with borrowers. The full report can also be found online on the new America, Chicago website. Before we get into the report, we wanted to start with a community member story that unfortunately was too common of an occurrence prior to the predatory loan prevention act. When our community member got her college tuition bill, she panicked. She'd gotten scholarships and taking as many school loans as she could, but it still wasn't enough. If she didn't come up with $1,500 quickly, she'd have to take a semester off of school and risk graduating late. At the time, prior to the PLPA, payday loans seemed the obvious fast solution to her problem. There were stores scattered all over her neighborhood advertising quick cash. The process of acquiring her loan seems simple, but she soon discovered, however, that the fine print and vague explanations were disguising hitting costs. Predatory interest rates and late fees turned her $1,500 loan into $3,000 of debt and an unimaginable amount of financial and emotional distress. She had no choice but to take several credit cards out to help her mom catch up on payments and a semester off of college that would set her back a year from her degree. Now looking back at her experience, she calls for greater transparent financial education and observes that there needs to be options that work for people, their family, and their overall life. Our community member's story is just one of many. For example, in 2019 alone, nearly 431,000 borrowers took out over 1 million loans. This figure includes payday, auto title, installment payday, and small consumer loans under $4,000. There is a huge untapped market and small dollar lending, and in particular the communities that were previously targeted by predatory lenders. These tended to be lower to moderate income communities with the emphasis on black communities and communities of color. Billions of dollars were stripped from these families in high interest rates and fees over the years, but with these untapped markets, there's also untapped potential. Instead of financial products that stripped wealth, imagine if these communities had access to products that helped with credit building, generating savings, and access to capital needed to start a business or even just make rent. Prior to our latest report, New America, Chicago's work and alternative to predatory lending has been going on for years. As part of the We Prosper Coalition, along with countless advocates like our partners at Woodstock Institute, responsible lenders, policymakers, and under the caucus and under the black caucus and Senator Collins leadership, the PLPA was signed into law of March, 2021, instituting a 36% APR cap on most consumer loans. A very important step in consumer protections, however, we knew the work was not done. As part of the We Prosper Coalition, we also contributed to a resource guide that includes lower cost loan options, resources for lowering bills, and additional income for community members who aren't sure what to do with loan funds. People took out these loans for a reason, so we wanted to better understand Chicago land residents' small-dollar lending experience and their ability to find safe, affordable loan products. We initially conducted a series of interviews and collaborated on a community survey with the PLPAs, on a community survey after the PLPAs passage, as well as an analysis on how much wealth was stripped and from which communities due to predatory loans, all this culminating to where we are now. Our current Designing Better Small-Dollar Loans report is based on a series of community design sessions we conducted with 32 Chicago land residents from communities impacted by predatory lending, all of whom had some experience with small-dollar loans. High interest loans have been targeted to communities of color in Chicago, so our respondents included a high number of black and Latino residents. These design sessions are similar to focus groups in that we gather a group of participants to discuss certain topics and do activities. However, our community design sessions and activities are crafted with human-centered design principles and seek to gather feedback on public policy and generate policy solutions alongside community. While designing these sessions, we met with several banks, credit unions, fintech, and thought leaders to figure out where was the disconnect and why they were having issues reaching LMI communities and what types of questions that they have. And so with their input and our own background research, we generated our two research questions, which were where do you go for information you can trust about small-dollar loans and what features make those loans safe and useful. And so, without further ado, I'll go ahead and pass it to my director, Megan Dugan-Adel, to share more about these top-line findings. Thanks, Vanessa. I appreciate that. My name is Megan Dugan-Adel, and I am the director of New America, Chicago. While I just want to be really clear, while we don't want more community members to take out more loans than needed, and we know they're using many of the options in the We Prosper Resource Guide that Woodstock Institute puts out every year, we know that sometimes people simply need another option. They sometimes need a loan. That's the only thing that will work for them. And we really wanted to understand when people aren't able to get loans, what they do and what they're looking for in loans. So, understanding what they're looking for is really important to making sure that all of my communities have safe, affordable options when they do have a financial emergency. So, what do we hear from our community design sessions, as well as our previous interviews? So, while there are quite a few different types of products out there for people, they don't necessarily know what their options are. And they're well aware of the high costs and hidden fees that were previously available before the PLPA. They're not always sure, though, following the PLPA, where to go, particularly if they're looking for large amounts quickly. And that's consistent with research out there that shows that after caps like this, people do not necessarily switch to more traditional lending instruments. So, why is that? If there's one thing I want you to walk away from our report today is that reputable lenders were less attractive than high-cost lenders for one clear reason. People knew they could get the amount they needed quickly, and that could be as fast as 24 hours. So, simplicity, clarity, and speed are really essential to people in the community that are looking for these types of products. And that's been confirmed in other research, including recent research from ideas 42. A couple other things to note from our top-line findings, people are confused about credit unions. They're not really sure when, where to go, they don't know if they're eligible. In addition, past discrimination had harmed people's opinions of banks. So, to be clear, while many people are looking for the security of an established institution like a bank and people, in many cases, trusted their own banks, they had had experiences in the past that meant they didn't think that would be the place to go for this type of help. So, among African Americans, this meant that they felt like if they physically went into the bank, they might not get approved because of their skin tone. Or they might be asked tons of invasive questions like, are you married? How many children do you have? And many, many other questions. For immigrants with or without ITINs, so individual tax ID numbers, it was almost impossible for them to get approved for things, even if they had a good payment history. It took a really long time for them to be able to build credit. And so I want to highlight this last top-line finding, which is that the approval processes as they stand in a lot of more traditional lenders really keep out people with solid incomes and good payment history. So, even if people had been paying their bills on time and they had good incomes, people from both of these groups have been denied in the past, maybe because they were self-employed or they had an online bank, or they hadn't used credit before, they'd been avoiding credit. And this meant that lenders were actually missing out on good investments. Next slide. So what challenges did people run into when they were looking for loans? So there were gaps in information, as I mentioned, people just didn't really know where to go or how much they'd be approved for. They thought of bank and credit union processes as maybe long and complicated. They just weren't sure what to expect. There was also quite a bit of confusion throughout our groups about credit. So people weren't sure if they should pay on time, if they should take out a loan, but then pay up, not use all the money, and when to pay, that would actually show up positively on their credit. They felt like sometimes it was difficult to show the positive that they'd done, but maybe one small thing might really mess up their credit. There was also a very strong aversion to loans, particularly among a group of Latinas that we met with. So people, they really described it as a noose. They saw loans as something only very poor people needed. There were also limits on access. People kind of felt like they just couldn't win. So this kind of goes back to the last finding I mentioned in the top line findings. People felt like if they lived in particular zip codes, they would not get offered good terms on loans or they might not even have access to certain types of loans. People felt like their race ethnicity would play into that. People also who were trying to do everything right, trying to pay taxes, but hadn't had the opportunity to become a citizen felt like there was a different system for them, that there were resources that were set aside that were only for citizens and really not for them. So as I said before, people felt like they couldn't win if they had a good income, but they were self employed. Lenders said no, if they had a steady payment history, but not enough income, they were denied. If they did receive a loan, they felt like they'd have to pay much higher interest rate than other people, particularly because of where they lived or other situations like this. Next slide. So who are some of the trusted messengers that people mentioned? So we talked to each of our three groups of community members about who they would trust to learn about good financial products or to find safe alternatives to high cost loans. People were really looking for a trusted messenger and they would kind of ask us actually, but there wasn't one common one. So family and friends was fairly common, wasn't a clear contender. Overall, we did see, though, some similarities based on generation. So trusted messengers were different based on the generation people were in. So older generation trusted TV news, other news sources like Unaficion in the Latino community. Middle-aged people really relied on the internet quite a bit. So they used Google searches. They might look at online reviews of the Better Business Bureau, credit karma, nerd wallet, maybe Facebook groups. Younger people really routinely use social media. So people mentioned Instagram, Reddit, TikTok. And actually some of our Latina participants were saying what actually that their young people, their teenagers were actually getting really good, helpful information off of some of these sources. There were also cultural differences when it came to where to ask for a loan. So asking for help from family and friends rather than other sources was more popular among black respondents for smaller loans. But for larger loans. And so we're talking in the $2,000 range. It was more popular among Latino respondents to ask family or friends for those loans. You can go to the next slide. So what were our community members looking for and safe, affordable loans. You, we've talked about a lot of that. So I'm not going to go into a lot of detail here and there's a lot more detail in our report. But I just want to highlight a few things I haven't talked about yet. So people don't want to spend a lot of time filling out paperwork, tons of paperwork only to find out it's too late and they can't get the money they needed or they aren't eligible. So that clear, simple, fast is very, very important. It was also really important, you know, in the black and Latino community, there are a good number of people who haven't actually used credit. They've either avoided it or haven't really, you know, there's other people who haven't been sure how to use it. And so there need to be options for people if they do not have credit or they have they're rebuilding their credit. Many thought that pay history, approve of income should be all that was needed for a short term loan. One thing to note, people really wanted to be able to see their accounts online, pay online, set their payment state, apply online, get help online. But they really were looking for protections too. There was some nervousness that if everything was completely online, so as an online only provider or an app, that their identities might be stolen, their money might be stripped from their accounts, you know, at the wrong time. They didn't want to give online apps full access to take money from their account. So that's also a negative feature that we heard. People really also wanted to have control over their payment dates to make sure that they can manage their money and make sure that that money was there to pay that loan on time. And then one of the other things people appreciated was some loans with credit building features. So they were interested in things like rewards for early payment and wealth building features like earning shares in an institution. Next slide. You can probably guess many of the bad loan features that people wanted to avoid and we've talked about some of them. And there was, there's more, a lot more detail in our report. One that we haven't talked about is membership fees that people couldn't get out of, say if they were in a bad financial situation and inconsistent credit reporting. So you all can learn more about that on our report. Next slide. So in the first session, we had people design their own loan and you can read more about that in the report as well. In the second and third sessions, we actually had participants review three different loan types thinking about which loan they would want to use in two different scenarios. We did not tell them which loans these were or which sources these were, but we did describe them. And so we had participants think about if they needed like a 250, $250 loan that would need to be taken out regularly because maybe their bills and their check don't match up or a one time one to $2,000 loan. Which one would they use? So we showed them three products with different amounts, a credit union loan, a fully online and a bank loan. The first choice in both scenarios with both groups was a credit union loan, but that was only after they had learned more about credit unions from their peers. So I think that's important to note. There were always people in each group who had positive experiences with credit unions and there was always people who didn't know much about credit unions. And so as they heard more about positive experiences and how they work, people were very interested. They also liked the low interest rates and the amounts. They really liked that there wasn't a specific credit score requirement, but they could rebuild their credit. In terms of the second most popular, that was the online loan. The main concern was security of a completely online product that wasn't linked to brick and mortar institution. A lot of people like the convenience of that loan also, but they didn't necessarily like, they felt like the loan amount was too low for the second scenario. The least popular was a bank loan. So while people really liked that it was attached to a long term kind of well respected institution, most people just assumed they wouldn't qualify or would be a long opaque process. And also they felt like, and they liked the term of like how long they could repay it, but they didn't like the APR. They felt like over 10% was a high APR. Next slide. So the last section of our report really builds on this body of behavioral research out there. So please check it out. But we believe that lenders can both help build financial health in LMI communities, low to moderate income communities will also mean their CRE obligations and also building a more loyal customer base and, you know, that possibly takes out different products over time. So there's a few things that we talk about in the report. There's nine recommendations for lenders. Obviously the first one is just clear, simple loan eligibility and quick processes that's absolutely number one and non-negotiable. Also, there's all of these different ways out there that vendors are using tech enabled alternatives to credit checks and for communities that avoid credit or don't aren't necessarily using it well or are still rebuilding their credit. This is really essential. There's a lot of research out there that shows that most people don't understand simple financial concepts like compound interest or that they overestimate their ability to pay debt back or they forget financial concepts quickly. There's a lot of research that shows that financial education isn't necessarily really useful if it's a one time thing because people forget it quickly. The thing to remember is that lenders actually have incredible access to customers through apps and other interactions. And so you can provide just in time financial education there. So that's a way of providing clear answers to help people make smarter financial decisions at the time that they need to remember it. People also routinely choose more expensive credit when cheaper credit is available. So showing what different payment options mean in real dollars is a really good way of educating communities and helping them make smarter choices for their financial future so they're better customers for you over the long run. People also choose default options. So there's a couple related to this. So give them a good default option that helps them make more financially smart choices. So for example, automatically give them a savings account and set them up with automatic deposits so they can build that savings or an investment account. Financial institutions can also create adaptive defaults based on customers preferences to make this more impactful and there's a little bit more about that in the report. One other thing I want to flag is temporal framing. So we know that a large number of black and Latino people, particularly in the Cook County area here in Chicago, don't have savings accounts. And so this is, you know, a very important thing that is needed in communities. Using a pennies on the dollar approach where savings are shown in daily or weekly payments can help customers save more money over time and build their financial stability so they're not running out of money losing accounts, a variety of things. We know that banks are making a lot of money on overdraft fees. And kind of getting there's some, you know, practices that aren't the best for when purchases are taken out, etc. But we believe that institutions could keep more customers longer and still make money by creating small dollar loans for regular account holders. When you have all of that data about when they might need it and how, how to support them in that way, and still, you know, make some money for the bank. And that's one of our other institutions like accrediting. Next slide. So policymakers also have a really unique role to play in ensuring the financial service needs of underserved communities are met. One thing we want to highlight, and that's one of the reasons why we've, you know, even done this report, any policy solution that doesn't deal with the underlying problem of why people take out high cost loans is a partial solution. So for example, if people aren't making enough money, just giving them financial education isn't going to fix the problem. You know, we also believe that PLPA and caps are very effective, but we need to make sure people have other solutions. There's a patchwork of regulations governing financial institutions and lending across the country so making these more consistent nationally would go a long ways towards protecting consumers. And we can, if people have questions about that, we can certainly talk more and speak more to that. Similar to the CARD Act, federal and state standards could really require lenders including online lenders to show real costs and clear terms. And we feel that the previous guidelines didn't really go far enough in making that clear for people. One thing I really want to highlight and I'm not going to go into all of these is there's a huge need for additional resources to help leverage private dollars, reduce risk for lenders. The demand is so much greater than the various programs out there, you know, such as CDFI programs. CDFI programs in many cases don't serve this purpose, most of them don't do this type of lending. But if we do look at the small dollar loan program for CDFIs, if we just look at Illinois in 2022, there were only $441,000 in that program across the whole state, compared to $1 billion in small dollar loans in 2019 alone. Credit unions are also fairly limited in size and scope, so really expanding funding for CDFIs and creating creative private partnerships between banks, credit unions, fintech, and you know, state or federal government could really help meet the need better. So one other thing I want to flag, fintech has a lot of potential to solve for problems that have existed for many years in the banking industry, namely the lack of access in black and brown neighborhoods. But if unregulated they really can be extractive and harmful and so really thoughtful regulation in the space is needed. One other note in this same arena, Generative AI has exploded in the last several in the last year. It has the potential to provide just in time financial education, if it's well designed and focused on accurate information, but there's also a huge opportunity for bad actors and inaccurate information. And so local and federal act authorities and good actor institutions like CDFIs could really work together to create a trustworthy trusted messenger for people looking for information on how to build wealth and financial health in these communities over time. There are also a number of different government programs that could really use some of behavioral health insights to help people save more and build healthy habits. This is really important because for example with tax credits, like the EITC or CTC, people tend to overspend when they receive what they see as a windfall. And so they often forget regular expenses or some only regular larger expenses that may come up. So integrating automatic savings or just in time financial education into some of these government programs could be really helpful if they're tested with people and framed in an appealing way that's meaningful to people and inspiring. So lastly, lending policy doesn't exist in a vacuum. So there's been research that's shown that increasing access to Medicaid has been shown to reduce reliance on predatory loans. And doing things like passing in prices in the child tax credit could also have the similar effect by getting needed cash flow into low to moderate income communities. So there's a lot of things that policymakers, communities and lenders can do together to find solutions for these challenges. And I'll turn it over to Vanessa. Thank you Megan and thank you for joining us and engaging on this very important topic. The Designing Better Small Dollar Loans report can be found on the New America Chicago website and here is Megan Dugan Adele's contact information if you have any questions or would like to reach out to us. Thank you.