A Reliable Financial Alternative to Predatory Lending in Rural Kentucky

appalachia, Economic Opportunity | March 21, 2018

“Good things happen when people have affordable options”, stated Mae Humiston, CDFI Manager of Redbud Financial Alternatives.   Redbud is a Community Development Financial Institution (CDFI) located in Hazard, KY, with a mission to provide equitable consumer and mortgage financial products that help clients achieve housing and overall financial stability.

CDFIs are private financial institutions dedicated to delivering responsible, affordable lending to underserved markets and people.  Redbud was founded by Fahe Member Housing Development Alliance (HDA) after an internal review of clients showed a high percentage of people in need of their services were ineligible due to credit and debt issues.  Perry County and the surrounding area were in need of an in-person resource which offered education and solutions to credit and debt issues and also provided affordable credit for people who couldn’t access traditional financial assistance. HDA’s solution was the founding of Redbud Financial Alternatives as a wholly controlled subsidiary.

Redbud has processed more than a dozen loans and is currently servicing more than 20 clients. Among those includes the Fugates1 who came to Redbud Financial Alternatives at the recommendation of their adult daughter, who had worked with Redbud to address her own debts so she could buy a home.  Her father, Joe Fugate, use to make a good living working with coal companies which allowed him to buy a home for his family.  With the recent decline in the coal industry, however, he hasn’t been able to find work. His wife, Leann, works for the school system, but her salary wasn’t enough to handle their mortgage payments exceeding $1,000 every month plus other bills and living expenses.

Low-income people are often forced to make suboptimal financial choices due to the lack of access to affordable loans particularly for short term problems, such as vehicle repairs. Many of the people who fall into this category become customers of payday lending services.  These services fill a financial need but at a great cost to consumers.    These loans have high fees and short repayment periods.  The average payday loan customer doesn’t the have original loan amount plus interest to payback on the due date, so instead, they renew the loan for a fee, and this cycle typically repeats for months. In Kentucky, the average repayment on a $350 payday loan is $822.50, well over $450 in fees and interest for an APR exceeding 300%. A 2008 financial report states that in Perry County, Kentucky alone, $2.9 million was paid into check cashing loan fee2.  That’s money which could have been applied to people’s homes, savings, and even taxes for the community.  On top of that, many of these check cashing agencies are based out of state, so the revenue they make leaves the community altogether.

The Fugates were forced to make a similar decision to meet their financial needs.  However, instead of a payday lender, the Fugates turned to a seemingly legitimate online debt consolidation service.  Unfortunately, the company scammed them, taking their money and leaving their debts unpaid and in collections. The collection debts on their credit report became a barrier that prevented the Fugates from accessing their bank for refinancing of their mortgage. So instead, they reached out to Redbud about consolidating their debt and addressing the collection bills.

Redbud isn’t simply an alternative to predatory lenders.  It is an alternative that allows borrowers to better prepare for their future.  Along with affordable loans, they provide clients with credit and financial counseling so they have information to make informed choices on how to build their assets.

“Redbud takes a high touch with all of our clients,” stated Mae.  “We take a deep look at income, spending habits, and credit.  Half of our conversations are about if a loan from Redbud will help the person and how.   Could we possibly trap them into debt ourselves?  I’m proud to say that we’re highly confident in our borrowers.”

However, despite success with their current client load and a great reception from the local community, including the chamber of commerce and some local banks, Redbud was in need of financial support to increase their capacity.

“By being essentially a startup entity, we are in the phase of proving our concept,” said Mae.  “An investment loan from Fahe provides the opportunity to expand our pilot phase so we can continue to test out our ideas and build on those that have already proven successful.  An act of confidence from Fahe shows other investors that Redbud is worth the risk.”

“In 2015, Fahe launched a new strategic plan to address our strategic charges of leadership, housing, education, health and well-being, and economic opportunity,” said Sara Morgan, Fahe’s Chief Operating Officer.  “The Loan to Redbud Financial Alternatives is emblematic of our dedication to strengthen existing leadership and our desire to address economic opportunity for the people in our communities.”

When people meet their financial goals in greater numbers, then their lives improve and so do the communities they live in.  Financial success has a cascade effect.  People open more bank accounts, they invest more into child and adult education, they broaden the tax base and rebuild community infrastructure.  Financial stability also greatly affects the intangibles in life such as stress reduction and increased community spirit.

Redbud worked with the Fugates to not only identify the best approach to addressing their collections, but also devised a plan that would allow them to keep their home.  Redbud offered the family a debt consolidation loan that paid off all of their collections which the Fugates are paying back with affordable monthly payments. With the collections off of their report and their credit score improving with each Redbud payment they make, the Fugates were able to go to the bank with dignity, find a way to stay in their home, and escape the devastating impact of a company that took advantage of a family in a desperate situation.

By increasing their capacity with a loan through Fahe, Redbud hopes to build systems that enable and uplift the potential of their rural communities.  Through growth and innovation Redbud will grow to become an alternative that provides borrowers like the Fugates the opportunity to access affordable financing that creates a better future.

1Names changed by request

2 http://www.kftc.org/sites/default/files/docs/resources/the_debt_trap_report.pdf