The state in 2012 outlawed payday and other short-term lenders with very high interest rates. But predatory short-term loans are available online, and the attorney general’s office continued to get complaints from Vermonters who were stuck in a cycle of paying interest rates of 400% or more for loans they couldn’t pay off.
Now a private employer, Rhino Foods in Burlington, is working to promote an alternative to high-interest commercial loans. The company’s newly formed foundation is spreading the word about income advance programs as its No. 1 priority.
“We support financial security for workers that would make business sense,” said Ted Castle, the CEO of Rhino, which makes frozen chocolate chip cookie dough for food companies like Ben & Jerry’s. “Our purpose is to impact the manner in which business is done.”
Rhino Foods is a B Corp., a business that prioritizes social and environmental performance, public transparency, and legal accountability. Through its income advance program, which Rhino has offered since 2007, workers can borrow up to $1,500, no questions asked, and repay it through a regular weekly paycheck deduction of $50. The interest on those loans is around 16%, which is standard for short-term loans, according to the attorney general’s office.
Small short-term loans can be critical in helping workers stay employed, said Castle. Over the years, he has watched as workers missed work because of unexpected problems such as car trouble. Without the money to pay for repairs, some good workers eventually ended up losing their jobs, he said.
“Forty-three percent of Americans don’t have $500 in savings,” said Castle, who speaks nationally on his company’s income advance program at B Corp. events. “If they don’t have money they miss work, they miss taking the kids to school — it spirals out of control.”
Vermont is seen as a national leader in consumer protections against predatory lending. The state outlawed payday loans in 2012, and it also caps interest rates at 12% to 24%, depending on the type of loan. In addition, the attorney general’s office has suggested that Vermont employers provide income advances to workers as a way of helping them steer clear of predatory loans.
Employer participation is useful because even as Vermont regulators look for ways to prevent predatory lending, the lenders are modifying their products to get around the law, according to a 2017 article in the Vermont Law Review.
High-interest lenders offer alternative products, such as installment loans and open lines of credit, that don’t fall under states’ payday lending laws, according to the article. Of the 15 areas that prohibit payday lending, four don’t cap fees on open-ended credit and five allow annual percentage rates of up to 65%.
“Only six, including Vermont, limit full APRs on small loans at 36% or lower,” the article said.
The Working Bridges Employer Collaborative of the United Way of Northwest Vermont — an effort aimed at helping workers find and keep jobs — was an inspiration for the Rhino program, Castle said.
Rhino doesn’t lend the money directly; it works through North Country Federal Credit Union, which now has 40 companies as partners in these small loans and made 1,000 income advance loans last year. North Country works with Rhino’s HR office to set up the loan, said Jeff Smith, senior vice president of lending at North Country.
The loan is automatically approved if the employer is on the credit union’s list, Smith said. The default rate is around 3% to 4%.
“It’s more than what we write off on other loans, so it’s a riskier loan, but comparatively it’s not bad,” said Smith.
Smith said the credit union is working with about 40 Vermont employers that offer income advance programs, and he talks to his counterparts at other credit unions a few times a month about them.
“Some have said it’s too risky,” he said.
Other companies already have their own version of a program that offers loans to workers.
“We’re supportive of any solution that brings to market opportunities for people to avoid the perils of payday lending,” Smith said. “It doesn’t have to be one size fits all.”
Castle said Rhino employees have borrowed $360,000 in the past 10 years.
“What’s cool about this is, they’re borrowing from a bank, so their credit scores go up,” he said. He added that nobody asks the workers why they’re borrowing the money.
“It’s putting judgment on what is the right need for that person or not,” he said.
Mascoma Bank, which has its administrative offices in White River Junction, works with about 10 Vermont and New Hampshire employers including King Arthur Flour — also a certified B Corp. — and Simon Pearce to provide income advance programs. Mascoma, a B Corp., sees income advance programs as a way to help people to become more financially self-sufficient.
Through Mascoma’s program, workers can borrow up to $1,500 at an interest rate of 16 percent. Ken Wells, chief retail lending officer at Mascoma, said the default rate is similar to that of the bank’s other consumer loan programs.
“It’s not a profit center; if anything it’s the opposite,” said Wells. “We probably don’t make any money on these loans.”
Instead of a payroll deduction, Mascoma has the employee open an account and have some of their pay deposited in a separate account as repayment of the loan. The local United Way provides some counseling to employees who are having trouble making their repayments, Wells said.
He added that North Country has been a national leader.
“We’ve been in touch with them and they’ve been helpful to us,” Wells said.
Ned Castle, Ted Castle’s son, is leading the Rhino Foundation’s efforts to spread the word nationally. He said many of the programs encourage the workers to continue making the $50 payments — but into a savings account — after the loan is paid off.
“You take a situation where somebody was in a financial emergency, and you deal with that, and then the upside over time is they’re building their credit and potentially starting a savings account for the first time,” Ned Castle said. “In terms of long-term impact, those two components are more important and life-changing — the credit and the savings — than getting out of the emergency.”
Ned Castle is working closely with B Labs and with the Filene Research Institute, which has created tools to help credit unions adopt such programs. FINRA Investor Education Foundation, a consumer industry group that works under the supervision of the Securities and Exchange Commission, also studies employer loan programs.
Income advance programs can help banks and credit unions pick up new customers, said Smith. A lot of people who have recently arrived from other countries participate, he added.
“The way we grow is by bringing in new members, and this program costs essentially nothing,” he said. “But we didn’t do it to add value to our bottom line.”
