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Escaping the High Cost Lending Trap—Exploring FinTech Alternatives to Borrowing for Low-Income Working Americans

Session 1: February 22, 4:00-5:30 pm, Belfer 503 (M-RCBG conference room)

For many years, policymakers and advocacy groups of all political stripes have agreed that increasing the access of low-income working Americans (“LIAs”) to consumer credit is critical to economic development and social mobility and, therefore, should be a core goal of public policy.  Historically, advocates for the goal of increased lending to LIAs expressed either egalitarian or libertarian reasons for their views.  Egalitarians generally focused on eliminating lending discrimination through legislation and regulation and the benefits of “financial inclusion”, while libertarians posited that private loan markets, by efficiently distributing credit to all comers, could solve the problem of access to credit best.

 On a separate track from these political & policy issues, profound changes occurred in the overall US labor economy and in the distribution of wealth and income.  These changes contributed to a massive increase in demand for short-term borrowing by LIAs to meet basic day-to-day needs.

This borrower demand, along with a series of structural, technological and legal developments which significantly changed consumer credit markets, led to a continuous expansion of lending to LIA borrowers and the establishment of a large, highly profitable and politically influential industry of lenders focused on “subprime,” high cost lending to LIAs. While the high-cost LIA consumer credit industry was damaged by the subprime mortgage crisis in the late 2000s, it quickly rebounded in other areas and today there are hundreds of lenders providing payday, car title, personal installment, overdraft and other loan products to LIAs. 

I have been a senior executive at companies which engaged in subprime lending as part of their business and have seen at first hand the impact on LIA customers.   My personal view is that high-cost credit is almost always a bad solution to the problem facing an LIA consumer, frequently leading to an ever-worsening debt trap and eventual default with highly adverse personal consequences.  

In the first two study groups in the Fall Semester we looked at how the current situation came to be, what the consequences of high-cost borrowing have been for LIAs, and how legal and public policy efforts to curb some of the most egregious practices have had only mixed success.

In the Spring Semester, we will examine ways in which financial technology (or FinTech) companies are creating new pathways for LIAs to avoid dependence on short-term borrowing (payday, car title, bank overdraft) by delivering structured information, guidance and practical, low-cost solutions to help LIAs better handle day-to-day cash flow management challenges.  We’ll look at the FinTech companies, products and business models, attempt to identify the most promising approaches, and explore ways in which private enterprise, non-profits and government can accelerate the adoption and distribution of high-value FinTech alternatives to the low-income working population and support further investment in this area.

Todd H. Baker is currently the Managing Principal at Broadmoor Consulting, LLC, which provides strategic consulting services to boards of directors, management and shareholders of domestic and international financial services and financial technology companies at all stages of development.  Mr. Baker is best known for driving strategic change in financial services organizations and his long history of leading high-profile financial services M&A and capital-raising transactions.  He is also a prolific writer and speaker on financial services and FinTech topics, with a special interest in alternatives to high-cost borrowing for low-income consumers and strengthening the business models of non-bank mobile and online lenders. Before founding Broadmoor, Mr. Baker was the Managing Director and Head of Americas Corporate Development for MUFG Americas Holdings, the Americas banking operations of Mitsubishi UFJ Financial Group (MUFG) and Executive Vice President of Corporate Strategy & Development for Union Bank NA, the U.S. commercial banking operation of MUFG, where at various times he led the company’s strategic planning, corporate development and performance management activities in the US and the Americas. Prior to joining Union Bank, Mr. Baker served as Executive Director of Corporate Development for TD Bank, N.A., where he was a member of the Managing Committee and had responsibility for leading Toronto-based TD Bank Financial Group’s acquisition activities in the U.S. market, and Executive Vice President of Corporate Strategy & Development at Washington Mutual, Inc. where, at various times, he served on the Executive Committee and had responsibility for acquisitions & divestitures, strategic planning, investor relations, venture investing and competitive intelligence.  Prior to his executive roles, Baker was a partner with the international law firms Gibson, Dunn & Crutcher LLP and Morrison & Foerster LLP, where he represented bank, non-bank financial services, technology, corporate and investment banking clients in corporate and board governance matters, mergers and acquisitions, public and private securities offerings, securitizations and compliance issues and was recognized as the leading financial services M&A and securities attorney on the West Coast. As a Senior Fellow at M-RCBG, Baker will explore alternatives to high-cost borrowing for low-income consumers with faculty sponsor Howell E. Jackson, James S. Reid, Jr. Professor of Law at Harvard Law School.  Email: todd_baker@hks.harvard.edu

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M-RCBG Senior Fellow Todd Baker.