Announcing an “all-in” 36% APR cap and a substantial reduction in legal collections
By Raul Vazquez, CEO
Oportun is a responsible lender driven by a mission to bring financial inclusion to traditionally underserved low-to-moderate income individuals and communities of color. I joined the company as CEO in 2012 because the mission resonated with me, as someone who had seen many people who look like me struggle to gain access to capital and make their way into the financial mainstream.
When I joined Oportun, we were a small regional lender that was structurally challenged as we sought to scale the availability of our essential products and services. Since then, we built the infrastructure necessary to disburse approximately $9 billion to low-to-moderate income communities, help more than 850,000 people establish a credit history and save our customers more than $1.7 billion in interest and fees.
Recently, a few consumer advocates and journalists have asked us about the APRs we charge some of our customers as well as the scale of our legal collections. We have always designed our products and practices to benefit our customers, so we asked ourselves how we can better serve our customers, especially in the current environment, while keeping our commitments to other stakeholders. After extensive discussions and with enthusiastic support from our leadership team and Board, we have decided that we can do better and I’m writing today to share how we intend to do that on a permanent basis.
36% APR cap
I am excited to announce that we are implementing an “all-in” APR cap of 36% for all newly originated loans – nationwide. While the average APR for our business today is about 34%, the APRs can exceed 36% for some customers, often because the size of the loan is small and the term is fairly short (less than 12 months).
The “all-in” nature of the rate cap means that we will not be adopting the common industry practice of charging a reduced nominal APR but seeking to collect additional fees from customers by selling them ancillary products, like credit insurance, which we have never offered.
This is a straight-up and transparent 36% APR cap, full stop. No ancillary products. This is the right thing to do now, in light of the challenging economic environment faced by many of the communities we serve.
This has long been our aspiration as a company, because it dispels the notion that small-dollar lending to unbanked or under-banked consumers requires APRs above 36%. We expect to have this change completed by mid-August. This move is possible now because: we have grown and scaled; our risk models have improved; and we’ve been able to innovate to serve our customers better with technology.
While our growth has created new opportunities to reduce our APRs, it has also created a challenge related to our legal collections practices, which we are similarly addressing today.
Substantial reduction in legal collections
While collections will always be a necessary part of any lending business, it is particularly challenging for unsecured loans. In the current environment, we recognize any legal action represents a stressful escalation for the small minority of customers impacted, especially those on the front lines of the public health and economic crises of COVID-19.
Our ability to leverage technology and non-traditional approaches has increased financial opportunity for our customers, and our company has evolved in many ways as we have grown and learned about the customers we serve. It’s in this spirit of learning and improving that we are now updating our approach to collections.
Historically, we have used the small claims legal process as a mechanism of last resort to get the small minority of our customers who have fallen behind in their payments and not answered our calls, letters, texts or emails for several months to reengage with us. In 2019, we disclosed that over the prior five years we have filed a small claims case on less than 6% of all the loans we have originated, and pursued a case to judgement in only about 2%. Put another way, in about two-thirds of the cases we’ve filed over the past five years, we chose to dismiss the suit because we were successful in reengaging with our customers, understanding their situation and getting them onto a plan they could afford. If a customer was unemployed and could not repay us, we also did not proceed with the case. Still, as we have grown, we’ve recently realized that 6% percent has become a big number, making us the largest filer of small claims in California and Texas. This is a position that does not reflect our objectives as a mission-driven company.
That is why, effective immediately, we are dismissing all pending cases, suspending all new filings and committing to reduce our future filings by more than 60% from current levels.
As we continue to provide affordable unsecured loans for low-to-moderate income communities, legal collections remains necessary, but we are committing to the development of new tools and approaches that better reflect who we are and are more consistent with the relationships of trust and respect we have built with our customers.
We are as dedicated as ever to our mission and being the financial services company that our customers can trust as they pursue their own versions of the American dream. Although we may not agree on everything, I want to thank the consumer advocacy groups and press for asking us to take a hard look at our practices. The concrete steps we are announcing today will enable Oportun’s continuing evolution into the company we envision, helping even more people build a better future.