But at the same time, in defense of the controversial, short-term, low-dollar loans, payday lenders have pointed out the role they play in the lives of lower income and unbanked American's-a role they charge most mainstream financial institutions have abandoned.
Payday lenders have experienced a couple of years of bad press, much of it driven by critics like the Center For Responsible Lending, an affiliate of the $301 million Self-Help Credit Union, headquartered in Durham, N.C. CRL and other critics have attacked payday lenders in particular for the high annual percentage rates the loans generally carry and rollovers.
These charges have resonated with legislators, policymakers and voters in a number of states. According to press reports, roughly 14 states have instituted interest rate caps on payday loans and, on Election Day, voters in Ohio and Arizona voted down measures that would have hiked the cap while preserving the industry's overall loan model. The federal government has also capped interest on loans made to men and women in the armed services.
Payday lenders have argued that such caps effectively put them out of business and deprive lower income and unbanked consumers of a financial service that they need. Studies published by economists working for the Federal Reserve have generally backed up this point, as have reports in the mainstream press.
Writing in The New York Times in November, reporter Douglas McCray studied the behaviors of consumers using payday lending outlets in Los Angeles. He later told financial services executives, "I would not say that they were 100% rational when they chose to use payday lenders, but I don't think they were completely economically irrational either, and I think we have to listen to them explain the reasons they make their choices."
Credit unions around the country have reacted in a number of different ways to their members needs for payday loan alternatives, with everything from actually buying and running payday lending outlets to offering a wide variety payday loan alternatives in-house.
One, the $146 million Prospera Credit Union, launched an effort in 2008 to offer its widely heralded GoodMoney campaign to credit unions nationwide.
The credit union worked with CU*Answers, a credit union technology CUSO, to develop a CU model of a software package widely used by payday lenders. Licensing the software to other credit unions and providing the training to use it, Prospera said, will enable other credit unions around the country to establish their own versions of the successful GoodMoney program.