Payday Lending a Nationwide Epidemic and CUs Nationwide Are Responding

MADISON, Wis. – Payday lending unfortunately knows no boundaries. It is on the rise in Alaska as much as in the lower 50 states, and credit unions throughout the U.S. are stepping up to protect their members from the abusive practice. Credit Union 1 in Alaska, with more than 50,000 members and $480 million in assets, began a new “Quick Cash” loan last December as a lower-cost alternative to payday loans, mostly offered by pawnshops here. The program which will be reviewed mid-year, has a $500 maximum, interest is 18% APR and carries a $20 annual fee. The program, in its trial phase, has initial funding of $250,000 to serve a minimum of 500 members. Tom Newins, marketing director, said about 60% of the fund had been loaned by mid-February. Financial guidance is provided by Balance, a San Francisco-based financial education and counseling program. Washington State, in January, reported that its payday lending industry grew 84% in three years to more than $1 billion in payday loans in 2003 with more than $76 million collected in fees in 2003. In 2004, Wisconsin saw an 18% increase in new outlets with 61 opening. The year before that, 1,324,405 payday loans for $429,749.464 were made – a 6.6% increase in number and a 15.3% increase in amount of loans over 2002. About a dozen credit unions have signed on to a new Wisconsin Credit Union League-Filene Research Institute initiative to help low-wealth and underserved members. Jim Drogue, WCUL vice president of operations, said the goal is to have credit unions in all parts of the state take part. A toolkit of products and methodologies for credit unions to transition people away from payday lenders will soon be rolled out. Some Wisconsin credit unions already offer alternatives. Summit Credit Union, Madison, for example, decided it had been too conservative in extending credit. “We were passing judgment instead of using judgment,” said Rebecca Gerothanas, vice president of marketing. With its new quick money loan alternative, she said, “Our idea is to provide access to cash at a reasonable cost, have them make headway on paying down their loan, provide them with good service and hopefully get at the root cause of emergency borrowing.” Summit has even gone so far as to visit some payday lenders with the result being that they have referred some of their customers to Summit, she said. Over on the east coast, North Carolina State Employees CU President/CEO Jim Blaine said an informal survey in August 2000 found that 4,000 payday loan checks were processed on one payday in the state. In response, SECU created its own salary advance loan to lend up to $500 to those that had a checking account and were not bankrupt. The credit union soon found itself the cheapest and largest payday lender in the state. The program had 45,000 members enrolled and 30,000-plus used the service each and every payday, said Blaine. “We found that the salary advance loan is not a one-time kind of product. It is a product that, once members are in it, many are in it forever.” About a year ago, SECU added a new feature to the program – a mandatory savings product. If a member borrows on a payday loan, 5% will go into a saving account pledged against the loan. If they borrow $500, $25 goes into the savings account. The intention, says Blaine, is that in 18 months, the member can break the payday cycle. They don’t need to borrow but can use the money saved. “We now have more than $7 million in deposits from folks who had never had savings in their lives. They are getting weaned off the cycle,” says Blaine. Chicago’s North Side Community Federal Credit Union offers loans up to $500 at 161/2% with a six-month term to its more than 4,000 members. “The emphasis is more on increasing membership than making a profit,” says Ed Jacob, credit union manager. Its Payday Alternative Loan (PAL) program has saved its members about $3 million in payday lender fees and charges. The program for this community development financial institution was begun with a grant. Its $500 credit-building loan, with a one-year membership requirement, “wasn’t a real alternative to the payday loan which has convenience – you get the loan immediately – as its main competitive advantage,” said Jacob. “We had to have a product that competes on this cycle of debt. We dropped our one-year membership requirement, knowing that our losses would be higher.” It’s a tough market to serve, said Jacob. “The reason we structured it the way we did is that to have the entire amount due in 30 days forces a rollover for most low-income people. In 30 days, one check pays the rent and the other check pays the other bills. We looked at what they could reasonably pay over time. That’s why we structured it over six months to pay down the principal. Our frustration with it is that they are often rolled over. The average payday loan is rolled over 11 times in Illinois.” A member’s credit history is improved by reporting payments to credit bureaus, he said. Payday lenders only report on a loan if it is in collection status. For the PAL, the only initial requirement was that a person had to have income of $1,000 a month. “We thought this would be a one-time emergency loan. The reality is that for the people we serve, there are ongoing cash flow problems. We’ve learned and changed the rules,” said Jacob. “You can get two loans a year and a person can’t get the second until four months after the first one. The second loan can only bring the total of both loans back up to $500. For some people, it’s not that they are spending extravagantly, it’s just that they may only make $7 an hour and can’t make a go of it. They have no cushion. If they ever have a bump in the road, it throws them off track.” Part of it, too, says Jacob is that people make bad decisions. Although at first it had not required financial education, it did begin such a requirement in December for anyone with a credit score under 580. “It was a tweak on the product. We aren’t saying `no’ to a loan but `when.’ Once we had done that, we had people turn around and walk out. “We went out and tried to save the world. We found we can’t be everything to everybody. We want to focus on those willing to make a commitment,” he said. Its efforts have brought positive feedback. “There are wealthy people who could go anywhere but want to `bank their values’ with an institution that is serving the community,” said Jacob. The program also has strengthened the credit union’s relationship with employer groups who do not want the hassle of employees seeking advances on their paychecks. -