WASHINGTON — The ongoing fight to further regulate or eliminatepayday lending in different states and provide consumers withalternative products for short-term loan needs continues topercolate and change, drawing in new media and opening newfronts.

One of the new battle fields is in Pennsylvania, where the stateand credit unions have collaborated to develop an alternative loanproduct to give consumers a lower cost option for short-term loansthat will not drag them into the “debt trap” that critics of paydaylending allege often happens.

The new product, dubbed the Credit Union Better Choice loans,has a longer term than payday loans–they can be repaid in 90 daysversus 14 for the average payday loan, require a $25 applicationfee and carry an 18% interest rate. The loans also carry a savingscomponent, requiring borrowers to place 10% of the face value ofthe loan into a share account where it cannot be removed over theloan term.

The loan product is the result of a collaborative effort betweenthe Pennsylvania Credit Union Association, Pennsylvania'sDepartment of the Treasury, and the Pennsylvania Department ofBanking. The regulator cooperated in helping state-chartered creditunions make the loans and carry them on their balance sheets, whilethe Treasury Department deposited $20 million with the Mid-AtlanticCorporate Federal Credit Union to assist with the program. Oncedeposited, the PCUA is able to take the difference between themarket rate Mid-Atlantic paid for the deposit and the interest itearned on the money to help fund marketing for the program anddefray 50% of the losses participating credit unions might expectfrom participating in the program.

The three partners announced the loan program in October 2006but it didn't draw much attention until more recently as the numberof participating credit unions has grown. Currently, the PCUA said,65 credit unions are signed up for the program and another two orthree are expected to come on board later this year. Those 65 CUsoffer the loans at 182 branches across the state.

According to Department of the Treasury and the PCUA,participating credit unions made 5,706 of the loans in 2007 for atotal of $2.7 million. Consumers who took out the loans savedalmost $2 million in fees.

“I am extremely pleased to see that so many Pennsylvanians havetaken advantage of this important loan product, and I look forwardto its further expansion,” Treasurer Robin Wiessmann said. “Bymaking the Better Choice, consumers are not only receiving theshort-term loan they need, but are also making an investment intheir financial future, through the program's savings and fiscalliteracy

components.”

The Commonwealth and credit unions compared the Better Choiceloans to average payday loans, making the case that over 90 days,based on a rate of $15 per every $100 borrowed and a 90-day term,consumers would spend $450 in fees for $500 loan. By comparison, a$500 Better Choice loan would cost the consumer $42.50 in fees andallow them a start saving with a $50 deposit in a shareaccount.

But the payday lenders have nonetheless attacked the loans on anew media venue the industry has launched.

The Community Financial Services Association of America, thetrade association representing more than half the payday loanindustry, called the Better Choice loans a “scam” on its newWeblog, Payday Pundit (http://paydaypundit.wordpress.com/).

“If they really want the loan, they must join the credit union,which means getting together enough money to open a new creditunion account,” CFSA charged. “This is not an easy thing forsomebody who needs $300 to fix their water heater. Of course, theycould always go down to their regular bank and either close thataccount or use a portion of that account to open their new creditunion account.”

But Mike Wishnow, spokesman for the PCUA, said the CFSA hadgotten its facts wrong. While its true that the Better Choice loansrequire that 10% of the loans face value be put into share accountwhere it earns interest, he explained, that deposit, should theborrower wish to use it, could be the opening deposit in themember's share

account so the borrower would not have to scramble for themoney.

He also challenged the part of the critique that focused on theinterest rates. Looking at one example of a Better Choice loan, onemade by the $123 million Riverfront Credit Union headquartered inReading, Pa., the CFSA charged that the CU was making a killing onthe interest on the savings component of the loan.

“The math is pretty simple here, folks,” CFSA complained. “Inthis example, the Better Choice program forces consumers to payRFCU 18% APR to borrow money for deposit in a compulsory savingsaccount which pays the borrower a return of only 1.75% APY. That'sa nifty little margin of 16.25% for the credit union. Can anybodyexplain why the Pennsylvania Better Choice program isn't a consumerscam?”

“It's not a scam for a number of worthy reasons but in thisparticular instance because the interest on the savings portion ofthe loan is rebated to the member once the loan is paid off,”Wishnow explained. “Because the core operating systems of mostcredit unions will not allow a loan to carry two separate interestrates, for example 18% on $500 of the loan and 0% on the $50savings portion, the only way to do it is to rebate the additionalinterest later. It's an operational issue, not an underwriting orpolicy issue.”

Federal Battlefield

Meanwhile, sources familiar with the ongoing tussle over paydaylending were not surprised that one of the chief CU champions, theCenter For Responsible Lending, an affiliate of the Durham,N.C.-based Self-Help Credit Union, has come under attack fromconservative U.S. Congressman Patrick McHenry (R-N.C.) who hasdiffered with his state's credit unions on other issues as well.The congressman once tussled with NCUA and credit union trades inthe legislative arena concerning mutual savings bankconversions.

McHenry has written House Financial Services Committee ChairmanBarney Frank (D-Mass.) seeking a hearing on the issue ofindividuals and organizations allegedly using non-profits tomanipulate real estate and other markets

McHenry used the Center for Responsible Lending as an example ofthis possible manipulation.

In October 2007, a wealthy hedge fund manager named John Paulsongave the CRL $15 million, in part, McHenry suggested, to help theorganization further its position in favor of allowing federaljudges to restructure mortgage loans — a position the CRL has longheld. Paulson stands to benefit if such a law were passed, McHenrywrote in his letter.

“In October, he gave $15 million to the Center For ResponsibleLending, which has been leading the charge in lobbying for a lawthat would let bankruptcy judges restructure mortgage loans. Byforcing servicers to accept lowered monthly payments, market valueswould likely fall even further, and Mr. Paulson would mostdefinitely benefit financially.”

Kathleen Day, a spokesman for the CRL denied there was anythinguntoward about the contribution and added “every penny of the[Paulson] money is set to help people stay in their homes.” Sheadded that the group has employed a detailed process to find localhousing assistance groups that can best use the money and isexpected to make an announcement of the first round of donationsthe first week of March.

Day and others were not surprised at the McHenry attack and sawit as another attempt to drag down CRL because of its opposition topayday lending. “This is nothing new,” she said. “In some ways wehave come to expect it.”

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