From Florida to Kentucky, and across the country to Oregon, the abuses of payday lenders made headline news in June. Recent reports in each state highlight the role credit unions can and are playing to offer reasonable cost alternatives to payday loans.
In the US, payday lending is effectively banned in 10 states. Oregon, once one of the friendliest states for payday lenders, tightened its regulations significantly earlier this month by placing a 30% cap above the Federal Reserve discount rate on all consumer loans. This action was coupled with reinstating a state usury law abandoned in 1981. According to Steven Hanson, President of Oak Brook Financial Corp., which operates 41 payday loan stores in the state, the legislation will likely cut the current 333 payday lending stores in the state down to about 20.
And just this week in Kentucky, the Lexington Herald-Leader reported that every four days last year a new payday lender opened for business in the state. The startling rise in payday lenders combined with other economic factors effecting the poor in the state led the Brookings Institute to author the first of its kind statewide report titled The High Cost of Being Poor in Kentucky: How to Put the Market to Work for Kentucky’s Lower-Income Families. According to the report, the most often cited reason for unbanked households to not use banks and credit unions is that “they have never really thought about opening up a bank account.”
One goal the report advocates is to promote market-based solutions that lower the higher costs of doing business with Kentucky’s lower-income consumers. As a case study the report sites North Carline State Employees’ Credit Union (NCSECU) who in 2001 took notice of members use of payday loans and began a Salary Advance Loan (SALO) program at an annual percentage rate of 12 percent instead of the 390 percent APR being charged by payday lenders. The loan includes a forced savings component requiring 5 percent of each advance be placed in savings. The savings account is unrestricted, but if the member withdraws savings, they cannot access a SALO for 6 months. Since the program’s inception the credit union has loaned $305 million, generating $1.9 million in interest income and through the required savings component, grown deposits by $6 million.
In Florida this summer, Kennedy Space Center Federal Credit Union in a play on words is offering teachers an “Add-A-Payday” short term, zero-interest loan to help ease burdens resulting from an oddity in the payroll schedule which will result in teachers missing a pay period later this summer. Space Coast Credit Union is providing a similar offer. Products like these offer an alternative to the 4.3 million payday loans originated in the state totaling $1.6 billion at an average annual interest rate of 281 percent in 2006.
Is it possible in these states and others that we are reaching a tipping point where credit unions can promote and grow their short-duration loan offers in order to provide a truly member-centered alternative to payday lenders? What methods are working best to reach the unbanked and members who are using payday lenders perhaps unaware or ill informed of alternatives?