Encouraging Competition in Payday Lending

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Rita Haynes heads up Cleveland's Faith Community United Credit Union. For more than half a century she's looked forward to the 15th of the month. That was payday so people in her black working class neighborhood would come in to draw money. But then in the late 90s, more and more credit union members started writing postdated checks to cover loans and fees from payday lenders. Customers needed money before payday, and that plunged Rita Haynes into a nightmare. Payday lenders would come into her credit union to beat their customers to the payday punch.

Rita Haynes: The payday lenders would come and get in line and try to cash that post dated check before the member could come and get their money for groceries or whatever.

The result: bounced checks, bank fees, and bank customers going out to get new payday loans to try and fix the mess. So to aid her customers Haynes created the Grace loan at her credit union, a one month loan with a 17% annual percentage rate. The payday lender down the street was charging nearly 400% APR on a two week loan.

Rita Haynes: The regulators at first were very afraid that this was going to take us under and all of that. We've found that we've lost very few loans.

The FDIC would like to see more successes like this so this summer, it released guidelines for the kind of payday loan they'd like more banks to offer: Small, one month loans capped at 36% APR. To sweeten the deal, the agency is offering extra credit come exam time. Every year banks have to show they are trying to comply with the federal Community Reinvestment Act by doing business with both rich and poor. The FDIC's Bob Mooney.

Bob Mooney: We will provide very favorable consideration during examination for a bank to offer this product. And it could improve their overall CRA performance.

But will that be enough for banks to wade into payday loans? Probably not if the APR is capped at 36% says Wayne Abernathy of the American Bankers Association. Abernathy says on average it costs banks up to $200 in overhead costs to make a loan. Still, he says, making these loans could be a kind of loss leader that generates more business for the bank... eventually.

Wayne Abernathy: What some banks have been wiling to do is 'Let me give it a try, I know I'm going to lose money at it, but I'm hoping that by starting off with this kind of a loan I'm going to create a relationship that will continue and in the end it will become mutually beneficial.' Others have said, 'I don't know how I can afford that.'

But critics say banks aren't interested in making lower interest payday loans available. That's because many bank customers have overdraft protection that they wouldn't otherwise take. And that overdraft protection can come with very high rates: even as high as what payday lenders charge. Roman Vaccari represents payday lenders at the Financial Service Centers of America.

Roman Vaccari: What the FDIC is seeking to do is to have banks cannibalize other products being offered by the banks like overdraft. Overdraft protection is extremely lucrative.

Bounced check fees from mounting payday loans led 44-year-old health care worker Jacqueline Oliver to switch banks for Faith Community United Credit Union. She says their short term 'Grace' loan, gave her a second chance.

Jacqueline Oliver: The payday lender I was using I had got behind on and when I borrowed from here they didn't hold it against me and it helped me to pay off the other loan.

Last year, the Credit Union made over 2000 "Grace Loans" and only 7 went bad. Despite the success, Credit Union CEO Rita Haynes admits Grace Loans don't make money. But she says the Grace Loan has helped them grow because borrowers must have direct deposit and save at least $10 every time they get a loan. I'm Mhari Saito, 90.3.

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