Payday Loans Targeted by Credit Unions

Tellers at the North Carolina State Employees' Credit Union noticed a troubling change several years ago: The first people in line on payday were high-cost lenders, waiting to cash checks from credit-union members.

A glance at the records showed that thousands of credit-union customers were turning to payday outlets for small loans to be repaid with their next paychecks.

Such products typically carry annual fees of 300 percent to 1,000 percent. Many strapped borrowers repeatedly roll over the loans, sinking deeply into debt.

To wean its members from payday providers, the State Employees' Credit Union in 2001 introduced a short-term loan that has a 12 percent annual interest rate, has a maximum limit of $500, and requires borrowers to repay via direct deposit of their paychecks and put 5 percent of loan proceeds in savings accounts.

The SECU is one of a growing number of credit unions offering products specifically designed to combat payday lending, which soared in popularity in the 1990s as the nation experienced record economic growth.

Payday lending has become a $40 billion annual business (in loan volume) with more than 22,000 U.S. outlets, according to the Community Financial Services Association of America, the industry's trade group. By comparison, Starbucks has 8,624 U.S. locations and McDonald's about 14,000.

In the meantime, officials are working with such nonprofits as Our Oregon and credit unions to promote alternative loans, including putting informational fliers in food-bank boxes.

"If all we do as regulators is say, 'We're going to cut back on this, cut back on that,' (high-cost lending) will pop up someplace else," said Cory Streisinger, the director of the Oregon Department of Consumer and Business Services.

"They don't even do a credit check; they just use your (paycheck).

A typical payday product might be a two-week loan for $200 with a $30 fee, which translates into an effective annual percentage rate of 390 percent.

Steven Schlein, a spokesman for the Community Financial Services Association, said the industry experience is that borrowers often choose payday lenders to avoid high bounced-check or credit-card late fees from mainstream lenders, which can carry fees of more than 1,000 percent on an annual basis.

For example, the Washington State Department of Financial Institutions, based on a voluntary survey of 66 percent of the state's payday lenders, found about 17 percent of borrowers took out one loan in 2004, half took out six or more and 25 percent a dozen or more.

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Payday Loan Story