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Payday Loan Industry Comes Under Attack

From the October 29, 2006 edition, Atlanta-Journal Constitution, Business Section, Page G4.

By Paul Gores

Consumer groups try to offer alternatives to those who feel they have nowhere else to turn when money is tight.

Milwaukee —- It wasn't hard for Jim Schrimpf to spot a disturbing trend at Brewery Credit Union: Members were using payday lenders instead of the credit union for small, short-term loans.

In a payday lending transaction, borrowers can get money in just a few minutes by writing a check for the amount of the loan, plus a finance fee. The lender agrees to hold the check until the customer's next payday when, in theory at least, there will be enough money in the account to cover it.

Schrimpf said payday lenders were coming into the credit union regularly to cash checks written to them weeks earlier by Brewery members.

"We estimate probably 15 percent of our membership either had a payday loan or were doing business with a payday lender within the last 12 months," said Schrimpf, who is president and chief executive of 7,000-member Brewery Credit Union in Milwaukee.

That meant that Brewery members were paying the going rate of at least $20 for every $100 borrowed —- which amounts to interest of more than 500 percent when expressed as a yearly rate —- for the typical $350 loan.

Moreover, some couldn't pay back the loan after two weeks and were forking over an additional fee to extend it another 14 days or longer.

Schrimpf said he felt compelled to do something.

After seeking guidance from the industry's Filene Research Institute, the Wisconsin Credit Union League and Milwaukee consumer finance lawyer Amy Salberg, Schrimpf set up a payday-like program called "Fast Cash," which offers loans to members at less than half the cost of traditional payday loans.

In Brewery's program, members pay $9.95 for every $100 borrowed and, in the process, receive some financial education and encouragement intended to eventually get them off the high-cost borrowing cycle.

Brewery Credit Union has made about 100 Fast Cash loans to its members since it started last winter, and Schrimpf is hoping the concept catches on to the extent that it poses some real competition to payday lenders in the Milwaukee area.

"It's been very well-received," Schrimpf said. "We're proud of what we're trying to do."

It's hard to say whether efforts like Schrimpf's —- and similar programs around the state and nation —- will put a dent in the growing payday lending industry. But consumer advocates are happy to at least see someone trying.

"It's a good sign that more mainstream financial institutions are starting to serve the small-loan needs of their own customers," said Jean Ann Fox, a spokeswoman for the Washington-based Consumer Federation of America.

Fox said payday loan outlets, which critics say add to the burden of people with low incomes or little personal finance know-how, have grown rapidly.

"This industry has spread to the point where you can't turn around without running into a payday loan outlet in low- to moderate-income neighborhoods," Fox said.

Growing numbers

Since 2000, the number of payday lending locations in the United States has more than doubled from 10,000 to 22,000, said Steven Schlein, a spokesman for the industry's trade organization, the Community Financial Services Association in Washington. Nationwide, payday lenders issued $40 billion in loans in 2005, he said.

Defending the industry, Schlein said it fills a niche that banks and most credit unions have shunned: small cash loans with little or no collateral. He said it started in the 1990s, when pawnshop operators decided to start making loans of $100 and $200 to people who otherwise would come in to hand over jewelry and other valuables as security for small, short-term loans.

It's "demagoguery" to classify payday loans as predatory lending, Schlein said. He defined predatory lenders as those who cause borrowers to lose whatever they've put up as collateral.

"We want people to pay their loans back," Schlein said.

Often, he said, a payday loan is a less expensive and less troublesome alternative to bouncing a check and being assessed a $30 overdraft fee by a bank.

Brewery Credit Union's Schrimpf tips his hat to payday lenders for one thing: They know how to cater to their customers. And for the credit union to be successful with its loans, it has to treat them just as well or better, he said.

"We knew they would be expecting at least the same type of experience. Because to be honest with you, payday lenders do a really good job of serving people," Schrimpf said. "They are friendly; they do this quickly with a smile on their face and all the rest."

Comfort factor

Ken Eiden, who runs Prospera Credit Union in Appleton, Wis., and has been offering similar fast-cash loans since the summer of 2005, agrees it was important that people who are accustomed to payday loan stores feel just as comfortable going to the credit union for a payday-like loan.

"It just made sense to make a product that looks like, acts like and feels like something they are already buying. They are already into payday loans," said Eiden, whose credit union has done about $1 million in what it calls "GoodMoney" loans.

Prospera opened its first GoodMoney outlet in a Goodwill Industries thrift store in Appleton after Eiden, who is on the board of Goodwill Industries of North Central Wisconsin, had a brainstorming session with the organization's executives on what could be done to deter customers and employees from taking out payday loans.

The fee on Prospera's loans is $9.90 per $100 borrowed and —- crucial to the process —- doesn't include a credit check the way a normal loan would. Payday borrowers typically eschew loans that involve credit checks, and credit unions have had difficulty trying to steer them into traditional loans.

Instead of conducting credit checks, payday lenders and credit unions like Brewery and Prospera subscribe to a payday loan industry database that tells the lender at the time of application whether a potential customer has outstanding loans or has defaulted on any payday loans in the past.

Gentle nudging

Typically, someone wanting a payday loan needs only to have a checking account, proof of employment and identification. The borrower writes the lender a check that includes the amount of the loan, plus the fee —- a $240 check for a $200 loan, for example. The lender agrees not to cash it for a specific term, often two weeks. The borrower also can come in to pay off the loan in full and redeem the check or, if he's still short of money, put down another $40 to extend the loan for two weeks.

The not-for-profit credit unions say they aren't in it to make money on the loans, and the nearly $10 charged per $100 goes toward expenses for running the payday program and to fund a separate loan-loss reserve to cover any debts that go bad. The credit unions also put limits on extending the loans.

The real goal, Schrimpf and Eiden say, is to help borrowers join the personal finance mainstream, get out of the constant cycle of asking for more money and even begin saving. Borrowers must become credit union members to obtain the quick loans, but that can be done by opening a savings account with as little as $5 at Brewery.

The credit unions say they have trained their employees to offer nonjudgmental financial counseling and gentle nudging toward better spending and saving habits to those who come in for the loans.

"If all we do is provide a cheaper not-for-profit alternative, that's not good enough in my mind," Eiden said. "We've got to be able to change people's lives and give them different financial futures. That's what we're trying to do."