Credit Unions Slowly Fill Void As Payday Lenders Leave D.C.

Stephanie Vann used to rely on payday loans to cover her rent and summer camp for her three children. She felt ashamed and kept her finances secret. But the short-term, high-interest loans seemed to be her only option.

Now, if the single mother needs a loan, she works with the Treasury Department Federal Credit Union. She can get longer-term loans for small amounts to tide her over -- and at vastly lower interest rates.

In January, legislation went into effect capping interest rates in the District at 24 percent, effectively driving out the area's payday lenders, whose business model is wedded to annualized rates of 300 percent and above. Credit unions are now slowly filling the void in small-dollar loans. At least half a dozen District institutions are attempting to reinvent the loans as a tool to help bring hard-pressed borrowers closer to financial health.

The credit unions' products vary, but generally they are loans of $300 to $1,000 with an annual percentage rate of up to 18 percent. Unlike payday loans, in which borrowers sign over part of their next paycheck for the cash advance, the credit unions' new products have longer terms, from thirty days to a year.

Vann, 43 and a former clerical worker who is pursuing a career in TV production, got a $500 six-month loan from the Treasury's credit union in January, at a 16 percent annual percentage rate. The money cleared her payday debt and put her on her feet. Now she has a checking account with the credit union.

"Credit unions were created to offer credit to people with modest means," said Leslie Parrish, a senior researcher at the Center for Responsible Lending. "So, historically, it's very much in keeping with their mission."

The small-loan alternatives could be key to making the District's new interest rate cap work without unintentionally harming low-income borrowers. Although their terms can be onerous, payday lenders do help some people meet their bills. Their absence can be a hardship. A 2007 study, for instance, found that bankruptcy and bounced-check rates increased in North Carolina and Georgia after the states swept out the lenders.

Now that payday lenders have vanished from the District, some residents go to Virginia to find them, according to officials at the District's Department of Insurance, Securities and Banking. Other borrowers rely on family or Internet lenders that offer money at rates that exceed the District's legal caps, said Marcel Reid, president of D.C. ACORN, one of the main activist groups that drove the crusade against payday lenders.

"And there are people absolutely who are falling through the cracks," Reid said.

Unlike commercial banks, credit unions are nonprofit institutions co-owned by their members. They are usually chartered by the federal government, which caps their interest rates at 18 percent.

The small loans provide a new, though minor, source of revenue for the institutions. The number of loans they issue is tiny compared with the large volume once generated by the payday lenders. In 2006, the latest year for which figures are available, the two largest payday lenders in the District made a total of 260,000 loans, worth $125 million. This year, by comparison, "stretch pay" programs -- payday-loan alternatives offered at 43 credit unions nationwide -- have issued only 8,656 small-dollar loans. Just a few hundred of those were made in the District.

"It's not something we really make money on," said Suzanne Curren, director of member education at Andrews Federal Credit Union. "Our intent is to get people in the door and introduce them to traditional banking products."