By Jordan Weissmann
Washington Post Staff Writer
Saturday, July 26, 2008
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."
Some activists say Washington's credit unions haven't courted low-income customers aggressively enough. "I think they have made an effort," Reid said. "I do think they could make a greater effort."
Many in the credit-union industry acknowledge that marketing and outreach have never been their strong suit. Traditionally, they have focused on advertising to existing members. They also have limited budgets and typically stress a risk-averse approach in managing their members' money.
But credit unions are evolving, said David Colby, chief economist at CUNA Mutual Group, a financial-services provider for credit unions and their members. More credit unions have been granted community-based charters in the past five years, allowing them to do business outside their traditional membership base. As a result, they're slowly acquiring new skills.
"[Credit unions] are in their formative years of learning to deal with the community charter and learning marketing," he said.
D.C. Council member Mary M. Cheh (D-Ward 3), who spearheaded the legislative battle to pass the interest cap, said that finding replacement institutions for the payday shops was crucial. She consulted with banks and finance companies, and together they decided that the District's credit unions seemed best suited for the role.
"They were enthusiastic and looking into it and prepared to fill the breach," Cheh said.
It was partly a matter of timing. In the past few years, many credit unions around the country, especially ones serving the military, realized that their members were borrowing from payday lenders. By the time Cheh was trying to pass the interest rate cap, several had already begun offering payday alternatives, including a few in the District.
"It was kind of a convergence of two different trends," said Jennifer Porter, chief advocacy officer at the Maryland and D.C. Credit Union Association.
The HEW Federal Credit Union, which does a significant amount of its business in Anacostia, has run a program issuing small-dollar, six-month loans for decades. But it began promoting such loans as payday alternatives only in 2007, during the legislative debate, and it has since seen an uptick in the business. Like many other credit unions, though, it has found it difficult to keep those customers.
"I think the community sees it as an easy fix," said Gloria Bowden, HEW's senior vice president. "It's hard to get persons to talk to our financial counselor so that we can get their financial status in a better position."