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Payday Lending Alternatives


Program Overview

In the past few years, payday lending outfits have been spotlighted for the negative effect of their short-term payday loans in low-income communities.  These loans are overwhelmingly marketed in poor and minority neighborhoods as a temporary solution to help ends meet until their regular paycheck arrives.  Often borrowers find themselves in spiraling debt as they take out new loans to repay the fees on the previous ones.  When rolled-over month after month, these predatory loans typically carry yearly interest rates of 400 percent or higher.

To address this issue, the Federation offered  a special grant program and training seminar to promote the development and expansion of affordable anti-predatory lending programs to compete with predatory lenders low-income neighborhoods across the country.

For more information about these initiatives, please scroll down or click on the links below:

"Antidotes to Payday Lending" Seminar

On April 27, 2005, the Federation held an intensive seminar in St. Louis, MO on credit union responses to high-cost payday lending.  Invited panelists included credit unions serving low-income areas, the broader community, and military bases, where the destructive effects of payday lending have attracted national attention.  The Center for Responsible Lending (Durham, NC), which recently documented the prevalence of payday lenders in African-American communities also presented at this special event.

Download the seminar agenda by clicking here.

View "Antidotes" presentation and handouts by clicking here.

APPLE Grants
(Alternative Products to Payday LEnding)

In 2004-2005, JPMorgan Chase & Co. and the Federation selected six credit unions in five states to create and develop alternatives to high-cost “payday” loans for consumers. 

The winning applicants were:

  • ASI Federal Credit Union (Harahan, LA)
  • Bethex Federal Credit Union (Bronx, NY)
  • Faith Community United Credit Union (Cleveland, OH)
  • Lower East Side People’s Federal Credit Union (New York, NY)
  • Northeast Community FCU, Mission Area FCU and Patelco CU (San Francisco, CA)
  • South Side Community Federal Credit Union (Chicago, IL)
For descriptions of APPLE Grant Awardees, please click here.

Characteristics of APPLE Loan Products

Loan Terms and Conditions

  • Interest Rates:  APRs ranged from 10% to 18% (median of 16%)
  • Fees:  Application fees ranged from $0 to $35 (median $15) plus late fees
  • Minimum loan:  Ranged from $0 to $500 (median of $100)
  • Maximum loan: Ranged from $300 to $3,000 (median of $800);
  • Loan types:  Mostly installment loans, with some line-of-credit and single payment loans
  • Restrictions
    • Three sites had no restrictions
    • Three sites had limits on maximum number of loans per period – e.g., no more than 2 loans per year or no more than one LOC draw per month
    • One site restricted the use of their emergency loans to consolidate the debts from payday lenders; the credit union itself would make the payments to the payday lenders and borrower must sign statement not to use payday lenders during term of loan

Underwriting

  • Membership: Half had no or minimal membership requirements; the rest required 3 to 6 months membership to be eligible.
  • Credit Reports:  Half required credit reports, half did not require them
  • Direct Deposit:  Strongly encouraged or required by all
  • Financial Education:  Required by one site, offered and strongly encouraged by all
  • Bankruptcy:  Recent filing or liens disqualify borrowers at two sites
  • Savings: Two sites require minimum savings deposits

Best Practices

  • Interest rates and fees: None were higher than 18% and fees were low in all case
  • Direct deposit: Recommended by all sites
  • Credit Reports are not needed if the borrower has a relationship with the financial institution or if direct deposit is required
  • Financial Education should be easily available and strongly encouraged
  • Payday-alternative loans should be used to build credit: Every site reported the payment history of their APPLE loan products to the major credit bureaus.
  • No Special Technology was used in underwriting, tracking or reporting on these loans.
  • Rapid follow-up on delinquencies: First contact generally by telephone within 10 days of first missed payment

In addition to APPLe grantees, the following CDCUs have payday programs supported by PRIDEs (Predatory Relief and Intervention Deposits) from the Federation’s Community Development Investments:

  • Community Choice FCU (Indianapolis, IN)
  • Faith Based FCU (Oceanside, CA)
  • Kootenai Valley FCU (Libby, MT)
  • LCO FCU (Hayward, WI)
  • Lower East Side Peoples’ FCU (New York, NY)
  • Mission Area FCU (San Francisco, CA)
  • Northeast Community FCU (San Francisco, CA)
  • Northside Community FCU (Chicago, IL)
  • Prichard FCU (Prichard, AL)
  • Toledo Urban FCU (Toledo, OH)
  • West Texas CU (El Paso, TX)
  • Zion United Community CU (Denver, CO)

 



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