Northwest Community News and Events for 2005

May 2005--A matter of interest: Credit unions beginning to offer cheaper alternatives to high-cost payday loans

By Joe Mosely
The Register-Guard
May 8, 2005

SPRINGFIELD - It was easy, and at the time it seemed to be Becky Lee's most logical option.

Her husband had been laid off at Weyerhaeuser Co., but the family's monthly bills were showing up as always. House payments. Car payments. Electric bills. The kids' birthdays.

Ends weren't close to meeting - even though she was working, and even after her husband found a new, lower-paying job.

"That's when I got into the payday loan thing, trying to save our house and cars and everything," says Becky Lee, who asked to be identified by only her first and middle names because of the embarrassment and stigma she associated with her desperate attempts to escape a downward spiral.

For a year, she flailed in debt, struggling to keep her head above water. One payday loan would cover a bill and the next loan would cover the previous loan. Eventually, a tax refund or an overtime check or some other form of pennies from heaven would pay off the loans.

But then another debt would crop up and the whole sequence would play out again.

"You think, `Oh, I'll just borrow it and pay it back,' and then something else comes up," the 39-year-old Springfield woman says. "It's a bad thing, but what else can you do if you don't have any rich relatives to borrow from?"

Becky Lee's payday loans were typical: a flat fee of $15 to $20 for every $100 borrowed, with the payoff date set at two weeks. If the loan were extended to a full month, it would have to be rolled over and the same fees would be applied again.

What isn't apparent to urgent borrowers such as Becky Lee and her family is the extreme cost of a payday loan. Those flat rates translate to annual percentage rates of 360 percent to 480 percent.

The mammoth interest rates prompted state banking regulators to seek help from conventional lending institutions last summer. The rates also persuaded Oregon's leading credit unions to step in and offer alternative short-term loan programs with much lower rates than payday loans.

"Payday loans are a last resort in our view," says Cory Streisinger, director of the Oregon Department of Consumer and Business Services. "We do recognize that consumers may feel they have no other source of credit and they have urgent needs. A payday loan is easy and meets their need ... but they do that at a very high price.

"Our goal is to make sure consumers have their needs met, but also that they have a range of choices."

Most of Oregon's "community charter" credit unions - those at which membership is open to anyone within a broad geographic region - have responded to last summer's nudge from the Department of Consumer and Business Services by offering their own versions of payday loans at credit card-type rates of 15 percent to 18 percent.

At those annual percentage rates, a one-month loan of $100 would bring interest charges of $1.25 to $1.50 if translated into the flat rates used by payday lenders.

"It's not a profit thing for us," says Bill Woods, vice president of lending for Springfield-based Northwest Community Credit Union, which now offers its members an urgent-need loan program called PayCheck Advance.

"It's a way to get you to improve your credit and to control your credit," Woods says. "We're trying to help you find a way to improve how you handle your money, and we're going to try to help you get out of the rut."

It has worked for Becky Lee, a Northwest Community Credit Union member who noticed a PayCheck Advance poster while at a branch of the credit union and decided that she'd try the new program the next time her family ran into money problems.

"We went in and did the $500 (loan), and the fee was like $1.80," she says. "And I said, `Is this like a mistake?' It's fabulous, for the people that live payday to payday.

"I was like, oh my gosh, I've been ripped off (with payday loans). I can't imagine how much I've spent on fees alone."

Credit unions are regulated in Oregon by the Finance and Corporate Securities Division of the Department of Consumer and Business Services. The division has not kept a complete list of all institutions that have responded to its plea last summer for payday loan alternatives, but at least four community charter credit unions operating in Lane County are now offering some form of urgent-need loan.

All are available only to members of the credit unions, and none charge application or processing fees.

Most carry 15 percent interest rates for members who transfer paychecks into their accounts by direct deposit and agree to have the loans repaid by automatic deductions, and 18 percent for other members. The loans usually are capped at $500, run for one month and are repaid in a single payment.

"Those percentages might seem high compared to what we'll do a car loan for, but they're very low compared to what some of these payday loans go for," says Jim Mau, director of lending at SELCO Community Credit Union in Eugene, which offers a Quick Draw program for its month-to-month borrowers.

"And again, this isn't our core business or anything," Mau says. "We're in no way encouraging people to roll them over. I would just say I know we've helped some members out, and we do know there's a need in the community for the short-term personal loans."

Beaverton-based First Tech Credit Union was the first such institution to offer a payday loan alternative in Oregon. Its ??? Advance program was launched a month before its competitors were prodded by a letter last Aug. 14 from director Floyd Lanter of the Division of Finance and Corporate Securities.

"We really try to structure it ... for the person who has urgent needs, and who has no time or propensity to go through the conventional loan process," says Mary Merriman-Smith, the regional president for Lane County of First Tech Credit Union.

"It's a service to our membership; really an effort to serve those members that use those payday loan programs."

Payday lenders don't have a problem with other financial institutions offering small, short-term loans to financially strapped customers, says Steven Schlein, spokesman in Washington, D.C., for the Community Financial Services Association, a payday loan trade group.

But the industry hasn't appreciated years of criticism from mainstream institutions that have shied away from offering their own services to those with urgent needs and marginal credit.

"We have always invited competition," says Schlein, whose organization represents about 60 percent of the nation's payday lenders. "We're willing to compete in a free market. It's the critics of our industry who are not."

Schlein says the alternative programs being offered by Oregon credit unions are a result of the first effort by a government regulatory agency to encourage competition for payday lenders. But the move doesn't come as a surprise for an industry that draws its clients from the lower income tiers that have traditionally been served by credit unions.

"They know some of their members are getting payday loans," he says. "Their business plan (is) to bring them back to the credit union."

Lanter, of Oregon's Division of Finance and Corporate Securities, warned the state's credit union executives in his letter last summer that their organizations "may be allowing many of (their) members to get to a position of borrowing money from payday lenders at fee rates that translate into APRs of several hundred percent."

The letter cited conventional banks' and credit unions' movement away from small, short-term loans and their prohibitive check overdraft fees as reasons for the rapid growth of payday lenders in Oregon.

The state counted 184 payday lenders in 2001, the first year Oregon's "short-term personal loan license" went into effect. By the end of 2004, there were 323 payday lenders generating well over $200 million per year in loans.

Oregon is one of just eight states that does not cap interest rates on payday loans, although a bill pending in the state Senate would set new short-term loan standards. It would cap fees at $15 per $100 borrowed, prohibit more than three loan rollovers and limit loan amounts to the smaller of $1,000 or 25 percent of the borrower's gross monthly income.

"I think we're going to be very reasonable in putting some sideboards on the payday loan industry," says Sen. Floyd Prozanski, D-Eugene, a sponsor of the bill. "It's something they should be able to live with and still flourish, as they have in other states."

Loretta Moesta, chief executive officer at OUR Federal Credit Union in Eugene's Whiteaker Neighborhood, has testified before the Legislature about the wave of payday lenders that have swept over poor areas.

"We call them `banks with neon signs in the windows,' " Moesta says. "If you go into the south hills (of Eugene) you won't find these kinds of institutions. But you can tell if you're in a low-income or rental area, because there are more of these out there."

Moesta's credit union is among the smallest in Oregon and doesn't have the assets necessary to offer its own payday loan alternative - the programs offered by larger credit unions tend to be higher-risk than most other loans, and produce little if any income. But OUR Federal Credit Union regularly works with its members to consolidate payday loans and other debts, and Moesta sympathizes with her clients.

"If you've never had to go (to a payday lender), good for you," she says. "But please understand, it is not necessarily stupid decisions (that draw borrowers to such loans). It is a lack of choices.

"Credit unions in particular have a responsibility to come up with an alternative," Moesta says. "I really admire that the bigger credit unions are taking this on. It's something they've ignored for a while."

While most of the state's large credit unions have responded to Lanter's letter and come up with new alternatives to payday loans, Eugene-based Oregon Community Credit Union has taken a more contrarian tack.

The credit union has contracted with a third-party vendor to provide short-term loans to its members through a program called CU on Payday.

But the loans more closely resemble those offered by payday lenders than the alternatives offered by other credit unions.

The CU on Payday loans sport fees of $12 per $100 borrowed, which equates to an annual percentage rate of 146 percent on a one-month loan term.

Jerry Liudahl, vice president of lending at Oregon Community Credit Union, says the program is simply a way of appeasing state regulators while protecting the credit union's members from the risks of lower-cost alternatives.

"The state requires us to have a payday loan alternative program," Liudahl says. "But we have not promoted that, other than having a link off our Web site.

"The folks we're finding that are using CU on Payday are people that we've already extended the maximum amount of credit they qualify for," he says. "CU on Payday is a product the credit union doesn't have any risk in, so that's responsible stewardship of our members' money."

Besides, Liudahl says, Oregon Community Credit Union has been offering unsecured lines of credit attached to its members' debit cards for the past 20 years.

"Those lines of credit really work, and they were already acting as payday loan alternatives," he says.

People at credit unions offering the lower-cost alternative loan programs maintain, however, that they are meeting a need that was not previously being addressed, and doing so without putting their institutions' assets at risk.

"We've received no criticism at all from the members," says Merriman-Smith, at First Tech. "Given the nature of these loans, you would think there would be a higher delinquency or default rate, but it's been consistent with our other lines of credit."

First Tech has made 470 ??? Advance loans since the program began 10 months ago, she says.

At Northwest Community Credit Union, at least 50 of the PayCheck Advance loans have been issued since the program began late last year.

A few have been late with payments and were cut off, but overall the program is succeeding in helping credit union members work their way out of debt and rebuild their credit, Northwest officials say.

"It's Northwest Community Credit Union trying to take care of its members," says Woods, the vice president of lending. "But it's self-serving. We're hoping to loan them a lot of money (as conventional borrowers) in the future."

Reprinted from the Register-Guard.