Consumer and community organizations have waged a lengthy and intense
campaign to warn the public about the high cost of payday loans and the
dangers of being entrapped in spiraling unaffordable debt.
Despite these efforts the pay day lenders and their profits are
multiplying. The yellow pages in telephone directories are filled with
advertisements for "easy and quick" pay day loans. The Internet is
becoming a favorite venue for these lenders to peddle their credit
products. The landscape in low and moderate income neighborhoods is
dotted with "check cashing" stores which specialize in these quick cash
A spokesman for the Consumer Financial Services Association which
represents payday lenders boasts that "our business has been growing and
growing and growing." The numbers support the claim. The association's
members have 22,000 locations up from 12,000 in 2000. Last year, the
association's members made $40 billion of loans, generating $6 billion
The payoff may be big, but the scheme is simple. The borrower provides
the lender with a post-dated check and receives an amount less than the
face value of the check-the deduction representing the lender's fee. The
check is then held until the borrower's next payday-a week or two or a
month later. But the scheme becomes even more lucrative for the lender
when the borrower asks for an extension, a rollover until a later pay
day. The charges mount with successive rollovers, ultimately leaving
borrowers under a mountain of debt carrying what amounts to an effective
interest rate of 390 percent on average. And consumer groups cite
numerous transactions with rates as high as 600 percent based on an
annual percentage rate (APR).
Why would anyone become involved in such one-sided transactions? Most of
them are born of desperation: A sick child needing costly prescriptions
in a family without medical insurance; major repairs for an automobile
needed by a worker who must travel to a construction job in the distant
suburbs; and a family attempting to forestall aggressive collection
efforts and legal action on overdue bills or to pay back rent to avoid
We have a far flung "recently modernized" financial system much
ballyhooed as the envy of the world-subsidized and coddled by a friendly
regulatory system and rendered essentially fail-safe by taxpayer-backed
insurance. Why can't borrowers turn to the insured government-chartered
banks instead of to payday loan operators operating on the fringe?
The hard truth is that banks with few exceptions don't make small
consumer loans-of the $200 or $500 or even the $1,000 and $2,000
variety. That always has been the case and today banks substitute
fee-ridden credit cards for small consumer loans. Most of the payday
borrowers lack the credit standing to obtain credit cards and if they
did they would face the tricky world of annual membership fees, the late
charges when the monthly payment misses the post date by a few hours and
ultimately the "over the limit" fees when charges exceed some previously
ordained limit imposed by the card issuer. And interest charges on
credit cards can and are arbitrarily raised and many of these hikes look
like first cousins to the rate schedules for the payday merchants.
Banks are quite happy to leave the consumer loans for the low and
moderate income population-the working poor-to payday merchants. Of
course, many "respectable" banks quietly furnish the capital for the
payday operations, getting a cut of the lucrative payday business
without getting their hands dirty or taking any risks.
The growing role of payday lending and its big brother, predatory
lending, in the lives of low and moderate income and minority citizens
is discouraging, but there are solutions-solutions already on the books
that can reign in the payday lenders. The answer lies in an underused
provision of the National Credit Union Act which authorizes the
formation of Community Development Credit Unions in low-income
A few of the Community Development Credit Unions (CDCUs) were formed 50
years ago as a weapon in combating loan discrimination in inner city
neighborhoods. The effort got a second wind when big banks launched a
massive closing of branches in low income and minority neighborhoods.
But, the biggest boost for the low-income credit unions came in 1994
when the new Chairman of the National Credit Unions
Administration-former New Hampshire Congressman Norm D'Amours-announced
the formation of the "Office of Community Development Credit Unions."
D'Amours followed up this initiative in speeches to credit union
audiences urging their support for low-income credit unions.
Under the leadership of Cliff Rosenthal, the National Federation of
Community Development Credit Unions was formed and today there are about
400-member credit unions operating under low-income charters around the
nation. The charters allow low-income credit unions to obtain technical
assistance from the National Credit Union Administration (NCUA) as well
as low-interest loans (one to three percent) from a revolving fund at
NCUA and to accept a limited amount of deposits from non members.
Credit Unions are cooperatives, consumer owned, nonprofit institutions
with no outside stockholders. There is no incentive to exploit their
"customers" who are the member-owners and there are no outside investors
to demand a share of "profits."
What is needed to end the plague of predatory lending and payday scams is
a crash effort on the part of the National Credit Union Administration
to establish a network of low income citizen-owned development credit
unions throughout the inner cities. Rest assured, the pay day lenders
won't try to compete on the credit union terms.
But, this can't be a passive effort on the part of NCUA. The agency
needs to beef up its staff by hiring organizers who will go into
communities, set up meetings to explain how the credit cooperatives can
be established and help move the applications forward.
There is precedent for this kind of outreach. That's how electricity was
brought to rural areas for the first time in the 1930s after
investor-owned power companies had stiffed rural communities for
decades. Staff members of the new Rural Electrification Administration
(REA) drove their Model T's down dirt roads, posted signs on school
house doors announcing meetings and then worked into the night to help
organize cooperatives and to process applications for two percent loans
to finance the systems. The effort revolutionized farm and rural life.
Credit cooperatives can do same for low and moderate income families,
particularly in our inner cities. It's a sure way to end the destructive
reign of the payday lenders.