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.
|Stephanie Vann got a loan from a credit union at 16 percent, a far lower rate than a payday lender would have offered.
(By Marvin Joseph — The Washington Post)
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
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
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
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.
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"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