Payday advance loan maryland

CUs and community leaders give members low-cost alternatives to high-priced payday lenders

Maria borrowed $300 from a Tampa-area check casher that offers payday advance loans. She couldn't pay it back in time so she went to another payday lender to pay the first one back. She still didn't have the money to pay that lender so she went to another. And another. And another.

These lenders said they wanted to help her. But they also threatened to deport her or put her in jail if she couldn't come up with the money.

Maria went to eight different payday lenders, rolling up $2,400 in fees before she contacted a local television station's consumer reporter.

That's when Ed Gallagly found out Maria was a member of his credit union.

"I was angry," recalls Gallagly, president/chief executive officer of $156 million asset Florida Central Credit Union in Tampa.

Gallagly wasn't angry because this member was in such deep trouble. He was angry because his credit union wasn't there when Maria was digging herself such a deep hole.

A $2 BILLION INDUSTRY

Payday loans are short-term transactions in which customers borrow against their paychecks by postdating personal checks in exchange for cash-- and service charges. Say, for example, you need $100. You write a check to a payday lender for $115 and you get $100 in cash right away. Two weeks later, the payday lender cashes your $115 check. Most payday lenders make the bulk of their money through rolling over loans, though. And consumers tend to roll over loans about seven times, consumer groups say.

Payday loans are also called check loans, payroll advance loans, deferred deposit transactions, postdated check loans, or cash advance loans. Regardless of what you call them, they're part of a thriving industry called "fringe banking" because their opponents claim they operate on the fringe of legitimate banking practices.

Fringe banking outlets-which include check cashers, pawnshops, title loans, rent-to-own shops, finance companies, and mortgage firms-have advanced steadily across the country since the 1970s, according to John Caskey, author of the book "Fringe Banking: Check Cashing Outlets, Pawnshops, and the Poor." He says these banking options are poorly understood by the general public and by most traditional financial institutions. Lower-income households turn to check cashers and pawnshops because they provide products, services, and overall convenience that banks, thrifts, and even credit unions don't, Caskey says.

The Community Financial Services Association of America (CFSA)-a trade group for payday lenders-estimates the industry will grow to between 20,000 to 25,000 outlets in the next six to eight years, up from about 7,000 today. Payday lenders earned about $810 million in deferred deposit service fees in 1998. Industry analysts expect that amount to exceed $2 billion this year.

While it's apparent payday lenders and check cashers are filling a void the traditional banking industry has avoided, it's also clear credit unions are working hard to offer viable alternatives with innovative products, services, and community partnerships.

A PROFILE OF PAYDAY BORROWERS

Typical payday advance customers are responsible, hard-working, middleclass Americans, according to CFSA. Their customers are, on average, 35.6 years old, earn $33,187 in annual household income, have lived at their current residences for 4.5 years, and have worked their current jobs for about four years. All of their customers have jobs or regular incomes, active checking accounts, and about one-third own their home, the group claims.

CFSA says consumers choose payday advances to cover unexpected expenses; to bridge short-term cash needs; or to avoid bounced check fees, late payment penalties, or pawning personal possessions.

Florida Central's Gallagly has done his own research. The credit union conducted focus groups with members and nonmembers living in the community whom a new credit union service organization (CUSO) will soon serve. "We discovered middle-class consumers are definitely using payday lenders," Gallagly says. "But so are many low-income community residents."

And six of 10 users aren't seeking the money for emergencies at all, according to Gallagly. "They want the money for discretionary purchases, such as new televisions."

That kind of behavior ties into another problem: a lack of savings. In fact, consumers' lack of savings is a crisis in the making, according to Stephen Brobeck, executive director of the Consumer Federation of America (CFA). He points out:

* The typical U.S. household has less than $1,000 in financial assets after subtracting debt.

* Kids and adults aren't getting any smarter about personal finance and savings concepts.

* Many Americans have no savings at all.

Credit unions can help avert this crisis with education. Promoting member savings helps credit unions fulfill their social mission, shows how credit unions differ from other financial institutions, and provides economic benefits such as a stronger net income and lower expense ratio, according to the Filene Research Institute Report "Credit Unions and Asset Accumulation by Lower-Income Americans."

Early education is another critical element to success, which is why CUNA has formed a partnership with the National Endowment for Financial Education to bring personal financial education to high-school kids.

This concept is no different at Florida Central Credit Union. "We work to educate members and potential members-especially through our select employee groups [SEGs]-about payroll deduction," Gallagly explains. "We show members how they can automatically save a certain amount each month and how they'll soon have what they need for a specific purchase.

"And then when they want to pull all their money out in three months to make that purchase, we might suggest they finance it if they're eligible. At every turn, we encourage regular savings," he says.

SMALL LOANS, BIG PRICE TAGS

The small advances payday lenders make come at a high price-interest charged at an annual percentage rate (APR) of 300% or higher, according to a CFA report, "Show Me the Money: A Survey of Payday Lenders and Review of Payday Lender Lobbying in State Legislatures."

The report identifies these trends:

* Payday lenders are making loans in spite of state usury ceilings. Interest rates charged for a $100, 14-day loan range from 416% to 858% in Maryland, 429% to 650% in Arizona, 780% to 988% in Georgia, 390% to 455% in Pennsylvania, and 455% in Virginia.

* Increasingly, payday lenders in several states try to subvert state usury ceilings by making loans through partnerships with national banks, which claim state laws don't apply to them.

* Stores don't quote APR despite new Truth in Lending Act amendments that say they must. Many payday lenders surveyed say they're not in the business of making loans so none of the fees paid for their services are interest.

* Nationally, only 85 of 230 payday lenders (37%) quoted even a nominally accurate APR when asked. Others claimed they "didn't know," or that the APR was equal to the fee for a two-- week loan.

* In seven of the 11 states surveyed where payday lending fees are capped by law, 23 out of 151 payday lenders (15%) appear to charge fees higher than the maximum allowed by state law.

* Nationally, the average APR is 474%. Fifty-six percent of lenders charge 400% APR or more. And of all lenders, 35% charge more than 500% APR.

ESTABLISH COMMUNITY PARTNERSHIPS

Tampa (Fla.) Hillsborough Action Plan (THAP) is a nonprofit agency that provides housing, social, and medical services to inner-city residents. The agency, headed by Chet Luney, is presently working on revitalizing an area known as Tampa Heights. The project will include both modest and upscale housing units, a shopping center, and a CUSO operated by THAP and Florida Central Credit Union called TRAP Financial Services.

Tampa Heights-the northern gateway to Tampa's downtown area-is a racially diverse, historic community. But the years have taken a toll on this urban neighborhood. The credit union is providing more than $5 million in financing for THAP to provide what Gallagly calls a "total restoration of a once grand community."

THAP has had a presence in the area for a long time, which will be necessary for the CUSO's success, Gallagly explains. That's one reason why the storefront will say "TRAP Financial Services" and not Florida Central Credit Union: Residents trust THAI but they might be suspicious of a credit union.

Having obtained all the regulatory approvals and licensing, "we expected the CUSO to be open by now," Gallagly says. "But location is everything. We rely on each other for the CUSO's success, and the opportunity to be part of the Tampa Heights revitalization project was fortunate and worth waiting a little longer for. In the end, we found a location that will bring both of us the most success."