Banks and Credit Unions Have No Alternatives to Payday Loans

Despite the high demand for payday loans in low- and moderate-income communities, most mainstream financial institutions have not developed a low-cost, short-term, small-dollar loan as an alternative to payday loans. While the new Payday Loan Reform Act recently signed by Gov. Rod Blagojevich will help limit the unfair and extremely costly practices of payday lenders in Illinois, banks and credit unions have yet to do their part to reduce the use of unethical payday lenders.

Incentives from bank regulators would entice more institutions to offer alternatives to payday loans, according to Prof. Sheila Bair of the University of Massachusetts in her presentation at this year’s Federal System Research Conference. For example, the Office of the Comptroller of the Currency and the Office of Thrift Supervision should clarify policies that are viewed as discouraging alternative payday loan products. Bank regulators could offer Community Reinvestment Act credit for low-cost alternatives.

Professor Bair cites products at North Carolina State Employees Credit Union and Citibank as examples of ways institutions are creating flexible credit criteria, reducing credit risks, and making a profit.

Another step in assisting low-income and moderate-income loan recipients is for advocates and consumers to continue a campaign against alliances between banks and payday lenders. These alliances tend to result only in large profits for the companies rather than real assistance for those in poverty.

To view Professor Bair’s presentation notes, go to www.chicagofed.org/cedric/files/2005_pres_session1_bair.pdf. For more information, contact Dory Rand, Sargent Shriver National Center on Poverty Law, at 312.368.2007.