Financial Institutions Offer Real Alternatives to Payday Lending

Across the country, community organizations, credit unions and banks are beginning to offer consumers real alternatives to payday lending. In several communities where payday lenders have come to outnumber franchises such as McDonald’s and Starbucks, financial institutions are stepping in to offer a sense of hope and provide relief from the predatory practices of payday lending.

North Carolina’s State Employees Credit Union is just one example of such programming. According to Jean Ann Fox, at the Consumer Federation of America, the credit union runs the Salary Advance Loan Program (SALO), which allows credit union members enrolled in direct deposit to take out a loan anywhere from $50 to $500 with no fees and an interest rate capped at 18 percent. When compared to the interest rate of 400 to 800 percent most payday lenders impose on clients, the benefits are tremendous. SALO also offers free credit counseling and encourages credit union members to save by automatically depositing 5 percent of their advance into an interest-bearing savings account. For more information on SALO, visit www.ncleague.org.

Similar to SALO, the Payday Lending Alternative Program (PAL), developed in Arkansas and supported by a coalition of organizations including the Federal Reserve Bank of Little Rock, represents a model in which consumers can take out an affordable loan and build their savings simultaneously. According to Arkansans against Abusive Payday Lending, www.stoppaydaypredators.org, participating banks and credits unions offer loans up to $500 with a savings component equal to 100 percent of the loan amount. No fees are charged for participation, and the loan may be paid over 6 to 12 months at an interest rate capped at 17 percent. Rules established by the Federal Deposit Insurance Corporation allow banks that offer PAL and other affordable small-dollar loans to receive Community Reinvestment Act credit. This program seeks to encourage responsible lending behavior by accepting early and partial payments, not allowing borrowers to take out additional loans until their current loan is paid in full, and providing financial education to ensure that consumers practice responsible money management.

While a number of organizations have begun to market their products and services as alternatives to payday lending, SALO and PAL highlight some of the “best practices” upon which others should model their lending programs. These alternatives focus on the best interests of the consumer by offering assistance to borrowers in unexpected crises, safeguarding against predatory institutions, and creating real opportunities for long-term financial stability through consumer education—practices that the Shriver Center strongly supports.

More essential than these “next best” alternatives, though, are regulations that close loopholes in an industry that has unscrupulously and creatively reinvented itself. The Shriver Center, along with numerous community organizations and policymakers, believes that Illinois’s Payday Loan Reform Act must be amended to close those loopholes enabling lenders consistently to avoid regulation. Sound policies that require accountability and effective regulations will help revolutionize the payday lending industry.

For more information, contact Dory Rand at doryrand@povertylaw.org or Kelly Slay at kellyslay@povertylaw.org.