Stopping the Payday Trap Alternatives that Work, Ones that Don’t

NCLC® NATIONAL CONSUMER June 2010 L AW C E N T E R® © Copyright 2010, National Consumer Law Center, Inc. All rights reserved.

About the Authors

Lauren K. Saunders is the Managing Attorney of NCLC’s Washington, DC office, where she handles legislative, administrative and other advocacy efforts on behalf of low income consumers. She contributes to several NCLC publications, including Fair Reporting, Fair Collection and Consumer Banking and Payments Law. She graduated magna cum laude from Harvard Law School where she was an Executive Editor of the Harvard Law Review, and holds a Masters in Public Policy from Harvard’s Kennedy School of Government and a B.A., Phi Beta Kappa, from Stanford University. Leah A. Plunkett is a staff attorney at NCLC, where she focuses on predatory small dollar , auto policy, protection of exempt funds, and the consumer needs of domestic violence survivors. Before coming to NCLC, Leah clerked in the District Court for the District of Maryland and established the Youth Law Project at New Hampshire Legal Assistance. Leah is a cum laude graduate of Harvard Law School, where she was on the board of both the Harvard Legal Aid Bureau and HLS for Choice. Carolyn Carter is NCLC’s Deputy Director for Advocacy. She is a contributing author to Cost of Credit, Truth in Lending, Unfair and Deceptive Acts and Practices and several other NCLC treatises. Prior to joining NCLC, she worked for legal services programs in Ohio and Pennsylvania. She is a graduate of Brown University and Yale Law School.

Acknowledgments

The views and opinions expressed in this paper are solely those of the National Consumer Law Center (NCLC), which takes full responsibility for all that is written here. We would like to thank the Ford Foundation for its generous support that allowed us to research and write this paper, as well as for its long-term support of our advocacy in support of low-income consumers. We would like to thank Tamar Malloy, Nate Player and Ana Lucia Hurtado of the National Consumer Law Center for research assistance and Jean Ann Fox with Consumer Federation of America for her expertise in payday lending.

NCLC® About the National COnsumer Law Center The National Consumer Law Center®, a nonprofit corporation NATIONAL founded in 1969, assists consumers, advocates, and public policy makers nationwide on consumer law issues. NCLC works toward the CONSUMER goal of consumer justice and fair treatment, particularly for those whose poverty renders them powerless to demand accountability L AW from the economic marketplace. NCLC has provided model language C E N T E R and testimony on numerous consumer law issues before federal and ® state policy makers. NCLC publishes an 18-volume series of treatises on consumer law, and a number of publications for consumers.

7 Winthrop Square, Boston, MA 02110 5 617-542-8010 5 www.NCLC.org executive summary

Payday loans are very high-cost, short- will lose a account, file for , term loans that ensnare borrowers in a debt be subject to eviction, delay medical care, face trap. As public awareness of the dangers of a utility cutoff, and become delinquent on a payday loans has grown, a number of institu- . tions have begun offering alternative products To be truly affordable and avoid the pit- that promise to be more beneficial to the bor- falls of traditional payday loans, an alternative rower. But alternatives are not all product must: created equal. Some are considerably more af- • Have an (APR), fordable and safer than payday loans. Others including , of 36% or less; differ little from the loans offered by tradi- tional payday lenders. • Have a term of at least 90 days, or one Several myths surround payday loan month per $100 borrowed; alternatives: • Require multiple installment payments rather than a single balloon payment; • The myth that any alternative that is slightly cheaper than a traditional payday • Not require that the borrower turn over loan is a good alternative. An affordable a post-dated check or electronic access alternative must be just that: affordable. to a bank account. • The myth that any loan that does not give The 36% rate has been the widely accepted the lender excessive profits is a responsible benchmark for small loans for over a century loan. Loans should be judged by their and retains broad acceptance today. But though impact on the borrower, not on the lend- the rate is clearly the most important of these er’s bottom line. criteria, it is not sufficient. The other terms are • The myth that a payday loan alternative also critical for the borrower to have a reason- needs to look like a payday loan. That claim able chance of repaying the loan without im- is a self-serving justification for offering mediately needing to take out a new loan and a loan with such a high structure and without endangering the ability to pay for short repayment period that it is necessities. Taken together, these criteria also unaffordable. force the lender to truly consider the borrower’s ability to pay the loan before it is made. • The myth that expensive loans must be toler- Many of the best alternatives also have a ated because there is demand for them and we savings component or offer financial educa- should not restrict access to credit. Harmful tion. These features enhance the loans but are forms of credit should be restricted. neither necessary nor sufficient. The dangers of payday loans are well doc- Evaluation of a number of payday loan al- umented. Payday loans lead to repeat borrow- ternatives finds many that meet these criteria, ing and escalating cost. Taking out a payday others that need improvement, and some that loan increases the likelihood that the borrower are essentially payday loans themselves.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 1 Credit unions dominate the field of the improvement” category because other features best alternatives. Many credit unions offer can make them dangerous. Some products that meet all of our criteria, and a small loans are admittedly better than a pay- number of others come close. A few day loan but are considerably too expensive offer affordable small loans, and many offer and have too short a repayment period. reasonably priced lines of credit that Finally, a number of credit unions, banks, can fit the needs of payday loan borrowers. and bank prepaid cards offer triple-digit, short- The larger banks, however, tend not to promote term products that are payday loans, plain and their low-priced lines of credit and prefer to simple. Whether they are called payday loans, market more expensive fee-based overdraft “direct advances,” or some- loans. Nonbank lenders are also emerging thing else, these loans pose the same dangers with viable payday loan alternatives. of repeat lending and an escalating debt trap. A number of other alternatives are consid- Some of these triple-digit loans are even erably cheaper than a traditional payday loan offered by federal credit unions that manipu- but fall short of being a safe and affordable al- late the APR to conform to their 18% legal ternative. Many payday borrowers have ac- cap. cess to credit cards, most of which meet our A full list of the products we evaluated is criteria, though we put them in the “needs found at the end of this report.

2 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap ALTERNATIALTERNATIVESVES THAT WOWORK,RK, ONES THAT DON’T

TABLE OF CONTENTS

I. Payday Loans 4

A. How Payday Loan Work 4 B. Who Takes Out Payday Loans and Why 5 C. The Harm Caused by Payday Lending 5

II. Myths About Payday Loan Alternatives 6

Myth 1: Any Alternative That Is Cheaper than a Traditional Payday Loan is a Good Alternative. 6 Myth 2: Any Loan that Does Not Give the Lender Excessive Profits is a Responsible Loan. 6 Myth 3: An Alternative Needs to Look Like a Payday Loan to “Meet the Consumer Where He Is” 7 Myth 4: Expensive Loans Must be Tolerated Because There is Demand for Them and We Should Not Restrict Access to Credit. 7

III. Criteria for Genuine Payday Loan Alternatives 8

A. Cost 8 1. Payday Loans: Triple-Digit Rates 8 2. Genuine Alternatives: Annual Cost, Including Fees, of 36% or Less 9 a. The History of the 36% Rate Cap 9 b. The 36% Annual Rate Cap Today 10 c. How 36% APR with Fees is Measured 12 B. Length of the Loan 13 1. Payday Loans: 14 Days 13 2. Genuine Alternatives: At Least 90 Days or One Month Per $100 14 C. Single or Multiple Installment Payments 14 1. Payday Loans: Single Balloon Payment 14 2. Genuine Alternatives: Multiple Installment Payments with Amortization 15 D. Form of Security 15 1. Payday Loans: Check Holding or Electronic Equivalent 15 2. Genuine Alternatives: No Coercive Security 17 E. Evaluation of Ability to Repay 17 1. Payday Loans: None 17 2. Genuine Alternatives: Consider Ability to Pay 18 F. Savings Components and Other Features 18

IV. The Alternatives 18

A. Genuine Alternatives and Ones That Come Close 19 1. Credit Unions 19 2. Banks 21 3. Other Lenders 23 B. Better Than a Payday Loan But Still Very Problematic 23 C. A Payday Loan By Any Other Name... 24 1. Bank And Prepaid Card Direct Deposit Account Advances 24 2. Credit Union Payday Loans 26 3. Fee Harvester Credit Cards 27 4. Overdraft Loans 28

V. Conclusion 29

Appendix A-1 Genuine Payday Loan Alternatives and Ones that Come Close 30

Appendix A-2 Better Than a Payday Loan But Still Problematic 35

Appendix A-3 A Payday Loan By Any Other Name . . . 37

Appendix B How the Annual Percentage Rate with Fees Was Calculated 44

Appendix C Credit Unions Offering Micro Loans or Short-Term Loans 45

Appendix D Small Dollar Loan Pilot Program Participants 55

Endnotes 56

nAtionAl consumer lAW center stopping the payday loan trap 5 3 A I. pAYDAY LOANS paper check, taking authorization for either a remotely-created check2 or an electronic A. How Payday Loans Work debit. Fast Cash with Little Underwriting. It A payday loan is a short-term, typically 14- does not take much to qualify for a payday day, cash loan. The cost ranges from $15 to $30 loan. A borrower merely has to have an open per $100 borrowed, with $15 being common for bank account, a source of income from a job storefront payday lenders, and online payday or public benefits such as Social Security, and lenders charging more. The consumer writes a a valid form of identification. Lenders do not personal check to the payday lender (or autho- use conventional credit checks but instead rizes the electronic equivalent) for the amount use specialized credit reporting services that borrowed plus the finance charge. The lender track the subprime market and weed out holds the check or authorization until the next only the very worst credit risks. Lenders payday. When the loan comes due, the bor- cater to those with bad credit and do not rower can redeem the check for cash, allow determine if a borrower can afford to repay the check to be deposited, or pay the finance the loan. charge and roll the loan over for another pay Repeat Borrowing Leading to Escalating period at a new fee. Payday loans range from Cost. Payday lenders depend on repeat bor- $100 to $1,000, depending on state legal rowers for the bulk of their revenues. Payday maximums. The typical loan term is about borrowers take out an average of 8 to 9 loans two weeks, and median loan size is $350.1 annually.3 Payday lenders depend on this Several features of payday loans are worth repeat borrowing despite their marketing mes- noting. sages that payday loans are for occasional, High cost, quick repayment. The annual infrequent use. The CEO of Cash America percentage rates run rates from 391% to 782% noted that “you’ve got to get that customer in, for a two-week extension of credit. work to turn him into a repetitive customer, Check holding and electronic debit long-term customer, because that’s really where authorization combine to hand control of the the profitability is.”4 Overall, 90% of payday consumer’s bank account over to the lending business is generated by borrowers lender. In addition to the initial check, the with five or more loans a year; and over 60% payday contract often authorizes the lender to of payday lending business is generated by withdraw the funds electronically in the event borrowers with 12 or more loans a year.5 that the borrower stops payment on the first Unaffordable loans create their own check. Such agreements enable payday lenders rollover demand. A study by the Center for to avoid laws that permit borrowers to stop Responsible Lending found that 76% of pay- payment on checks. The payday lender may day loans are churned loans—ones that are re-present the check several times, forcing the made not because of a new need for credit, borrower to incur a nonsufficient funds fee but because the borrower needs a new loan each time. An internet payday lender operates to pay off a previous unaffordable payday the same way but dispenses with the initial loan.6

4 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER B. Who Takes Out Payday Loans and Why payday loan demand is also created by a prior payday loan. Payday loan borrowers have regular income and a bank account. Estimates of the median income of a payday borrower range C. The Harm Caused by Payday Lending from $20,000 to $50,000. A 2007 survey from As payday lending has spread across the the Board puts the median country, a growing body of independent aca- income of payday borrowers at $30,892.7 demic research has documented the adverse Many payday loan borrowers are benefit impact on the consumers who use payday recipients. A survey commissioned by the loans. California Department of Corporations found Using payday loans increases the chance that 10.6% of payday loan users are public of losing a bank account. Payday lenders often benefit recipients, plus another 4.9% listed dis- claim that payday loans are used to prevent bank ability and 2.9% listed retirement as their reg- , but they actually may increase them ular source of income.8 Similarly, in Colorado, and jeopardize the bank account. One study found the three most often cited occupations are that an increase in the number of payday loan laborer, office worker, and benefit recipient.9 outlets in a county is associated with an 11% In 2008, Social Security and Supplemental increase in involuntary bank account closures, Security Income and other public benefit even when other variables such as income and recipients were estimated to pay $860 million poverty rate are taken into account.14 per year in payday loan finance charges.10 Using payday loans increases bank- Payday borrowers may have access to ruptcy filings. In a large Texas study, other forms of credit. Payday lenders often researchers found that payday borrowers were claim to be serving those who do not have about 88% more likely to file for Chapter 13 credit files or cannot obtain credit. That is bankruptcy in the next two years than the rest partly true, but many payday borrowers have of the Texas population.15 Similarly, a Detroit credit cards and use other forms of credit.11 area study found almost three times the rate of Borrowers use payday lenders because bankruptcy among payday loan users, com- they are easy and fast. The top reasons that pared to similar low to moderate-income consumers cite for taking out payday loans is households without payday loans.16 that they are quick, easy to get approved, and Using payday loans causes financial convenient.12 Though borrowers also cite the hardship for families. A University of Chicago inability to get money at a bank or credit Business School doctoral student compared union and maxed out credit cards, those are households in states with and without access not typically borrowers’ top reasons. to payday loans over a five year period and Loans are often used to cover ordinary found that access to payday loans increases expenses, not emergencies. Various studies the chances a family will face hardship, have have found that 40 to 60% of consumers difficulty paying bills, and have to delay medi- take out payday loans to cover routine cal care, dental care, and prescription drug expenses like utility bills, rent or groceries, purchases.17 A Detroit area study found dou- or nonessential items.13 As noted above, much ble the rate of evictions and phone cut-offs

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 5 among payday borrowers and almost three whether a loan is cheaper than traditional pay- times the rate of having utilities shut off.18 day loans; it is whether it is affordable enough Payday loan users who also have credit to be used sustainably by borrowers. The cards are roughly twice as likely to become point of reference is the borrower’s well-being, delinquent on the card. In examining a large not the cost of the most extreme products on sample of payday loan users who also had a the market. Any loan that is unaffordable is credit card from a major issuer, researchers not a genuine alternative. Public policy needs found that credit card customers who took out to focus on eliminating harmful forms of a payday loan were almost twice as likely as credit, not expanding the array of dangerous other credit card customers to become seri- products available to consumers. ously delinquent on their credit card during the next year.19 Myth 2: Any Loan that Does Not Give Half of payday borrowers in the the Lender Excessive Profits is a first year of use. Researchers at Vanderbilt Responsible Loan. and the University of Pennsylvania examined Lenders offering dangerously expensive a large sample of payday loan files at a Texas loans often justify the price by asserting that payday lender and found that over half (54%) they do not have a high profit rate and that a of borrowers defaulted on their payday loans high price is necessary to cover loan losses and during the first year.20 overhead. Whether lending is responsible or irresponsible, however, is unrelated to profit margin. A lender that is barely breaking even II. myths ABOUT PAYDAY LOAN can still be offering loans that endanger con- ALTERNATIVES sumers. The toxic mortgages made in the last few years were predatory even though they Before discussing the criteria for assessing turned out to be money losers for the holders genuine alternatives to payday loans, it is im- of the loans. The point of reference must be the portant to address several myths about pay- impact on the consumer, not the lender’s day loan alternatives. economics. Conversely, there is nothing wrong with Myth 1: Any Alternative That Is Cheaper healthy profits if the loan is helpful to consum- than a Traditional Payday Loan is a Good ers. Indeed, affordable payday loan alterna- Alternative. tives will not become widely available unless Some very expensive small loans boast lenders can design a business model that about how they help consumers by pointing builds in reasonable profits. That is undoubt- out that they are cheaper than the traditional edly a challenge, but a number of institutions $15 per $100 two-week payday loan. That are working to make it happen. comparison says nothing at all about whether High loss rates are also not legitimate the loan is helpful or harmful to consumers. justification for high-priced loans. In fact, Alternatives to payday loans must stand high loss rates are a sign of a dangerous prod- on their own merits. The question is not uct. High loss rates indicate that the loans are

6 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER unaffordable to a high percentage of borrow- Myth 4: Expensive Loans Must be ers, not that lenders need to be compensated Tolerated Because There is Demand for for risk-taking. Write-offs do not justify preda- Them and We Should Not Restrict tory lending, but they may well signal that Access to Credit. such lending is taking place. Free market purists argue that we should not impose strict restrictions on payday loans Myth 3: An Alternative Needs to Look because the market is supplying a need that is Like a Payday Loan to “Meet the not being met elsewhere and we should not Consumer Where He Is” restrict access to credit. We reject this idea for Some institutions offer short term (two- or several reasons. four-week) loans with high, fee-based rate First, some borrowers have other, better structures (i.e., $12 per $100) that look a lot (if not ideal) options that they would exercise like traditional payday loans. The explanation if payday lending were unavailable. As dis- is often that, to be attractive to a payday bor- cussed above, some borrowers have, or could rower, an alternative loan needs to “meet the qualify for, a credit card. Some could use a consumer where he is.” —a form of lending that is far from This is simply a self-serving justification ideal but still significantly better than a pay- for offering an unaffordable loan that contains day loan.21 Some could qualify for a reason- the same features that make payday loans ably priced overdraft line of credit, could problematic. Though there is nothing per se borrow from friends or relatives, or could ob- wrong with pricing or explaining a loan as tain a pay advance directly from their em- dollars per hundred rather than charging in- ployer. Some will be able to access the terest on a percentage basis, the loan still alternatives described in this report. The ease needs to be affordable. Payday borrowers are and convenience of payday loans is part of capable of understanding that a loan carrying their popularity, and payday loans are not al- 18% annual interest is cheaper than $15 per ways the borrower’s only option. $100 every two weeks. They will seek Second, bad credit tends to drive out out these cheaper loans if they are made good. This phenomenon was clear in the mort- available. Conversely, any benefit to a struc- gage crisis: once some lenders started offering ture that resembles the payday loans to quick and easy loans with little or no docu- which borrowers are accustomed is out- mentation of ability to pay the deceptively af- weighed by the harm of a price structure that fordable initial payments, others followed suit is unaffordable. and abandoned traditional, safer loans for Similarly, it may be attractive to feed the which many borrowers could have qualified. illusion that a loan is inexpensive because it Conversely, the supply of good alternatives is will be paid off in two or four weeks. But the likely to increase if the bad ones are driven real needs of payday borrowers are met only out. One study found that credit was more by loans that have payments that they can ac- available in Arkansas, which had a 10% usury tually make, without repeat borrowing or ceiling, than in states allowing higher inter- shortfalls the next pay period. est.22 North Carolina documented that the

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 7 volume of consumer finance lending increased in trouble today. If a loan cannot be made respon- after the state passed laws eliminating triple- sibly, then it should not be made at all. digit payday loans.23 Payday loans are popular in part because they are quick and easy. Elimi- nation of irresponsible “fast cash” will in- crease both the supply of and demand for III. Criteria for Genuine more responsible loans that may require more Payday Loan Alternatives careful underwriting or may a require a trip to the bank or credit union and not just the The correlation of payday lending with strip mall. bankruptcy, debt spirals, bank account clo- Finally, and perhaps most importantly, sures, and other difficulties is not a coinci- harmful forms of credit should be restricted. dence. Several aspects of payday loans make Just because there is demand among cash- them especially pernicious. The terms of a strapped consumers for credit does not mean genuine alternative to payday loans must ad- that that demand must be met on any terms dress those aspects of payday loans that make whatsoever. Study after study shows that them dangerous. payday loans lead financially stressed bor- A. Cost rowers into even more serious financial problems. If high-rate borrowing is not sus- 1. Payday Loans: Triple-Digit Rates tainable for the borrower in the long term, it The most obvious danger of payday loans is better for the borrower to address the un- is their high cost. At a typical fee of $15 per derlying problems early rather than later. $100 for a 14-day loan, with that fee multiply- Even payday lenders will eventually cut off a ing each time the loan is renewed, a $300 loan borrower who cannot pay. At that point, or carries an annual percentage rate (APR) of when the payday debt balloons and the debt 390%. The consumer ends up repaying $1,470– collector becomes intolerable, the borrower the original $300 plus $1,170 in loan fees--if the will have to do something else. She may seek loan is carried for a full year. Payday lenders help from friends or family, cut expenses, get argue that the annual cost is not an appropriate relief from an employer loan or a charitable way of judging the cost of payday loans. But organization, ignore that cannot be col- even if the loan is only renewed eight times, as lected from her if she is judgment-proof, or the average loan is,24 the cost of repaying a $300 file for bankruptcy. It is much better to choose loan balloons to $705 in four months—well over one of those options earlier, before the debt double the amount borrowed. Even looked at explodes, than later after suffering the havoc over two weeks, $45 is a lot for a cash- created by repeated payday lending. strapped low-income person to come up with Consequently, the criteria for responsible in two weeks just to stay even, without mak- small loans must be considered on their own ing any progress in repaying the principal. merits, without excessive concern for whether Triple-digit interest rates are a clear hall- or not they will permit the wide availability mark of .25 Loans of 390% of easy credit that gets payday borrowers used to be illegal, the realm only of mob loan

8 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER sharks, for good reason. The debt escalates far and questionable practices . . . .”32 The general faster than most borrowers can keep up. civil usury statutes in most states hovered around 6%, so legitimate lenders focused on 2. Genuine Alternatives: Annual Cost, making large dollar loans to businesses, which Including Fees, of 36% or Less netted them more money than small dollar The best payday loan alternatives will consumer lending. 33 have an APR, including fees, of 36%. For small The idea behind the 36% cap loans, the 36% rate has deep historical roots. It was to create an exception to the lower general continues to embody the modern consensus of usury statutes so that legitimate lenders the top rate for loans the size of payday would have the incentive to enter the small loans—at least among those who agree that dollar loan market. Lenders would make a any rate caps are appropriate. profit—despite the higher costs of administer- ing consumer as opposed to business loans— a. The History of the 36% Rate Cap and consumers in turn would be given a Interest rate caps are more than just num- reasonably-priced product.34 bers: they are reflections of society’s collective This idea and the 36% figure itself are gen- judgments about moral and ethical behavior, erally credited to the Russell Sage Foundation business and personal responsibility, and tol- (“RSF”), “among the most respected and influ- erance for risk.26 Interest rate caps embody ential American social policy research and ad- fundamental values.27 vocacy institutions during the Progressive Era The 36% rate cap for small dollar lending and beyond.”35 Even though the RSF was not emerged in the first half of the twentieth cen- the only institution exploring this approach to tury.28 Although it was originally a response the problem, it is the most respon- to the excessively low legal usury rates of the sible for its dissemination and implementation time, its origins have striking parallels to to- through its Uniform Small Loan Laws.36 day’s situation, and the reason for a 36% cap From 1914 to 1943, thirty-four states adopted are no less valid today. a version of the Uniform Small Loan Law or In the late 19th and early 20th centuries, its equivalent.37 The exact amount of the recom- loan sharks had cornered the market on small mended interest rate cap was not static over the dollar consumer lending, a new market as the course of the more than half a dozen incarna- American economy transitioned toward tions of the Uniform Small Loan Law, though greater reliance on the purchase of personal they generally ranged from 3% to 3.5% per goods.29 Offering products very similar to con- month.38 The interest rate caps suggested in temporary payday loans,30 these so-called the Uniform Small Loan Laws were the result “ lenders” would make small dollar, of both “political compromise and practical ex- short-term loans repayable on the borrower’s perience.”39 In other words, they were the re- next payday. A typical product carried a four- sult of hypotheses, bolstered by some research digit annual interest rate.31 Multiple strategies studies,40 being tested in real world arenas. were pursued to wrest small dollar consumer The real world validated the RSF’s efforts. lending from the grip of these lenders, who The landscape for small dollar lending was trans- built their business on a “variety of legal ruses formed. Through the 1960s, the RSF-inspired

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 9 small loan laws managed to keep small dollar This does not mean that the full annual consumer loans available to consumers.41 cost of all small-dollar loans in all of these For a variety of reasons including the de- states is capped at 36%. Many of these laws velopment of the credit card, credit cards also permit fees and charges in addition to in- eventually “began to supplant (and expand) terest, which can bring the APRs for small the market for small dollar credit” previously loan products well above 36%.49 Typically the dominated by traditional small dollar lend- interest rate caps were adopted before fees ers.42 Though most credit cards operate today began proliferating on loans on top of interest. outside of legal usury limits, rates above 36% In addition, as the payday loan industry was are exceedingly rare. developing, before the dangers were well doc- In states where they are legal, payday, umented, the industry was very successful in auto title, and other fringe products also began getting exceptions to more general usury rates targetting payday borrowers.43 in order to sell their products. But the deregulatory tide has begun to b. The 36% Annual Interest Rate Cap turn. The explosive growth of the payday in- Today dustry—which barely existed two decades Until the deregulation of the 1970s and ago—and the growing recognition of the dan- 1980s, virtually all states had usury caps, gers of high rate lending have caused many though they varied widely and were typically states to reexamine exemptions for payday well below 36% for larger loans.44 Deregulation loans from rate caps. The trend is back toward was spurred by two developments, neither of an APR cap of 36% or less on small loans. which reflects on the appropriateness of rate In just the last two years, four jurisdic- caps today. First, a Supreme Court decision tions—Arizona, the District of Columbia, New permitted banks to charge the rate of their Hampshire, and Ohio—have re-imposed rate home state, regardless where the loan was caps for short-term small loans. In Ohio, vot- made.45 The decision led some states to repeal ers defeated an industry-sponsored ballot ini- their interest rates in exchange for banks’ relo- tiative to undo this new rate cap.50 In Arizona, cating their headquarters and forced other voters in the 2008 election rejected a ballot ini- states to follow suit or lose their banking in- tiative that would have permitted payday dustry.46 Second, double-digit inflation lenders to remain in business permanently, in- squeezed the availability of credit and spurred stead of allowing the 2010 sunset provision in a climate of deregulation. The response of the payday loan law to go into effect.51 Both of many states to the combined developments these consumer victories occurred over mas- was to eliminate interest rate caps.47 sive industry spending to support triple-digit But the 36% rate continues to have wide APR payday lending.52 Since 2008, no acceptance at the state and federal level. jurisdiction has repealed its rate cap on payday Today, over thirty-five jurisdictions—70% of lending, signaling growing reluctance to exempt states—still provide for annual interest rate payday lenders from comprehensive rate caps caps at the 36% benchmark or less within their of 36% or less. A wide variety of consumer and statutory schemes governing small dollar in- religious groups are continuing to urge states stallment loans by nonbank lenders.48 to impose rate caps of 36% or even less.53

10 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Currently, 14 jurisdictions—soon to be effective while the limitations on the term, 15—either ban payday loans or subject them amount, and fees will appropriately limit the to an interest rate cap of 36% APR or less. product to meeting its purpose as an alterna- Some of these states permit an origination fee, tive to predatory credit products.”62 but the APR for a two-week, six-month, and Thus, within the last three years, no less 12-month loan is well below triple-digits in all than three federal agencies—DOD, FDIC, and of those states even with the fee included.54 NCUA—have drawn upon the 36% benchmark Several arms of the federal government to construct responsible and fair small dollar have also endorsed a 36% rate cap. In 2006, loan frameworks. The DOD views its “social following a report from the Department of De- compact” with military families as including fense detailing the problems that payday loans an understanding of “personal finances as an were posing for servicemembers and military integral part of their quality of life.”63 The “so- readiness,55 Congress imposed a 36% rate cap, cial compact” between society as a whole and including fees, on small dollar loans offered to civilian consumers demands no less. active duty members of the military and their Even 36%, of course, is high, and that rate dependents.56 As DOD made clear in its im- is appropriate only for small dollar loans. The plementing regulations, the 36% rate was ad- DOD, FDIC and NUCA caps are all directed at opted “to balance protections with access to small loans. The DOD report noted that lend- credit.”57 ers “should not interpret the 36 percent cap as In 2007, the Federal Deposit Insurance a target for small loans provided to Service Corporation (“FDIC”) announced Small Dollar members; it would be a ceiling, and often a Loan Guidelines encouraging lenders to offer lower rate would be more appropriate to the loans at rates under 36% with low or no fees.58 risk of a borrower.”64 NCUA limited its pro- In 2008, the FDIC followed up with a two-year posed 28% to 36% rate to loans of $1,000 and pilot program to study sound small dollar below; higher amounts are still subject to the loan products based on the 2007 guidelines.59 18% rate cap.65 Many state credit unions also The FDIC deemed a 36% APR, as well as the are subject to an 18% rate cap. Outrage over other features set forth in its guidelines, to be rampant credit card rate increases into the 25% helpful for institutions to “meet the goal of to 30% range spurred considerable public safe and sound small-dollar credit programs, anger and helped propel passage of a new fed- which is to provide customers with credit that eral credit card law restricting unrestrained is both reasonably priced and profitable.”60 rate increases. Bills are pending in Congress to Most recently, in 2010, the National Credit impose a 15% rate on all lenders.66 Union Administration (“NCUA”) proposed to For small loans, however, the 36% rate has permit federal credit unions, which currently widespread and long-standing support. It is have an 18% usury cap, to charge either 28% high enough to make up for the small dollar APR plus a $20 application fee, or 36% with- values on which the interest accrues, but low out fees, on short-term, small loans.61 As enough to avoid predatory lending. NCUA explained, “[p]ermitting a higher inter- The 36% rate cap also works on a practical est rate for [small] loans will permit FCUs level for the loans we are evaluating. For a [federal credit unions] to make loans cost loan that meets the criteria we propose for an

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 11 affordable small loan—a 90-day minimum appropriate. For example, a $10 late fee on a $300 installment loan carrying a 36% APR four-month fully amortizing installment loan with fees—the borrower would have to pay that carries 18% interest would not trouble us about $48 every two weeks, including interest and could appropriately be excluded from an and a portion of the principal. That is virtually APR calculation. But a payday lender could the same as the $45 fee that payday borrowers purport to charge only 18% interest on a 14- commonly now pay every two weeks to carry day loan, while knowing that the borrower over a payday loan without making progress would not be able to repay the loan in full on on the principal. Even $48 is a lot for someone the 14th day, and planning to refuse to roll living paycheck to paycheck, as most payday over the loan until the borrower was a day late borrowers are. But the payments are realistic, and incurred a $15 per $100 late fee. Late fees unlike the repayment schedule of a payday of that sort should be included in measuring loan. For a borrower with a $35,000 annual in- the cost of that loan, but designing a measure to come, $48 would account for less than 4% of capture them is beyond the scope of this report. after tax income every two weeks, an amount We calculated an APR with fees by figur- that is conceivably within budget. ing the total cost of a loan that nets the con- sumer $300 over approximately a four-month c. How 36% APR with Fees is Measured period, or the period of the loan, whichever is This report compares loans based on the longer.69 Four months was chosen as the time calculation of an annual percentage rate period for comparison because it reflects the (“APR”) with fees. The “APR with fees” as typical amount of time the average payday used in this report is not the same as the APR loan is renewed. That is, if the typical payday that the Truth in Lending Act (“TILA”) re- borrower rolls over a loan eight times—a total quires lenders to disclose. The complicated of nine 14-day periods or 126 days—then it regulations that detail how the TILA APR makes sense to compare the cost of alternative must be calculated have gaps that can leave loans over the same period of time. Four out several fees, such as application fees and months is also long enough to take into ac- annual, monthly or other “participation” fees. count the impact of loans whose fees multiply Lenders can use those fees to manipulate and with each rollover and those that do not. add considerably to the disclosed APR.67 In- Our methodology results in even some of deed, regulators have proposed to improve the more affordable loans having an APR with the APR in the mortgage context by including fees over 36% for a four-month loan. For ex- all fees.68 With that same correction for the ample, if a loan has a $20 application fee and short-term loans that we are examining, the 18% interest, the APR with fees for a 120-day APR is widely accepted as a uniform method loan would be 50%. Though this might seem of comparing the cost of loans. like a large jump from the 18% interest rate, We did not attempt to capture penalty adding the $20 fee nearly triples the $11.32 fees, such as late fees or over-the-limit fees. cost of a comparable 18% loan with no fee, so Depending on how they are triggered, the the APR should be three times as high as well. amount of the fee, and the pricing structure of The purpose of this report is not to justify the loan, penalty fees may or may not be a precise methodology of measuring whether

12 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER a loan is or is not over 36%. We do not fore- structure, including the length of the loan, the close the possibility that modest, one-time ap- combination of flat fees and interest, whether plication fees could legitimately be excluded the fees recur, whether the loan is repayable in from an APR with fees calculation in some cir- installments rather than a single payment, and cumstances, which would result in more lend- whether the loan has a fixed beginning and ers meeting the 36% threshold.70 Moreover, if ending date (a “closed-end loan”) or is more the lender does not charge multiple applica- fluid, like a credit card or line of credit (an tion fees, the APR with fees may be under 36% “open-end loan”). That is precisely why the for loans over $300 or with terms longer than APR was developed in 1968.71 Providing an four months. For these reasons, we have in- APR with fees also provides a method of com- cluded in the category “Genuine Alternatives paring them to other loan rates that are not an- and Ones that Come Close” several loans that alyzed in this report (assuming that those yielded APRs with fees of somewhat more loans are not heavily dependent on fees that than 36%. TILA does not require the to include Payday lenders argue that an APR is a in the APR). distorted way of measuring the cost of a two- Consider, for example, the relative costs, week loan and makes that loan look more ex- not including principal repayment, of the al- pensive than it actually is. But we believe that ternatives in Table 1 for a $300 loan. The APR an APR (with fees) should be used to compare with fees gives a snapshot of which alternatives loans for several reasons. are cheaper over the long haul. First, the risk and expense of a loan are due more to what happens over the long term B. Length of the Loan if renewals are needed than to the cost for the first installment. Any loan can look affordable 1. Payday Loans: 14 Days over only two weeks. That is a big reason why The second aspect of payday loans that consumers fall into the payday loan trap. makes them dangerous is their short, typically Second, looking at an APR with fees en- two-week, repayment period. Even if used ables a comparison between loans that vary in solely as a means of covering short-term

Table 1. Cost of $300 Loan

First Cost for APR With Fees for Type of Loan Structure 2-week loan 4 months 4-month loan

Overdraft line of credit 17.5% APR $ 2.01 $ 8.08 17.5% Credit card 25.24% APR plus 3% $11.99 $ 33.91 35% cash advance fee Overdraft loan $34 per overdraft plus $49.00 $441.00 397% $15 after 5 days Payday loan $15 per $100 for $45.00 $405.00 391% 14-day loan

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 13 emergencies, few payday borrowers will have loans will carry a term of at least 90 days, un- the means to repay the loan plus the fee in two less the loan is only $100 or $200, in which weeks. Borrowers with the cash flow to do so case the term should be one month for every most likely have other, more affordable options. $100 borrowed. Ideally, the borrower should Moreover, as discussed above, borrowers often get one month per $100 for larger loans as well. take out payday loans to cover ordinary living This term is consistent with the FDIC’s expenses that have fallen short. The chances of Small Dollar Loan Guidelines. The FDIC being able to repay those loans plus a fee in explained: two weeks, without causing an even larger We encourage institutions to utilize a rea- shortfall the next pay period, are remote. sonable time frame for the repayment of Payday lenders count on borrowers’ inabil- closed-end credit, e.g., at least 90 days. ity to repay the loans in two weeks as a central This should enable borrowers to repay part of their profit structure. Indeed, they have the debt without incurring the cost of vigorously opposed limits on back-to-back multiple renewals.73 loans, arguing that they cannot make a profit unless the loan is rolled over multiple times.72 A borrower who does not have $300 today If the typical payday loan is rolled over is unlikely to have $300 plus a fee in two weeks eight times for a total of 18 weeks, why doesn’t without putting herself behind for the next a payday lender instead make an 18-week in- pay cycle. Time to chip away at that debt is es- stallment loan? The answer is clear: the ficti- sential. Two-week loans stretch out to much tious two-week deadline and relatively small longer for an obvious reason: the borrower fee for those two weeks are part of the decep- simply cannot come up with enough to pay tive aspect of the loans. Writing that post- the loan off in two weeks or even four or six. dated check for two weeks from now gives the Instead of basing lending on the myth of a illusion that the loan will be paid off then at only two-week loan, the terms of a responsible loan the cost of the amount in that check and permits do not depend on renewals. The actual repay- the borrower to ignore the longer-term cost. ment period is built into the initial term of the Payday loans would not be nearly so attrac- loan. For a $300 loan, a 90 day repayment pe- tive if lenders were up front about how long the riod means that for a payment of $48 every borrower is likely to be in debt and how much two weeks, the borrower will have fully re- the borrower will pay over that period for that paid the loan at the end of the 90 days. Even $300 loan. Instead, it is much easier to get the $48 is a lot for a cash-strapped borrower, but borrower on the hook with what looks like a any more than that is likely to be completely very short-term loan. Once snared, the lender unaffordable. then is in control and the loan takes off.

2. Genuine Alternatives: At Least 90 Days or C. Single or Multiple Installment One Month Per $100 Payments Cost is not the only important feature of 1. Payday Loans: Single Balloon Payment an affordable small loan. The length of the loan The balloon-payment structure of payday is also critical. A viable alternative to payday loans is another pernicious aspect. When

14 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER payment comes due, the borrower cannot interest, so that with each payment the bor- make a partial payment; the entire loan is due. rower is making steady progress. With no Borrowers who roll over their loans must pay sudden balloon payments at the end, the final off the old one completely with a new one that payment does not send the borrower back into carries the same high fees. the cycle of borrowing again. Though the lender typically requires a payment to roll the loan over, the payment D. Form of Security goes entirely to the fee on the old loan and 1. Payday Loans: Check Holding or Electronic does not reduce the principal. The full $300 is Equivalent due again in the next two weeks, and the cycle Payday loans are, in effect, secured by the continues when the borrower inevitably does borrower’s future paycheck. By holding a not have the $300 then either. Payday lenders post-dated check and/or the electronic equiv- typically do not take partial payments; it is all alent, the lender can grab the paycheck when or nothing. The Center for Responsible Lend- it comes in, without the need to engage in any ing analyzed the budget of a typical borrower formal action. earning $35,000 a year and found that, even at This form of security enables payday zero interest, the borrower would be hard lenders, like typical predatory lenders, to en- pressed to pay back the typical $350 loan in gage in lending without responsible under- 74 just one pay period. writing—that is, without considering whether Balloon payments are one of the hallmarks the borrower will be able to repay the loan. 75 of predatory lending. They are part of the de- They rely on their ability to coerce repayment. sign of payday loans that traps the borrower Paper or electronic check holding are the into a debt spiral and forces repeat loans. The modern equivalent of several practices that the loan continues until eventually, out of des- Federal Trade Commission banned over 25 peration, the borrower finds some way of years ago as unfair trade practices. In the coming up with that $300 balloon payment— Credit Practices Rule,76 the FTC banned the often friends, family, skipping more impor- following practices, among others: tant expenses, or bankruptcy (options that • Confessions of judgment, which like a were likely available before the borrower post-dated check or electronic debit au- took out the loan and incurred months worth thorization, allow the lender to seize the of fees). borrower’s income without judicial 2. Genuine Alternatives: Multiple Installment process. Payments with Amortization • Exemption waivers, which permit lend- A responsible small loan requires multiple ers to reach Social Security and other ex- installment payments and does not rely on empt income, much like payday balloon payments. The payments are more af- lenders can. fordable because they need not cover the en- • Assignment of , which is effec- tire loan amount. Each payment must cover tively the same as a two-week payday part of the principal, not just accrued fees and loan secured by the paycheck.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 15 Loans secured by assignments in preserving the family unit and furnishing the particular bear a striking resemblance to the insolvent with nucleus to begin life anew.”81 structure of payday loans. The “substantial in- Payday lenders evade these fundamental jury” to consumers that led the FTC to ban protections by securing direct access to the mandatory wage assignments and other protected income. Payday lenders happily credit practices77 is mimicked by the effect accept proof of regular public benefits as of check holding or electronic bank account qualification for a loan and even sometimes access: target the recipients of public benefits. The Food or the payday loan. Borrowers who lenders’ ability to grab those benefits as they turn over access to their bank account lose come in is even more immediate and harmful control over whether to pay food, rent, or the than the exemption waivers banned by payday loan if funds are insufficient for all the FTC. three. Bank account access, like a wage assign- Check on illegal loans or illegal fees. Con- ment, causes “disruption of the family’s trol over one’s bank account is important if the finances and make[s] it difficult for the payday lender has operated illegally in some to purchase necessities.”78 fashion. For example, online payday lenders Evasion of protections for Social Secu- often ignore state laws limiting the rates of rity, Disability Income, payday loans. Like wage assignments and Insurance, and other exempt funds. The confessions of judgment, bank account access ability to grab the paycheck without formally occurs “without the procedural safeguards garnishing the account enables payday lend- of a hearing and an opportunity to assert ers to defeat laws that protect from debt defense or counterclaims.”82 Moreover, the collectors funds that are needed to pay essen- security used for payday loans deprives con- tials. A high proportion of payday borrowers sumers of their legal right to stop payment on are public benefits recipients. These and other checks and other preauthorized electronic forms of income are protected in most states transfers. Payday lenders evade the laws by from by debt collectors. Even taking advantage of loopholes in the laws and for ordinary wages, under federal law the by changing the amount or form of the pay- maximum amount a debt collector can gar- ment so as to confound a stop payment order. nish is 25% of the borrower’s disposable earn- The right to stop payment is an important one ings for that week or the amount by which that gives the borrower control if a creditor is those earnings exceed 30 times the federal attempting to collect an illegal or disputed minimum hourly wage, whichever is less.79 amount, or if the borrower simply cannot Many states have laws that protect a greater make good on the check without losing money amount.80 to buy food. In banning exemption waivers, the FTC Coercion to roll over the loan. With no explained that the “reason for exemption laws way out, the borrower is forced to pay a new is to afford minimal protection to and fee for a rollover that increases the debt. Pay- their families by allowing them to retain the day loans, like wage assignments, “can result prime necessities of life, with a view to in costly refinancing.”83

16 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Added pressure of bank fees: Finally, the large fees that cover the loan principal before payday lender’s ability to present and re-pres- the borrower defaults. ent the check or electronic debit subjects the To those who would argue that lending is borrower to multiplying nonsufficient funds impossible without electronic check holding, it fees or to overdraft fees, either on the payday is important to remember that credit cards are check or other outstanding checks. generally unsecured and are widespread even among low and moderate income households. 2. Genuine Alternatives: No Coercive Security A credit card company takes no security and For these reasons, a safe payday loan al- cannot take the funds that a borrower needs ternative will not be secured by the borrower’s for food, rent, and other necessities. Indeed, post-dated check or the equivalent electronic the unsecured nature of credit cards is what form of access to the bank account. Many justifies their relatively high interest rates–18% lenders—even ones whose loans are reason- to 29% APR or more--compared to deposit in- ably priced—rely on electronic debit authori- terest rates or the rates on secured forms of zations as security for their loans. Even in the lending such as mortgages. hands of an otherwise responsible lender, Even though the best payday loan alterna- however, turning over access to the bank ac- tives do not and should not require electronic count has harmful effects on the borrower. check holding, borrowers always have the op- It gives the lender first crack at income tion of electronic repayment. Many of the best needed for necessities, deprives the borrower alternatives discussed below offer the bor- of legal protections for exempt income, and rower the choice of a lower rate with electronic can subject the bank account to multiplying repayment or a higher rate without it. overdraft fees. Lenders, like those 25 years ago using E. Evaluation of Ability to Repay wage assignments, undoubtedly justify requir- ing access to the borrower’s bank account as 1. Payday Loans: None necessary for borrowers who are bad credit The final dangerous feature of payday risks or whose paycheck is their only asset, as loans is that they are made to consumers with- a way of keeping the transaction costs of un- out any significant evaluation of their ability to derwriting down, and to minimize collection repay the loan. Having a checking account to costs. The FTC found that those justifications which regular paychecks or public benefits are did not outweigh the harm to borrowers from deposited is about all that is required. Though wage assignments used as a collection de- payday lenders typically check specialized vice,84 and the same is true for electronic check credit reporting services, they are looking to holding. Indeed, a big part of the problem is weed out only those with the very worst credit. that a security interest in the borrower’s pay- Payday lenders do not consider whether the check enables the lender to avoid the under- consumer will be able to afford to repay the writing that is critical for a responsible and loan plus the fee in two weeks when it is due, affordable loan. As long as the paycheck or what other obligations the consumer has. comes in, the lender has a good chance of In the end, all of the other dangerous as- being repaid, or at least of extracting several pects of payday loans come down to this:

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 17 borrowers cannot afford to repay them when fore and does not leave the borrower with an due. Lending without regard to ability to immediate deficit leading to re-borrowing. repay is one of the most central aspects of abu- Finally, the lack of a coercive form of se- sive lending.85 For example, recent reforms curity is probably the most important incen- aimed at abusive mortgage lending and credit tive to appropriate underwriting. The creditor card practices have both included require- of an unsecured loan depends on the ability of ments that lenders consider ability to repay the borrower to make payments. An unafford- before extending credit.86 able loan will have to be turned over to collec- tors, an expensive process. 2. Genuine Alternatives: Consider Ability to Pay F. Savings Components and Other A lender that is offering a truly affordable Features alternative to payday loans will consider the Many of the best alternatives to payday ability of the borrower to make the payments loans also include other features that help bor- as they come due. This is not a criterion that rowers on a path to financial security. Several we have included directly in our ratings. We of the best loans include a savings component, have not attempted to delve into the internal requiring the borrower to make regular contri- underwriting practices of those offering alter- butions toward savings, or putting a portion natives to payday loans to determine how or of the loan principal into a savings account whether they assess ability to pay. Nonethe- that is turned over to the borrower upon com- less, adherence to the other criteria for a genu- plete repayment of the loan. Though instilling ine alternative will ensure that ability to pay is the habit of savings is important, required sav- taken into account. ings also add to the cost of the loan. Some A small loan that only costs 36% on an an- lenders require participation in financial edu- nual basis does not leave the lender a lot of cation as part of their small loan programs. room for write-offs once the cost of processing Other lenders have available the loan and the cost of funds are taken out. A that kicks in if the borrower has trouble mak- lender who charges only 36% will have to en- ing payments. sure that the vast majority of borrowers can af- These features are not necessary for a loan ford the loan. Those who do not or cannot will to be a genuine alternative to payday loans. not stay in business. They are also not sufficient to make up for a A longer loan term, with multiple amortiz- loan that is not affordable. But they enhance ing installment payments, also gives the lender the borrower’s experience, and we have noted an incentive to ensure that those payments are loans that have these features. affordable. If the borrower defaults early, the lender must write off most of the loan. The loan structure does not give the lender reason IV. the ALTERNATIVES to encourage rollovers. If the borrower does complete the repayments, the final payment is The products surveyed in this report in- no larger than the ones in the paychecks be- clude truly affordable payday loan alternatives,

18 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER ones masked as alternatives that are little bet- • Alternatives Federal Credit Union in ter than traditional payday loans, and every- New York offers a Credit Builder Loan thing in between. No attempt was made to for low-income borrowers with little or find every alternative on the market. Rather, no credit and a Score Builder Loan for this report describes examples of the types of those with low credit scores. Both have products available. A full listing of the prod- 14.25% interest and no fees for a six- ucts surveyed is found in Appendix A. A sam- month loan. pling of the alternatives is discussed below. • Novartis Federal Credit Union in New Jersey has a Personal Loan with 16.5% A. Genuine Alternatives and Ones That APR, and no fees, for a loan up to two Come Close years. The loans are available to borrow- 1. Credit Unions ers with credit scores from 550 to 559. Given that credit unions are nonprofit in- The payments are amortizing install- stitutions formed for the purpose of serving ment payments and automatic payment their communities, and that most operate with is not required. interest rate caps well under 36%, it is not sur- • First New England Federal Credit Union prising that many of the best alternatives come in Connecticut also offers Personal Loans from credit unions. for borrowers with low credit scores. Through its REAL (“Relevant, Effective, For those with credit scores under 600, Asset-building, Loyalty-producing”) Solutions the rate is 17.99% with no fees, and the program, the National Credit Union Founda- loans can be up to three years. The rate tion has been collaborating since 2007 with goes down to 10.25% and the term can state credit union leagues to encourage credit be up to five years for those with a unions to offer affordable small dollar loan credit score over 640. Again, the loans products to their members who have limited come with amortizing installment pay- assets. There is no “one size fits all” REAL So- ments and neither direct deposit nor au- lutions loan. The goal of the program is to pro- tomatic payments are required. vide loan products that support borrowers’ efforts not only to obtain short-term funds but Other credit unions also offer affordable also to build good credit and savings. The products. Eglin Federal Credit Union in Flor- REAL Solutions effort includes 650 credit ida has a SAFE Loan Salary Advance of up to unions across 34 states.87 Several credit unions $500 or half of the borrower’s monthly pay, involved in the REAL Solutions program offer whichever is less.88 The loan term is 90 days at affordable alternatives to payday loans that 16.9% APR interest, with no fees other than meet our criteria. However, we note that some the Florida documentary stamp fee of $0.35 of the very expensive loans we identified came per $100 borrowed. Even including that fee, from credit unions that also participate in the the APR with fees is 19%. Direct deposit is re- program. quired. Payments can be made automatically Credit unions that participate in REAL So- by payroll deduction but this is not required. lutions include: The minimum payment, due on each payday,

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 19 is $25 weekly, $50 bi-weekly/semi-monthly or borrower has the capacity to pay the new loan. $100 monthly. Members who have had two The credit union tries to distinguish between SAFE Loans are required to complete the BAL- those for whom a loan means a fresh chance, ANCE Budget Counseling course prior to re- and those who will not be helped by more ceiving their third SAFE Loan. credit and should instead be referred to the A number of other credit unions offer credit union’s financial counselors. loans that are not specifically marketed as pay- A number of other credit unions that offer day loan alternatives but may serve that pur- loans meeting our criteria for affordable loans pose. Most credit unions offer unsecured are listed in Appendix A. personal loans, often called “signature loans,” A number of credit unions offer small and in some cases these are available in small loans that otherwise meet our criteria but amounts for borrowers who do not have per- charge a one-time application fee that pushes fect credit. The National Credit Union Admin- the cost of a four-month loan over 36%. Some istration surveyed credit unions and found 605 of these come down below 36% if the bor- federal credit unions offering loans of $500 or rower renews the loans for a full 12 months. less and 352 federal credit unions that offer As discussed above, one could argue that a small-dollar, short term loans designed to be modest, one-time application fee should be repaid the next payday.89 Some of course offer excluded from the APR with fees, but we have both. A list of these federal credit unions, as included all fees in our calculations. well as the state credit unions surveyed, is in- Veridian Credit Union in Iowa offers a cluded in Appendix C. Payday Alternative Loan from $200 to $1,000 For example, Navy Federal Credit Union, with a 6-month term and a $20 application the nation’s largest credit union, does not have fee.90 The borrower can choose between 19% a specific payday loan alternative product but interest with automatic payment and 21% does have flexibility in adapting its standard without, and thus is not required to sign over Signature Loan to the needs of its military cli- access to her bank account. Borrowers must entele. Though the standard minimum loan is have direct deposit of their paycheck and pay- $250, loan officers can make exceptions. The ments are due every payday. Half of the loan Signature Loans start at 11.25% and carry a amount requested is deposited into a savings maximum rate of 18% with no fees. Loans are account and is available after the loan is re- repaid in installments from six months to five paid. With the application fee included, and years (for large loans). The loans do require assuming the higher 21% interest rate, the automatic repayment at some point, however. APR with fees for a 6-month $300 loan is 44%. Though the credit union does check credit However, since the application fee is constant scores, and former payday borrowers might regardless of the size of the loan, the APR with be initially disqualified, more senior loan offi- fees is lower for larger loans. For a $500 six- cers are available to review applications that month loan, the APR with fees is 35%. are turned down. For example, the credit A number of other credit unions offer union is willing to make exceptions to its un- small loans with an APR with fees under 36%, derwriting criteria to make an emergency but the loans have a short repayment period loan, or to pay off payday lenders, if the or a single balloon payment, and may also

20 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER require electronic repayment. (Most of them Amarillo National Bank in Amarillo, have all three of these negative features). The Texas has had a small dollar loan program for payments for these loans will be more chal- more than 100 years.93 There are no estab- lenging for borrowers and are more likely to lished parameters for loan amounts, but the leave them short in the next pay cycle. There- standard minimum is $500, with terms from fore, repeat borrowing appears more likely, 9 to 12 months. The maximum interest rate is though the low price tag means that the fees 18%, and the bank does not charge an origina- do not multiply excessively, and they are a tion fee, giving the loans an APR with fees of considerable improvement over a payday loan. 18%. The bank offers a discount for consumers North Carolina State Employees Credit who choose to have their payment automati- Union offers a Salary Advance of up to $500 at cally debited from their checking account but 12% APR and no fees. The loan must be repaid does not require automatic payment. In the in full by automatic repayment on the next first year of the FDIC pilot program, the bank payday. The finance charges are very afford- originated 1,074 loans under $1,000. The bank able, and the loan could be helpful to a bor- does not formally advertise these loans but in- rower who is coming into extra cash by stead relies on word of mouth. payday. The short repayment period is prob- Bank of Commerce recently began offer- lematic, however. Many borrowers may find ing small dollar loans primarily out of its Stil- that they do not have enough extra paycheck well, Oklahoma branch as part of the FDIC to cover the loan principal and that they will pilot program.94 Stilwell is rural, with a large fall short again in the next pay cycle. concentration of low and moderate income The same is true of the Payday Freedom households. Loans range from $200 to $1,000 Loan at Watermark Credit Union in Washing- with a 12-month term. The interest rate does ton State.91 The loans are only 18% APR with not exceed 13.75% with an origination fee of no fees, but are repaid on the next payday one $25 to $50, depending on the size of the loan. to 31 days later. The credit union puts 5% of The fee brings the APR with fees on a $300 12- the loan in a savings account, which the bor- month loan to 29%. A credit report is obtained rower can access in 20 months. as part of the underwriting process, but the bank does not require a particular credit score. 2. Banks If the customer’s documents are in order, a The FDIC has been conducting a Small- loan can be underwritten in less than one Dollar Loan Pilot Program to review afford- hour. Borrowers can choose to add 25% to the able and responsible small-dollar loan monthly payment for deposit in a linked sav- programs in financial institutions.92 Twenty- ings account. Checking accounts are not re- eight banks participated in the study, with quired and consumers may choose, but are not nearly 450 branches located in 27 states. All required, to have their loan payment debited offer loans under 36% including fees. All but from their checking account. Results from the one also have 90-day or longer repayment pe- first year of the program indicated that the riods with multiple installment payments. Not loans were profitable on a stand-alone basis all of these banks are included in our survey, and have provided a gateway to establishing but a couple of examples are described below. customer relationships. According to Vice

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 21 President Jason Garhart, “We offer check-cash- fees (maximum 4/day) for overdrafts over $5. ing services and see lots of folks that we’d like Only when asked for something cheaper did to have as customers, and we see our own cus- the representative describe an tomers writing checks to payday lenders and overdraft line of credit with a variable rate such. We thought that an affordable small-dol- currently at 17.5% and no fees. Payments each lar loan product might be a good way to build month are either 2.5% of the outstanding bal- relationships with new customers, strengthen ance or $50, whichever is greater. This line of our relationships with existing customers, and credit meets all of our criteria. The APR with do some good for the community.”95 fees is 17.5%, a $300 loan would be paid in in- BankPlus in Mississippi offers CreditPlus stallments over 6 months, and it does not re- loans up to $500 for those with a credit score quire automatic repayment or check holding. below 500 and up to $1,000 if the borrower’s The representative could not tell us whether score is higher. The rate is only 5% APR with this overdraft line of credit might be available no fees and a 12- to 24-month repayment pe- to someone with blemished credit. riod. Half of the loan proceeds are placed in an The experience was similar at Citibank. interest-bearing savings account and put on After first mentioning a high-cost fee-based hold until the loan is fully repaid. Even con- overdraft loan program, the bank revealed an sidering the interest paid on the savings half, overdraft line of credit that charges $10 for the terms are very affordable. Borrowers are each transfer and then a top rate of 18.25% in- required to take a three-hour course in finan- terest on the amount drawn from the line. The cial literacy. $10 fee can be avoided by transferring the In addition to traditional closed-end money online before the overdraft occurs. Re- loans, responsible interest-based overdraft payment is similar to a credit card where there lines of credit are also available at many banks is a low monthly payment each month, well (and credit unions), which can be used for over 90 days. Even including the $10 fee, we short term emergencies. Some large, nation- calculate the APR with fees at 29% for a four- wide banks also have reasonably priced over- month loan of $300. draft lines of credit that may be available for U.S. Bank was more forthcoming. When customers with less than perfect credit. But as asked about overdraft protection, the cus- our researchers found when looking for these tomer service representative described the products, banks are quick to offer much more “Reserve Line of Credit,” which requires in- expensive overdraft fees as the first option, come of at least $1,000 per month, well within and sometimes revealed the existence of the means of most payday borrowers. Interest cheaper lines of credit only when pressed. is 21.9% APR plus $2 per transfer, but there is Our researcher called Capital One and no annual fee. The APR with fees for a $300 said she was interested in opening a checking overdraft comes to 38%, a bit over our target account but had trouble with overdraft fees of 36%. Unlike the Capital One and Citibank and wanted to find an account that would be plans, however, once money is deposited into cheaper. The customer service representative the linked checking account, it is automatically described a checking account with no monthly deducted to pay off any outstanding balance on fee, no minimum balance, and $35 overdraft the line of credit. This security feature makes the

22 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER loan less safe than it could be because the loan around $46 million, with low losses. Progreso payment comes before any other necessities. believes that the performance of its portfolio is better than that of most super-prime credit 3. Other Lenders cards portfolios in America. Progreso Financiero, a Community Devel- In addition to the institutions discussed in opment Financial Institution (CDFI)-certified this report, many charities and military service lender, offers small dollar loans in California societies offer free or low-cost emergency and Texas. Target clientele are lower-income loans. However, we did not include these sub- and underbanked Latinos with no credit file, a sidized loans in our survey. thin credit file, or a low FICO Score, averaging around 545. Loans are made from 29 retail points across California, mostly located within B. Better Than a Payday Loan But Still Latino supermarkets and pharmacies. Appli- Very Problematic cants are given an initial electronic screening, A number of payday alternatives are avail- lasting about two minutes. Those that pass are able that are considerably less expensive than given a seven- to ten-minute questionnaire, a traditional payday loan but still fall short of followed by a conditional approval. being affordable for many borrowers. Loan amounts typically range from $250- Credit cards are the primary form of small $2,500 and last about 6–18 months. The flag- dollar lending in this country, a widely avail- ship product is a $900 average loan for about able alternative to payday loans often ignored 9–10 months. The cost to borrowers is 24–30% in the debate over payday loans. Credit cards annual interest, with 26% being the average, as are marketed heavily and are widely available. well as an origination fee of 5%, capped at $50. Even a consumer who needs a short-term loan For a $300 six-month loan, the APR with fees because of a financial bind may qualify for a comes to 43%. For a 12-month loan, the APR with credit card. Indeed, some payday borrowers fees goes down to 32%. For their more standard already have credit cards, and they have not $900, nine-month loan, the APR with fees is always reached their credit limit. Traditional about 39%. Loans are repayable in installments, credit cards—either on their own or linked to no security is required, and renewals are only a checking account—meet or come close to all available when the prior loan has been paid of the criteria used in this report for affordable off in full. payday loan alternatives. 96 Progreso Financiero reports borrowers’ Nonetheless, we include credit cards in payments to credit bureaus and finds that 88% the “needs improvement” category because of borrowers increase their credit score from they have other flaws not analyzed in this re- the first loan. The typical borrower builds port’s criteria. They have the opposite problem from no score to a 660 credit score after three of too-short payday loans: the payments are loans and strong payment behavior. In its loan stretched over such a long period of time—20 underwriting, Progreso Financiero uses a pro- years is common—and so little of the principal prietary credit-scoring model designed for its is repaid with each payment that debt can con- target population. Since 2006, Progreso Finan- tinue endlessly.97 Credit cards also often permit ciero has made over 50,000 loans, totaling the borrower to incur high debt levels beyond

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 23 their means, and may contain hidden traps that Union (Washington State) have a 45-day induce over-limit or late fees that add consid- term and an APR with fees of 97%. erably to the interest rate. For a disciplined • Oregon Community Credit Union offers borrower, however, who is able to limit how a Payday Loan through CUonPayday. much he borrows and who pays, on time, com, which costs $9 per $100 for a 31- to more than the minimum payment, main- 40-day loan, for an APR with fees of stream credit cards are a vast improvement 108%. over payday loans. 98 The Capital One Standard Platinum Card These loans also fail our other criteria, is available to those with “fair” credit. It car- with less than 90-day terms, single, balloon ries a 24.9% APR on purchases and cash ad- payment structures, and required electronic vances, and a 3% fee (no less than $10) for cash repayment. advances. For a $300 advance held for 120 days, the APR with fees comes to 36%. Like all C. A Payday Loan By Any Other Name . . . credit cards, it has a long repayment term and Triple digit loans are unfortunately not solely multiple amortizing payments and does not the province of payday lenders. Some banks and require that the borrower turn over access to credit unions offer loans that are nearly as bad her bank account. as or even worse than payday loans. The Chase Freedom Card is available to those with “good” (rather than “excellent”) 1. Bank And Prepaid Card Direct Deposit credit. It has a maximum standard APR of Account Advances. 23.44 but that rate goes up to 29.99% if the bor- A growing number of banks, including rower triggers the penalty rate. With a cash U.S. Bank, Wells Fargo, Fifth Third Bank and advance fee of the greater of $10 or 5% of the GuarantyBank, offer account advances to cus- advance, and assuming the high range of in- tomers who have wages or benefit checks di- terest at 23.44%, the APR with fees over 120 rectly deposited to their checking accounts. days is 40%. At the 29.99 % penalty APR, the Customers must sign up for the plans and can APR with fees is 46%. take out advances by telephone or at ATMs. Some credit unions offer small loans that The funds are deposited into the consumer’s are admittedly much cheaper than traditional bank account and the bank automatically re- payday loans but are far too expensive to be pays itself in full when the next deposit of $100 considered affordable. Assuming that the or more is received, even if that is the next day. loans are renewed for a total of 120 days, we If not paid in 35 days, the bank may overdraw calculate rates as follows: the account and trigger overdraft fees. At U.S. Bank, Wells Fargo and Fifth Third, • Q-Cash Loans at $12 per $100 for mem- the advances cost $2 per $20. These advances bers of the Washington State Employees are payday loans, plain and simple—triple Credit Union are repayable in 60 days, digit loans repaid on the next payday. They for an APR with fees of 72%.99 Q-Cash carry an APR with fees of 240%, based on our Loans for members of Salal Credit generous assumptions that the borrower is

24 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER paid semi-monthly and has a full 15 days’ use Fargo, which gives borrowers the option of of the advance each pay period before the loan paying by mail, but requires an up front fee of is repaid. This assumes that the borrower $100 to exercise that option. In the unlikely takes out the first advance on the same day event that a borrower chooses to pay the extra she is paid, and takes out a new advance the $100 to pay by mail, the APR with fees for ad- moment the first one is automatically repaid vances held 15 days is 340%. 15 days later when the next paycheck is depos- This type of bank payday loan is likely to ited. The APR with fees goes up to 521% if a spread now that changes in federal law pro- single advance is taken out 7 days before pay- hibit banks from automatically enrolling con- day, and even higher if the loan is taken out sumers in abusive fee-based overdraft only a day or two before payday. The banks programs to cover ATM and debit card trans- claim an APR of 120%, but that rate is calcu- actions. Bank consultants have touted account lated assuming that the borrower keeps the advances as one of the products banks can use money for the maximum 30 days—which re- to make up for lost overdraft fee income. quires both a single monthly paycheck and an The same type of account advance payday advance taken the same day as payday. In re- loan is also available on prepaid debit cards ality, the loan term is likely to be only a few (which are essentially a bank account debit days, as most consumers undoubtedly take card without the bank account). In fact, this out the advances towards the end of their pay type of cash advance may spread as a means period, as money is running short. of circumventing state laws limiting the fees The payment structure is different at on payday loans. GuarantyBank, headquartered in Milwaukee MetaBank offers account advances, called with locations in five Midwestern states. Ad- iAdvance, on its prepaid cards if the consumer vances cost a flat $25 application regardless of has direct deposit of wages or public benefits. amount; apparently no APR is disclosed. Ad- The advances cost $12.50 per $100 and are re- vances up to $400 are available for those with paid automatically in a lump sum with the direct deposit, and up to $200 without. Under the next deposit, for an APR with fees of 300% same assumptions as above, the APR with fees under our generous assumptions. for advances held a full 15 days is 203% (whether CheckSmart, an Arizona payday lender, or not rolled over for 120 days). The APR with appears to be preparing to circumvent Arizo- fees for a seven-day advance is 434%. na’s new payday loan restrictions by offering All of these account advances also failed “Bridge Accounts” through an Insight Prepaid our other criteria. They have a maximum re- MasterCard from Urban Trust Bank. For bor- payment period of one paycheck and a single rowers who use the accounts for direct deposit lump sum payment. They also give the bank of wages or benefits, account advances are the right to seize the paycheck the moment it available for a fee of 15% of the advance, due is deposited, regardless whether the money is on the next payday. The cost is similar to a needed for food or other necessities or comes payday loan—$15 per $100, but with a cap of from a protected source like Social Security. $36. Assuming that the borrower is paid semi- The only exception on the latter point is Wells monthly and gets a $300 advance twice a

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 25 month for the full 15 days, the APR with fees the credit union evades that limit by charging is 288%. These fees far exceed the 36% interest, a $39.95 application fee for each of its standard plus a single 5% origination fee, that will be $400 14-day loans on top of 15% annual inter- permitted once the payday loan exception to est.101 The application fee is charged each time, Arizona’s usury law expires on July 1, 2010. even for repeat borrowers, making the APR However, because the loans are technically with fees 362%. Clearly, the credit union is col- made by an out-of-state bank—Atlanta-based lecting most of its profit through the “applica- Urban Trust Bank—and not by CheckSmart it- tion” fee, not the interest. self, Arizona’s laws are preempted. Prospera Credit Union in Wisconsin has In some respects, these bank and prepaid created the GoodMoney payday loan, which it card loans are much worse than payday loans. offers through Prospera branches at Good Will First, the loans are repaid as soon as the next stores. Prospera also sells GoodMoney as a deposit is made, which could be the very next turnkey product to other credit unions. The day, not even giving the borrower the full 14 loans are due on the next payday, and the fee day loan that payday lenders offer. As a dis- depends on how often the borrower is paid: abled Army veteran reported, “on several oc- $4.90 per $100 per pay period if paid every 1–7 casions I took a direct deposit advance on a days; $9.90 per $100 if paid every 8–14 days; Thursday, only to have the advance and fee $15 per $100 if paid 15–45 days. Borrowers can taken out of the very next day’s deposit . . . . take up to 60% of their income with a max of I’m not good at math, but I began to suspect $700. A 14-day loan carries an APR with fees that a one day loan of $500 with interest of $50 of 258%. For a 15-day loan, the APR with fees (the current maximum loan amount and the is 365%. The APR with fees goes down to dollar interest amount) certainly exceeded the 182% for a borrower who is paid monthly. claimed APR rate.”100 Second, these loans are After five rollovers and a two-day cooling off made by the bank that controls the borrower’s period, the credit union will offer a repayment income, leaving absolutely no possibility that plan consisting of the minimum fee, part of a borrower who needs the money for food can which goes towards principal. Yet the bor- stop payment on the check or cancel the elec- rower has to wait for five rollovers before any tronic authorization (which is a possible, of the payment goes toward reducing princi- though difficult, with traditional payday loans). pal—little different from the repayment plans that payday lenders claim to offer. Though a 2. Credit Union Payday Loans. 14-day loan (but not a 15-day loan) is cheaper Though credit union loans dominate the than the average payday loan, the difference field of good alternatives described in this re- is not enough to make this an affordable port, a growing number of credit unions offer product. triple-digit payday loans. More typically, credit unions do not make Kinecta Federal Credit Union offers pay- payday loans directly but rather do so through day loans, marketed through its Nix Check arrangements with subsidiaries of other credit Cashing subsidiary. Despite the fact that fed- unions (called Credit Union Service Organiza- eral law subjects Kinecta, as a federal credit tions, or “CUSOs”). The credit union lends its union, to an 18% annual interest usury cap, name to the CUSO, may include the loans on

26 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER its website, might even permit terminals in its directs borrowers to apply at terminals in the lobby, and receives a finder’s or broker’s fee. credit union’s lobby. The fact that the credit E-access Loans102 offers 30-day loans in union receives a finder’s or broker’s fee makes the name of several credit unions, primarily the distinction meaningless in any event. federal ones, at a cost of $59 per month plus The only consolation is that most of these 18% interest. With the fee included, the APR credit unions do not disguise the fact that with fees for a $300 loan is 254%. Despite the these are in fact payday loans, typically using 18% usury cap for federal credit unions, that term in their name. Though their rates E-access Loans makes these triple-digit pay- may be slightly cheaper than the loans from day loans in the name of the following federal traditional payday lenders, their triple-digit credit unions: rates are still extremely expensive, and they also fail to meet any of the other criteria in this America First (Utah) report, requiring short term 14- to 30-day Chemcel (Texas) terms, balloon repayments, and paper or elec- County Federal (Maine) tronic check holding as security. Community One (Nevada) Crossroads Financial (Indiana) 3. Fee Harvester Credit Cards. Family First (Utah) “Fee harvester” credit cards are marketed Heritage Trust (South Carolina) to borrowers with poor or no . Huntington County (Pennsylvania) The cards come with low credit limits and very LAMPCO (Indiana) high, not always transparent, fees that add con- Pocahy Family (Texas) siderably to the APR that is disclosed.105 Recent The Local Federal Credit Union (Texas) changes stemming from the Credit CARD Act Tip O’Texas. of 2009 reduce the permissible fees considerably. Several state credit unions also lend their But some institutions continue to offer credit names to E-access Loans. cards with very high fees to individuals with- CU on Payday103 works primarily with out good credit. These cards may be an option state credit unions in Colorado, Oregon, Utah, that some payday borrowers are considering, and Washington. The rate structures vary state but they are a very expensive and risky option. to state, but typically charge $12 to $15 per The First Premier Bank Classic Credit Card $100 for a loan repaid automatically on the has a 23.9% APR. However, the card has a $75 next payday, except in Oregon and Washing- annual fee charged immediately to the credit ton, where the loans carry a 31-day minimum line, and a $95 processing fee must be paid term. We calculate the APR with fees for these up front before the card is issued. The card has loans at 141% for a loan with a 31-day term an initial credit limit of $300 but the $75 an- and 288% to 360% for a 15-day loan.104 nual fee is charged against that credit limit. Fine print on both the E-access and CU on The cash advance fee is 3% of the advance Payday websites tells borrowers that the credit or a minimum of $5 and a maximum of $10. union is not the lender. That distinction is likely The minimum monthly payments are the lost on borrowers. Indeed, America First Credit greater of $30 or 3% of the balance, and there Union in Utah—a federal credit union—even is no required security. If the consumer

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 27 immediately took out the maximum cash ad- To compare overdraft loans to the other vance of $225 ($300 minus the $75 annual fee), short-term loans that this paper examines, we the net credit extended would only be $130 in assumed that a borrower who is paid semi- light of the $95 processing fee. Making the monthly overdrew his account by $300 twice a minimum payments for three months and month (once before each paycheck), incurring then repaying the remaining balance in four an overdraft fee each time. That is, the over- months would an APR with fees of draft was automatically repaid with each pay- 417%. Clearly, this is a very expensive option. check but the borrower effectively rolled the Moreover, the expense might be even higher loan over like a payday loan by overdrawing because the confusing structure of the card and at the beginning of each of eight consecutive other tricks hidden in the fine print could in- pay cycles over a four-month period. We also duce borrowers to incur multiple late fees of assumed that the loan was “outstanding” for $29 to $35. the full 120 days with no gaps, ignoring any Orchard Bank has a Classic MasterCard other overdraft fees likely triggered by checks with a 20.9% APR. However, the card has a or debits coming in while the account was $39 annual fee charged immediately to the overdrawn. credit line, and a $35 processing fee must be Capital One’s basic Rewards Checking paid up front before the card is issued. If the account charges $35 per overdraft, but no fee initial available credit line is $300, and the if the overdraft is less than $5. No more than cardholder immediately took out a cash ad- four overdraft fees (or a total of $140) can be vance that netted $226, the card would have charged in a day. The APR with fees for two an APR with fees of 146%. These APRs do not $300 overdrafts per month (one per pay pe- include any late or other penalty fees. riod) over four months comes to 283%. If the $300 in overdrafts occurred in two separate 4. Overdraft Loans. transactions (i.e., one for $100 and one for $200), Though overdraft loans are not typically the APR with fees would rise to 568% and of thought of as alternatives to payday loans, course it could rise much higher than that. payday lenders definitely promote their prod- U.S. Bank charges $19 per item for the first ucts as alternatives to overdraft fees. Overdraft overdraft, $35 per item for the second incident fees have exploded in the last several years as and $37.50 per item for the third and each ad- banks and credit unions began putting hidden ditional incident. The bank will only charge lines of credit on accounts, which permit over- three overdraft fees per day. If a consumer has drawn debit and ATM transactions to be ap- two overdrafts per month over a four month proved and to trigger large overdraft fees. period, the escalating fee structure leads to a Recent changes in the federal regulations gov- total of $279 in fees or an APR with fees of erning overdraft loans now require consumers 283%. If there are twice as many overdrafts (as to opt in to overdraft coverage, and banks would happen if the $300 were split into two have made some improvements in pricing. But transactions), the APR with fees comes to overdraft loans remain a very expensive and 579%. As with Capital One, the cost could rap- dangerous way to cover expenses. idly rise beyond that.

28 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Consequently, at first blush, the payday A number of genuine payday loan alterna- lenders have a legitimate claim that their loans tives are available, especially at credit unions. are cheaper than overdraft fees and could be Banks should also publicize more widely their used to help consumers avoid those fees. reasonably-priced lines of credit instead of en- However, the payday loan is more likely to ex- couraging credit-impaired customers to rely acerbate than to solve the borrower’s overdraft on pernicious fee-based overdraft programs problems due to the deficit caused by the pay- that can be even worse than payday loans. Main- day loan payments and the NSF fees that the stream credit cards, while carrying their own check written to the payday lender to secure problems and not available for all, are also a the loan can trigger. viable option for a number of borrowers. But many loans that purport to be alterna- tives to payday loans are little or no better V. conclusion than payday loans themselves. These loans are more likely to exacerbate the borrowers’ prob- The growth in the number of products lems than to help. A slightly lower price and a touted as “alternatives” to payday loans is new name do not make a loan a genuine alter- strong evidence of a growing public recogni- native to payday loans. tion of the dangers of payday loans. But to be As lenders and policymaker explore alter- a true alternative, a loan must be more than natives to payday lending, they should insist just a little bit cheaper than a traditional pay- on truly affordable products like ones that meet day loan. It must be designed so that it can be the criteria discussed in this report: a 36% an- affordably repaid, over time, by a borrower nual rate including fees, 90 days to repay the who does not have a lot of excess income and loan in manageable installment payments, and who can make the payments without falling either no security or a security method that behind again the next pay cycle. does not put money for food and rent at risk.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 29 Appendix A-1 Genuine Payday Loan Alternatives and Ones that Come Close

No Required Bank, APR Install- Security/ Lender and Name FCU, CU with 90+ ment Electronic Special of Loan or Other* State Interest Fee Term Fees Days payments Payment Features Comments Capital One, B nat’l 17.5% none revolving 17.5 ✓ ✓ ✓ overdraft line of credit Citibank B nat’l 15.75%– $10 transfer revolving 29% ✓ ✓ ✓ Checking Plus 18.25% fee per overdraft U.S. Bank, B nat’l 21.9% $2/transfer revolving 38% ✓ ✓ overdraft line of credit Family Security C AL 15% none up to 36 15% ✓ ✓ ✓ Credit Union months Comunidad FC CA 18% none 6 months 18% ✓ ✓ ✓ Latina Federal Credit Union Payday Plus C CA 18% none 12 months 18% ✓ ✓ ✓ SF (through some CA Credit Unions) Progreso O CA 25–28% Lesser of 6–15 32–43% ✓ ✓ ✓ Financiero 5% or $50 months origination fee First New FC CT 17.99% None up to 3 yrs 17.99% ✓ ✓ ✓ England Federal if credit Credit Union, score Personal Loan under 600 West End B DE 12–15% none up to 3 15% ✓ Can pay in Neighborhood months installments. House through Wilmington Trust Co., Loans Plus Eglin Federal FC FL 16.9% None except 120 days 19% ✓ ✓ ✓ Credit Union, Florida doc- SAFE Loan - umentary Salary Advance stamp fee of $0.35 per $100

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

30 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER No Required Bank, APR Install- Security/ Lender and Name FCU, CU with 90+ ment Electronic Special of Loan or Other* State Interest Fee Term Fees Days payments Payment Features Comments Veridian Credit C IA 21% $20 6 months 35–44% ✓ ✓ ✓ Half 19% with Union, Payday deposited automatic Alternative in savings. repayment, Loans 21% without Ascentra Credit C IA, 13–21% none 48 months 21.0% ✓ ✓ ✓ Union, Signature IL Loan Ascentra Credit C IA, 13.5% none revolving 13.5% ✓ ✓ ✓ Union, Open- IL End Line of Credit Family C IA, 20% none 6 to 36 20% ✓ ✓ ✓ Credit Union IL months Personal/ Signature Loan Austin Bank of B IL 16.99% $35 Revolving 32–54% ✓ ✓ Chicago, Ready annual Cash Now fee Overdraft Line of Credit North Side FC IL 10.5– $30 6 months 45% ✓ ✓ ✓ If credit Community 16.5% application score below Federal Credit fee 600, must Union Payday attend 4 Alternative Loan financial education workshops. $75 put in savings. Campus Federal FC LA 18% none 6 months 18% ✓ ✓ ✓ Credit Union, Money-Wise Loan City of Boston C MA 10% none Up to 12 10% ✓ ✓ ✓ Credit Union, months Holiday Loan Goldmark FC MA 11.99% None generally 11.99% ✓ ✓ ✓ Borrower Federal Credit 6 months must have Union, Zero close to zero Credit Score credit to Loan qualify.

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 31 No Required Bank, APR Install- Security/ Lender and Name FCU, CU with 90+ ment Electronic Special of Loan or Other* State Interest Fee Term Fees Days payments Payment Features Comments Communicating C MI 18% $35 annual 30 days 40–63% Arts Credit fee Union, Stretch Pay BankPlus, B MS 5.083% none 12 or 24 5% ✓ ✓ ✓ Must take CreditPlus months course Missoula FC MT 18% none 90 days 18% √ √ Federal Credit Union, Payday Alternative Loan Pinnacle Bank B NB 10% up to $50 7–10 28% ✓ ✓ ✓ Half months of fees rebated if have a savings account North Carolina C NC 12% none next 12% State Employees payday Credit Union, Salary Advance Service Credit C NH 8.75– none 30 days 14.99% 10% of Union, Early 17.99% loan Pay Loan proceeds placed in savings account. St. Mary’s Bank, C NH 18% $15 annual 30 days 33–36% Open-end MyPay Loan fee for $250, line of $25 for $500 credit. Aspire Federal FC NJ 12% none 12 months 12% ✓ ✓ ✓ Credit Union, Credit Builder Loan Novartis Federal FC NJ 16.5% none Up to 2 16.5% ✓ ✓ ✓ Credit Union, yrs Personal Loan Corners Federal FC NM 18% $20 applica- 120 days 53% ✓ ✓ ✓ Credit Union tion fee

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

32 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER No Required Bank, APR Install- Security/ Lender and Name FCU, CU with 90+ ment Electronic Special of Loan or Other* State Interest Fee Term Fees Days payments Payment Features Comments Alternatives FC NY 14.25% none 6 mo. 14.25% ✓ ✓ ✓ Federal Credit Union, Credit Builder Loan and Score Builder Loan Cooperative FC NY 9% none revolving 8.54% ✓ ✓ ✓ Federal, PRIDE Loan Bank of B OK 13.75% $25-$50 12 months 29% ✓ ✓ ✓ Commerce origination fee OnPoint C OR 14% none next 14% Community payday Credit Union, Payday Advantage Loan Unitus C OR 18% none 1 month 18% ✓ ✓ Community per $100 Credit Union, up to 6 Advance Loan months Kimberly Clark C TN 17.75% none up to 36 17.75% ✓ ✓ ✓ Credit Union months Signature Loan Memphis Area C TN 17.74% none Up to 60 17.74% ✓ ✓ ✓ Teachers Credit months Union Personal Loan Amarillo B TX 18% none 9-12 18% ✓ ✓ ✓ Lower rate National Bank months for automatic repayment Armed Forces B UT 18% none Up to 24 18% ✓ ✓ Bank months Bayport Federal FC VA 18% $35 annual 30 days 40-63% Credit Union, fee PayDay Cash Loans Langley Federal FC VA 18% none next 18% Credit Union, payday Quick Cash

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 33 No Required Bank, APR Install- Security/ Lender and Name FCU, CU with 90+ ment Electronic Special of Loan or Other* State Interest Fee Term Fees Days payments Payment Features Comments Virginia Credit C VA 24.99% none 6 months 24.99% ✓ ✓ ✓ Must .25% rate Union, VA State complete reduction Employees an online if pay by Assistance Fund financial automatic Personal Loan fitness transfer. course. Navy Federal FC VA, 18% none 6 mo to 5 18% ✓ ✓ Credit Union, DC years Signature Loan Watermark C WA 18% none 30-59 days 18% 5% placed Credit Union, in savings Payday Freedom for 20 Loan months Mitchell Bank B WI 15–22% $8 6 or 12 31% ✓ ✓ ✓ 20% of application months loan put in fee savings as security. If credit score above 570, rate 18.5% and only 10% in savings. University C WI 22% none 10 months 21.75% ✓ ✓ of Wisconsin Credit Union, Paycheck Advance

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

34 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Appendix A-2 Better Than a Payday Loan But Still Problematic

Bank, APR Install- No Lender and Name FCU, CU with 90+ ment Required Special of Loan or Other* State Interest Fee Term Fees Days payments Security Features Comments CorePlus FC CT 0% $20 Up to 30 160% Federal Credit processing days Union, Flex Pay fee Members Credit C CT 0% $25 30 days 100% Union, Quick application Loan fee ASI Federal FC LA 12% $4 if paid $101 due 115% ✓ ✓ Line of credit. Credit Union, weekly, $7 each Stretch Plan biweekly, payday $16 monthly Chase Freedom B nat’l 19.24%– Transac- revolving 40% ✓ ✓ ✓ Used as cash Credit Card 23.24% tion fee of advance. cash greater of advance $10 or 5% APR Capital One B nat’l 24.99% Cash revolving 36% ✓ ✓ ✓ Used as cash Standard purchase advance advance. Platinum Card & cash fee of 3%, advance no less APR than $10 Citi Diamond B nat’l 25.24% Transac- revolving 35% ✓ ✓ ✓ Used as cash Preferred cash tion fee advance. MasterCard advance of 3%, $5 APR minimum Chetco Federal FC OR $2 per $10 per Next 144% Credit Union, $100 $100 payday Payday Loan 31–40 days through CUonPayday. com Clackamas FC OR $2 per $10 per Next 144% Federal Credit $100 $100 payday Union, Payday 31–40 days Loan through CUonPayday .com

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 35 Bank, APR Install- No Lender and Name FCU, CU with 90+ ment Required Special of Loan or Other* State Interest Fee Term Fees Days payments Security Features Comments MaPS Credit C OR $2 per $10 per First 144% Union, Payday $100 $100 payday Loan through 31–40 days CUonPayday. away com Oregon C OR $1 per $8 per $100 First 108% Community $100 payday Credit Union, 31–40 days Payday Loan away through CUonPayday. com Rivermark C OR 25% $15 First 170% Community application payday Credit Union, fee 14–30 days PayDay away Advance Loan Rogue Federal FC OR $2 per $10 per First 144% Credit Union, $100 $100 payday Payday Loan 31–40 days through away CUonPAyday. com Smart Cash O OR $3 per $10 per First 156% Payday Loan $100 $100 payday through 31–40 days CUonPAyday. away com Pacific Crest FC WA $2 per $10 per First 144% Federal Credit $100 $100 payday Union, Payday 31–40 days Loan through away CUonPAyday. com Salal Credit C WA 0% $12 per 45 days 97% Can pay Union, through $100 in 2 q-cash.com install- ments. Washington C WA 0% $12 per 60 days 72% Can pay State Employees $100 in 2 Credit Union, install- through q-cash. ments. com

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

36 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Appendix A-3 A Payday Loan By Any Other Name . . .

Bank, APR Install- No Lender and Name FCU, CU with 90+ ment Required Special of Loan or Other* State Interest Fee Term Fees Days payments Security Features Comments Anheuser-Busch C nat’l 18% $59 30 days 254% Employees monthly Credit Union, through e-accessloan.com Chase Fee-Based B nat’l 0% $34 plus revolving 391% Overdraft $15 if outstanding at day 5 First PREMIER B nat’l 23.9% $75 annual revolving; 393% ✓ ✓ ✓ Tricks in card Bank Classic fee. $95 minimum structure Credit Card Processing payment likely trigger Fee. 3% greater of additional cash $30/mo or fees, raising advance fee 3% rate. ($5 min, $10 max) MetaBank, B nat’l 0% 12.5% Next 300% iAdvance on advance fee payday prepaid cards Orchard B nat’l 21% Processing revolving 146% ✓ ✓ ✓ Tricks in card Bank, Classic fee $39. structure MasterCard Annual Fee likely trigger $35 first year. additional fees, Cash advance raising rate. fee of 5%, $5 minimum US Bank, B nat’l 0% $2 per $20 1-35 days 240% Account Advance Wells Fargo B nat’l 0% $2 per $20 1-35 days 240– $100 fee to Bank, Direct 340% pay by mail Deposit Advance Arizona C AZ 18% $59 30 days 254% Central Credit monthly Union, through e-accessloan.com

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 37 Bank, APR Install- No Lender and Name FCU, CU with 90+ ment Required Special of Loan or Other* State Interest Fee Term Fees Days payments Security Features Comments Pinal County FC AZ 18% $59 30 days 254% Federal Credit monthly Union, through e-accessloan.com Urban Trust B AZ 0% 15% up to Next 288% Bank, Insight $36 payday Prepaid Mastercard through CheckSmart California C CA 18% $59 30 days 254% Coast Credit monthly Union, through e-accessloan.com Kinecta Federal FC CA 15% $39.95 14 days 362% Credit Union application (offered at Nix fee Check Cashing) Priority One C CA 18% $59 30 days 254% Credit Union, monthly through e-accessloan.com Arapahoe C CO $15 per Next 360% Federal Credit $100 payday Union, Payday Loan through CUonPayday. com PBC Credit C FL 18% $59 30 days 254% Union, through monthly e-accessloan.com Fifth Third Bank B FL, 0% $10 per 1-35 days 240% IL, $100 IN, KY, MI, MO, OH, TN Urban Trust B FL, 0% $2.50 per Varies. 300% ✓ ✓ Bank, Elastic MD, $20 cash 10% per Cash VA advance pay period

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

38 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Bank, APR Install- No Lender and Name FCU, CU with 90+ ment Required Special of Loan or Other* State Interest Fee Term Fees Days payments Security Features Comments Univ. of Hawaii FC HI 18% $59 30 days 254% Federal Credit monthly Union, through e-accessloan.com Community C IA 18% $59 30 days 254% 1st Credit monthly Union, through e-accessloan.com Potelco United C ID 18% $59 30 days 254% Credit Union, monthly through e-accessloan.com Crossroads FC IN 18% $59 30 days 254% Financial monthly Federal Credit Union, through e-accessloan.com LAMPCO FC IN 18% $59 30 days 254% Federal Credit monthly Union, through e-accessloan.com Medical C KS 18% $59 30 days 254% Community monthly Credit Union, through e-accessloan.com Midwest C KS 18% $59 30 days 254% Regional Credit monthly Union, through e-accessloan.com County Federal FC ME 18% $59 30 days 254% Credit Union, monthly through e-accessloan.com FM Financial C MI 18% $59 30 days 254% Credit Union, monthly through e-accessloan.com Meijer Credit C MI 18% $59 30 days 254% Union, through monthly e-accessloan.com 1st Financial FC MO 9.99% $50 30–45 days 210% Federal Credit application Union, Fast fee Ca$h Loan *Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 39 Bank, APR Install- No Lender and Name FCU, CU with 90+ ment Required Special of Loan or Other* State Interest Fee Term Fees Days payments Security Features Comments Mazuma C MO 0% $45 for $300 14 days 360% Credit Union, Xtra Cash Loan through xtracashllc.com River Valley C NH, 18% $59 30 days 254% Credit Union, VT monthly through e-accessloan.com Zia Credit C NM 18% $59 30 days 254% Union, through monthly e-accessloan.com Community One FC NV 18% $59 30 days 254% Federal Credit monthly Union, through e-accessloan.com Financial C NV 18% $59 30 days 254% Horizons Credit monthly Union, through e-accessloan.com Northern Hills FC OR 0% $12 per Next 288% Federal Credit $100 payday Union, through CUonPayday. com Huntington FC PA 18% $59 30 days 254% County Federal monthly Credit Union, through e-accessloan.com Heritage Trust FC SC 18% $59 30 days 254% Federal Credit monthly Union, through e-accessloan.com Chemcel FC TX 18% $59 30 days 254% Federal Credit monthly Union, through e-accessloan.com Gulf Coast FC TX 18% $59 30 days 254% Federal Credit monthly Union, through e-accessloan.com

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

40 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Bank, APR Install- No Lender and Name FCU, CU with 90+ ment Required Special of Loan or Other* State Interest Fee Term Fees Days payments Security Features Comments Hapo C TX 18% $59 30 days 254% Community monthly Credit Union, through e-accessloan.com Members C TX 18% $59 30 days 254% Choice Credit monthly Union, through e-accessloan.com Pocahy Family FC TX 18% $59 30 days 254% Express Cash, monthly through e-accessloan.com The Local FC TX 18% $59 30 days 254% Federal Credit monthly Union, through e-accessloan.com Tip O’Texas FC TX 18% $59 30 days 254% Federal Credit monthly Union, through e-accessloan.com 1st Odyssey/ O UT 0% $13 per Next 312% Odyssey One $100 payday Source Cash Advance Loan, through peocash.com Alliance Credit FC UT 18% $59 30 days 254% Union, through monthly e-accessloan.com America First FC UT 18% $59 30 days 254% Credit Union, monthly through e-accessloan.com Cyprus Credit FC UT 0% $12 per Next 288% Financial Union, Payday $100 payday counsel- Loan through ing CUonPAyday. available. com Family First FC UT 18% $59 30 days 254% Federal Credit monthly Union, through e-accessloan.com

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 41 Bank, APR Install- No Lender and Name FCU, CU with 90+ ment Required Special of Loan or Other* State Interest Fee Term Fees Days payments Security Features Comments Heritage FC UT 0% $12 per Next 288% West Credit $100 payday Union, Payday Loan through CUonPAyday. com Mountain C UT 0% $12 per Next 288% America Credit $100 payday Union, through CUonPayday. com Southwest FC UT 0% $12 per Next 288% Federal Credit $100 payday Union, Payday Loan through CUonPAyday. com USU Charter FC UT 0% $12 per Next 288% Credit Union, $100 payday Payday Loan through CUonPAyday. com CUonPAyday O WA 0% $12 per Next 288% Loan may .com for $100 payday be con- members of verted to Washington 90 day credit unions install- ment plan if not in default. People’s FC WA 0% $12 per Next 288% Community $100 payday Federal Credit Union, Payday Loan through CUonPAyday. com Blackhawk C WI 18% $59 30 days 254% Community Credit Union, through e-accessloan.com

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

42 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Bank, APR Install- No Lender and Name FCU, CU with 90+ ment Required Special of Loan or Other* State Interest Fee Term Fees Days payments Security Features Comments First American C WI 18% $59 30 days 254% Credit Union, through e-accessloan.com GuarantyBank B WI 0% $25 1–35 days 203% application fee Prospera C WI 0% $4.90 per Next 258- Credit Union, $100 if paid payday 365% GoodMoney every 1–7 Loan (Good Will days; $9.90 Stores) per $100 if paid every 8–14 days; $15 per $100 if paid 15–45 days

*Credit unions are listed if loans are offered in their name, even if the credit union is not technically the lender.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 43 Appendix B How the Annual Percentage Rate with Fees Was Calculated

A consistently-calculated annual percent- or twelve-month term, we used that time age rate (APR) that takes all costs of credit into period. account is necessary if policymakers, lenders, For loans that were payable on the next consumer advocates, or consumers are to eval- payday, we assumed that the borrower was uate whether a payday loan alternative is less paid semi-monthly and that the loan was costly than a payday loan, or compare one al- taken out on the first day of the pay cycle so ternative to another. Unfortunately, the Fed- that the borrower had use of the money for the eral Reserve Board’s rules for calculating the full half month. APRs that must be disclosed under the Truth In general, for a loan with an annual, in Lending Act are so riddled with exceptions, monthly or application fee and an interest rate, and so different from product to product, that we assumed that the borrower took out a loan they are of little use at best, and misleading at that would net her $300 cash, and we then fig- worst. For purposes of this report, we at- ured the cost of that loan as a percentage of a tempted to calculate an “APR with Fees”—an $300 loan. For example, if a four-month loan APR that is consistent from product to prod- had a $30 application fee and 18% interest, we uct and that captures all the costs of the exten- calculated the cost of a $330 loan but then used sion of credit. $300 as the amount financed to calculate the The APRs with Fees listed in Appendix A APR. But if the lender only made loans in spe- are approximations. It was necessary to make cific amounts, such as $250, we deducted the several assumptions about how loans operated fee from that amount and used the net cash to in order to provide rough consistency in calcu- the borrower as the amount financed. lations and to create an APR without knowing For loans that had a range of rates, we used exactly how charges and payment schedules the highest rate, except that we generally gave were treated for every loan. The APRs may not the borrower the benefit of any discount for di- reflect precisely how the loans operate in practice. rect deposit, which many of the loans required. We generally figured the cost of the loan For open-end loans, we assumed that bor- over four months, or the nearest approxima- rowers would make minimum payments each tion to that time depending on the structure month and then pay off the remaining balance of the loan. If the loan had a minimum six- at the end of the fourth month.

44 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Appendix C Credit Unions Offering Micro Loans or Short-Term Loans

The following credit unions reported to next payday, when the loan is to be repaid in the National Credit Union Administration that full). The loans offered by these credit unions they offer Micro Consumer Loans (loans of are not necessarily available to subprime borrow- less than $500) or Pay Day Loans (small, short- ers and the terms vary widely. Some credit term loans that are intended specifically to unions that do offer affordable payday loan cover a borrower’s expenses until his or her alternatives are not on this list.

1st Advantage Advantage Allegheny Central America’s First 1st Community Advantage One Allegiance Americhoice 1st Financial Advantage One Alliance Americo 1st Gateway Advantis Alliance of Maine Amicus 1st Liberty Afena Alliant Aneca 1st North West Affinia Allied Anheuser-Busch 1st Pacific Affinity Allsouth Employees 1st Patriots Affinity Plus Alpena Community Animas 1st Priority Agassiz Alta Vista Anoka Hennepin 1st Valley Agfirst Altana AOD 77th Street Depot Agility Financial Alternatives AP A C M G Air Academy Alton Route APCO Employees A O Smith Employees Air Force Altra Appalachian A. E. A. A-K Valley Ambraw Apple A.C.P.E. Alabama Central Ambridge Area Appliance A+ Alabama State America First ARC A-B Employees American ARC Abbco Community Alabama Teachers American 1 Arcadia ABCO Alaska USA American Airlines Archer Cooperative Aberdeen ALCO American Chemical Archer Heights Academic Employees ALCON Employees Society Arizona Acadia ALCOSE American Heritage Arizona State Acadian Alexandria Municipal American Lake Arlington Community Access Employees American Partners Armour Kankakee Access First Alhambra American Southwest Arrowhead Central Ace Community Allcom American Spirit Ascend Advanced Financial Allegacy America’s Ascension

Source: NCUA.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 45 ASI BMI Carolina Cooperative Chicago Heights Assurance Boeing Employees Carolina Employees Onized Atlanta Postal Boeing Helicopters Carolina Family Chicago Municipal Auburn University Credit Union Carolina Trust Employees Augusta Seaboard Boulder Valley Carter Chino Community Bourns Employees Carter County Chiphone Aurora Bowater Employees Cascade Choice One Community Aurora Schools Box Elder County Case Choices Autotruck Bragg Mutual Catholic Christian Financial Avanti Brainerd B. N. Catholic Family Cinco Family Financial Center Aventa Brazos Community CBI Cinfed B.A.E. Brewery Cecil County School B.C.S. Community Brooklyn Cooperative Employees Cintel B.E.A. Brotherhood Cedar Point Cit-Co Bangor Buffalo Cooperative Centex Citizens Cities Banner Buffalo Fire Department Central Credit Union of Citizens Barksdale Building Trades Illinois Citizens Community Bashas’ Associates Bull’s Eye Central Electric Citizens Equity First Bay Area Burlington Northern Central Florida Postal City Bay Gulf Santa Fe Railwy Central Illinois City Baylands Business And Industrial Central Maine City & Police Bayport Credit Union BVA Central Michigan City Employees Bcm C G H Community City of Ukiah Employees Beach Municipal C R C Central Minnesota City-County Employees Bear Paw C.H.H. Central Star Clackamas Community Bell CACL Central Valley Class Act Bellco Caddo Parish Teachers Central Willamette Community Classic Berrien Teachers Calaveras Tehachapi Central Wisconsin Clawson Community Besser Calcite Cessna Employees Coast Central Bethlehem Teachers California Champion Coasthills Bethpage California Agribusiness Champion Coast-Tel Big Island California Center Changing Seasons Code Big Valley Campus Cheektowaga Collins Community Billings Canandaigua Community Columbia Community Biloxi Municipal Canton School Chelsea Employees Columbus United Birmingham Police Employees Chemcel Columbus-Lowndes Black Hills Capital Cheney Educational Blackhawk Community Capital Chetco Combined Blue Cross Blue Shield Capitol Chicago Area Office Commonwealth Central K.C. Carnegie Mellon Commonwealth One Bluestone University

46 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Communicating Arts County & Municipal Delta Community ECU Community Employees Delta County Eddy Community County Schools Delta Schools Education Associations Community 1 Covantage Denali Alaskan Eglin Community 1st Covenant Health Denver Community El Futuro Community 1st CP Dept of Labor El Reno R.I.L. Community Choice CPM Derry Area Elec Workers Union 474 Community Choice Crane Gulf Deseret First IBEW Community Financial Credit Union 1 Desert Sage Electric Members Credit Union of Denver Desert Schools Electrical Community First Credit Union of Dodge Desert Valleys Electrical Workers No Community First City Dexsta 22 Community First Credit Union of Johnson DFCU Financial Electrical Workers No County 558 Community Healthcare Diebold Credit Union of The Elgin Mental Health Community Plus Dillon Employees’ Berkshires Center Community Resource Directions Credit Union of Elk Basin Communitywide Discovery Vermont ELKO Compass Financial Doco Regional Credit Union One Elm River Comstar Dodge Central Credit Unions United EM Comunidad Latina Dow Louisiana Cross Valley Emerald Coast Concordia Parish Down East CTCE Employees School Emp Dresser Alexandria CTECU Employees Conservation Dupaco Community Employees CU Community Emporia State Dupont Community Consumer’s Cutting Edge Empower Dupont Fibers Consumers Cooperative CVPS Employees’ Encentus Dupont Goodrich Cook Area Cyprus Enrichment Dutch Point Co-Op Dacotah ENT Dyersburg Co-Op Credit Union of Dairyland Power Entrust Eagle One Montevideo Dakotaland Envision East Allen Co-Operative Dallas EPA East Central Cooperative Center Dane County Episcopal Community East End Baptist Coosa Pines Dannemora Erie Tabernacle Coral Community Danville City Erie Flagship Eastern Michigan Employees Community Coreplus University Datcu Erie General Electric Cornerstone Eastern Panhandle Day Air Fcu Corpus Christi City Eastern Utah DC Escondido Employees Community Decatur Earthmover Espeeco Cosden Eastman Decatur Policemen ETMA Cottonwood Eaton County Community Dekalb County Educational Evansville Teachers County - City Delaware Alliance Eaton Family Everett

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 47 F R B First Entertainment Freedom First Greater Pittsburgh F.R.S.A. First Financial Fresno County Police Fairfield First General Friends First Green Bay Central Fairmont First Metropolitan Frontier Community Greenville Fairview Employees First New York G.A.P. Grenada Lake Medical Faith Based First Ohio G.H.S. Center Empls Family Advantage First Pace Galaxy Gropaco Family First First Pioneers Gateway Metro Group Health Family First of Ny First Priority General Electric Guadalupe Fannin First Priority Generations Guardian Angels Farm Bureau Family First South Generations Guardian First Farm Credit Employees First Technology Community Gulf Coast Farmway Firstmark Generations Gunnison Western Federal Building Fitzsimons Community H. E. Telephone Federal Employees of Five County Genesee Co-Op Hampton Roads Catholic Chippewa Cnty Flag Genesee Valley Hampton Va Fedmont Flasher Community Genie-Watt Hancock Fedone Florence Georgia Hanscom Fedstar Florida Georgia Guard Hapo Community Fellowship Florida Central Georgia’s Own Harbor Fergus Florida Commerce Gesa Harbor Area Postal Filer FME GFA Employees Finance Center Fond Du Lac Glacier Hills Harborlight Financial One Foothills Glass City Harborone Financial Partners Fort Bragg Glatco Harris County Financial Plus Fort Campbell Gnc Community Hartford Financialedge Fort Gordon Golden Key Hartford Healthcare Community Fort Mcclellan Golden Triangle Harvest Finans Fort Sill Golden Valley Hawaii First Fire Fighters Fort Worth Telco Goldenwest Hayward Community Fire Police City County Founders Goldmark Health Firelands Four Corners Good Shepherd Health Alliance First Alliance Four Points Goodyear-Danville Family Credit Uni Health Associates First Capital Fox Valley Grand Valley Co-Op Health Care Family First Community Frankenmuth Granite Health Center First Community Franklin County Health Systems First Community Credit Teachers Great Northwest Healthcare First Credit Union Franklin Mint Great River Community Union First Community Cu of Franklin-Oil Credit Greater Institutional Healthcare Plus Beloit Union A.M.E. Church Healthcare Services First Eagle Freedom Greater New Orleans

48 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Healtheast Employees I-C Ka’u Langley Healthnet Idaho Advantage Kearney Eaton Lassen County Heard A.M.E. Idaho State University Employees Latah Heart of Louisiana Idahy Keesler Latino Community Heartland Illinois Community Kemba Les Bois Heartland Area Incenta Kemba Peoria Lexington Postal Henrico Incol Credit Union Kennedy VA Liberty Alliance Heritage Indiana Heartland Employees Library of Congress Heritage Indiana United Kent Light Commerce Heritage Community Methodist Kern Limestone Heritage Family Indiana University Kerr County Lincone Heritage Trust Industrial Keystone Lion’s Share Heritagewest Industrial CU of Keystone Lisbon Community Hickory Springs Whatcom County Kinecta Listerhill Employee’s Highmark Innovations Kingsville Area Lithium Educators Hillside Hospital Inova Little Giant Kitsap Hinds Community Insight Financial CU Livingston Parish Knoxville Law College Integrity LM Enforcement Holley Investex Local 265 IBEW Knoxville Post Office Holsey Temple Iowa Community Local 32 Asbestos Knoxville Teachers Holston Valley IQ Workers Knoxville Tva Holy Family Parma Iron County Local Government Employees Holy Rosary Community Loco Kootenai Valley Home Town Iron Mountain Longshore Kingsford Kramer Homes Community Credit Longshoremen’s Local 4 Community L&N Employees Union Louisiana Usa Ishpeming Community L.C. School Employees Homeport Lower Columbia J.C.T. La Capitol Hope Community Longshoremen JAX La Crosse Area Postal Hopewell LU 354 I B E W Jeanne D’arc La Crosse-Burlington Horizon Lufkin Jessop Community La Joya Area Horizon Utah Luso Johnson City La Terre Horizons North M E A K G C Lacamas Community Hospital System Madison K I T Lake Shore Houston Texas Fire Main Line Health Fighters K. C. Police Lake State Employees Huntington County Kankakee County Lake Superior Maine Education Federal Emp Hurlbut Employees Lakelands Marine Kansas Air Guard Hutchinson Lakes Community Marinette County I. H. Mississippi Valley Kansas Blue Cross-Blue Lakeview Employees Shield IBM Southeast Landmark Marion Community Kansas Super Chief Employees Lan-Fair Marisol Kaskaskia Valley

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 49 Maroon Financial Meridian Trust MPO New Generations Marriott Employees Meritrust MSU New Hampshire Marshall Community Metro Health Services Mt. Garfield New Kensington Martinsville Dupont Metrum Community MTC Municipal Emp Credit Unio Michigan Schools And Multi-Media New Salem Matadors Community Government Multiple Employee New York State Mazuma Michigan State Group Employees McAlester Aap University Municipal Newcomer Employees McCone County Mid East Tennessee Municipal Emps CU of Newspaper Employees McCoy Community Oklahoma City Niagara County’s Meadow Gold Mid Minnesota Mutual Security Niu Employees Employees Mid-Hudson Valley Mwrd Employees NLRB Member One Mid-Kansas N E Blue Cross No. Mass. Tel Workers Members Midland Employees Community Members Midsouth Community N.G.H. Norfolk Fire Members 1st Midstate Napus Department Members Choice Mid-Tex Narfe Premier Norstate Members Choice Wv Midwest City National Institutes of North Coast Members Cooperative Midwest Community Health North County Members Exchange Midwestern State Navigant North East Welch Members First University Navigator CU North Iowa Community Members First Credit Military and Civilian Navy Federal Credit North Jersey Union of Flori Millbury Union North Kent Catholic Members United Minnco NCE North Side Community Members1st Minnesota Power Nci Community North Western Community Employees Development Employees Membersfirst Minnesota Valley Ne Pa Community Northeast Community Memberstrust Missoula NEBO Northeast Community Memorial Mitchell Area Nebraska Rural Northeast Regional Community Memorial Health Credit Mohawk Progressive Northern Hills Union Monad Nebraska State Northern Indiana Employees Memphis Area Monroe Telco Northern Tier Neches Teachers’ Montana Northland Teachers Neighborhood Memphis Municipal Montana Educators’ Community Neighborhood Trust Employees Monterey County Northstar Menasha Corporation Employees Nekoosa Northwest Community Employees Mountain America Net Northwest Plus Mennonite Financial Mountain High New Albany Schools Northwoods Merco Mountain Laurel New Century Notre Dame Mercy Health Partners Mountain States New Cumberland NRS Community Meriden Postal Mountain West New Dimensions Development Employees New England Numark

50 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Numerica Pacific N W Pinekraft Radio Cab Nuvista Pacific Postal Pinellas Railway O.S.U. Paducah Teachers Pioneer Rainbow O.U.R. Palmetto Trust Pioneer Randolph-Brooks Oakland Municipal Pannonia Pioneer Valley Rapid City Telco Ocala Community Paradise Valley Pittsburgh Ravalli County Ocean Communities Parish Pittsburgh Central Red River Employees Ocean Crest Parishioners Pittsford Rediform Niagara Falls Oconee Park Side Platinum NY Ohio University Park View Pocahy Family Redstone Ohio Valley Parkside Pocatello Simplot Redwood Community Parkview Community Point Loma Regional Ok Members First Parkway Polish & Slavic Register Guard Oklahoma Employees Patelco Porter-Cable Employees Employees Old Hickory Patent and Trademark Portland Reliant Olympia Office Post Community Renton Community Omaha Public Power Pathfinder Postal Employees Resource One Dist Emp PCH Postel Family Rheem Arkansas Onaway Community Peach State Potlatch No 1 Richfield-Bloomington One Source Pelican State Powerco Rio Grande Onomea Pen Air PPG & Associates Ripco Onpoint Community Penn State Premier Financial River City Community Opportunities Pennstar Prevail River Region Oregon Community Penobscot County Prince Kuhio River to River Oshkosh Postal Pensacola Government Professional River Valley Employees People First Progressions River Valley Otero County Teachers People For People Prospera Riverfront Otter Tail Community Develop Provident Rivermark Community OU Peoples Public Employees Rivers Edge Ouachita Valley Community Peoples Public Service Our Family Peoples Choice Employees Riverset Credit Union Our Mother of Mercy Peoples Choice Pueblo Government Riverside Community Parish Houston Peopleschoice Agencies Rivertown Community P S T C Employees Peoria Journal Star Pueblo Horizons Roanoke Postal P. C. M. Employees Permaculture Purdue Employees Employees P.I.A.S. PFD Firefighters Credit Putnam County Roanoke Virginia Firemen PA Healthcare Credit Union Inc. Quaker Oats Employees Union Rockford Postal Phenix Pride Queen Of Peace Employees PAC Philadelphia Arlington Rocky Mountain Pacific Cascade Pickens R G Rocky Mountain Law Pacific Crest Pine Creek Racom Community Enforcement

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 51 Rogue Secure First Credit Southeast Michigan St. Paul Postal Royal Union State Employees Employees S F Recreation & Parks Security First Southern St. Roses Parish S G E Security Service Southern St. Thomas Sabattus Regional Selco Community Southern Chautauqua St. Thomas Hospital Sabine Self-Help Southern Illinois Area Employees SAC Self-Help Southern Mass St. Vrain Valley Saco Valley SEMC Southern Select Star of Texas Safe Seminole Schools Community State Agencies Sagelink Sentinel Southpoint State Employees San Antonio Citizens Service Southpointe State Employees San Antonio Water SERVU Southwest State Employees’ System Settlers Southwest Colorado State Employees Cu of San Francisco Seven Seventeen Southwest Maryland, Inc San Gabriel Valley Shamrock Foods Communities Steel Valley Postal Sharefax Southwest Community Sterling San Jacinto Area Sheridan Community Space Age Suffolk San Juan Sherwin Williams Emp. Space Coast Suffolk, Va City Employees San Mateo Shiloh of Alexandria SPCO Summit Sandia Laboratory Shipbuilders Spirit of Alaska Summit Santa Ana Shoreline Spirit of America Sumter City Santa Cruz Community Shoreline Spokane Firefighters Sun Santee Cooper Credit Shrewsbury Spokane Media Sun Financial Union Signal Financial Spokane Teachers Suncoast Schools Savannah Schools Sioux Empire Springdale P. P. G. Sunset Science Park SCE Sioux Falls SRP Superior Choice Schofield Sioux Valley St. Agatha School District 3 Community St. Agnes Employees Superior Credit Union School Employees Siouxland St. Anne’s of Fall River Sylvania Area Lorain County SIU St. Cloud T & P School Employees of Sky St. Gertrude’s T L C Community Washington SLO St. Jean’s T M H Schools Financial SMW St. John Dallas Tabernacle Schoolsfirst Snocope St. Jude Tahquamenon Area Scott Snowflake Mills St. Mary Tanner Employees Scott Schools Solidarity Community St. Mary Parish School Tarrant County Sea Comm Soo Co-Op Emp. Taunton Seaboard South Dekalb Church St. Mary’s & Affiliates Tazewell County Seaford Government Emp South Side Community St. Mary’s Bank Seattle Metropolitan Tazewell County School South Western St. Pats Employees St. Paul Employees

52 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER TCT Thornapple Valley Umassfive College US Teachers Community Unified Correctional USC Teachers Three Rivers Unilever USF Credit Union Team Financial Ticonderoga Union Pacific California USU Charter Team One Timberland Emp Utah Central Teamsters Timken Aerospace Union Ut-Muo Teamsters Council #37 Tinker Unison Valdosta Teachers Telco Plus Toledo Police United Valex Telcom Toledo Urban United 1st Valley Telhio Tongass United Churches Valley Board Tenet Topline United Community Valley Communities Tennessee Employees Toro Employees United Community Vantage Tennessee Members 1st Total Assurance United Financial Vatat Tennessee Valley Tower Services Velsicol Texaco of Houma Town And Country United Heritage Veridian Texas TPS United Methodist First Vermillion Choice Texas Associations of Trailblazer Vermont State Professionals Transit Employees United Poles Employees Texas First Choice Transit Workers United Services of Veterans Health America Texas Plains Tremont Administration United Workers Texas Tech Trenton Via Credit Union Unitus Community Texas Workforce Tri Boro Victor Valley Unity Catholic Texhillco School Tri-Lakes Victoria Unity One Employees Tri-Pointe Community Victoria Community Universal 1 Texoma Trugrocer Virginia Beach Schools University The County Truliant Virginia Credit Union, University Credit Union The Family First Trumark Financial Inc., University First The Florist Trustus Virginia Educators University of Illinois Credit Union The Golden 1 Tucson Emps Visions The Health & Education Tucson Healthcare University of Louisiana The Infirmary Affiliates Visterra University of Michigan The Labor Tucson Telco W T N M Atlantic University of Nebraska The New Orleans Tulsa W. N. M. H. University of VA Firemen’s Tuscaloosa County Walker County Community CU The Partnership TVA Allen Steam Plant Wanigas University of Wisconsin The Richmond Postal Twinstar Warren Credit Union In University of Washington Area U. H. S. Employees Wisconsin-Oshkosh The Summit Teachers U.S. New Mexico Uniwyo The Triumph Baptist Washington Postal UARK UNO The Union Employees Ufirst Upper Cumberland The Wright Washington State UGI Employees Ups Employees Employees

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 53 Watermark Westby Co-Op Whatcom Educational Wisconsin Heights Wauna Westconsin White River Word of Life Wawa Employees Westerly Community Whitefish Credit Union Wright Patman Weber Western Association Congressional Weber State Western Wichita Falls Wright-Patt Weld Schools Western Cooperative Wildfire Y-12 WES Western Districts Wiltruco Employees Yakima Valley Cu WESC Members Winkler County Yellowstone Wesley Medical Western Region Winslow Community Yha South Unit West Michigan Postal Western Valley Winston Salem Yolo Service Westerra Firemen’s Youngstown Ohio City West Monroe Westmark Winthrop Emp West Oahu Community Westmoreland Winthrop-University Zia West Orange Municipal Community Hospital Employ West-Aircomm Westside Employees Wiregrass

Source: National Credit Union Administration

54 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Appendix D Small Dollar Loan Pilot Program Participants

Twenty-eight banks are participating in offices located in 27 states. They have total the FDIC study. The participating banks are assets ranging from $28 million to nearly $10 headquartered in 15 states with more than 450 billion.

Name Location Mitchell Bank Milwaukee, WI Amarillo National Bank Amarillo, TX National Bank of Kansas City, MO Armed Forces Bank Fort Leavenworth, KS Kansas City Bank of Commerce Stilwell OK Oklahoma State Bank Guthrie, OK BankFive Fall River, MA Pinnacle Bank Lincoln, NE BankPlus Jackson, MS Red River Bank Alexandria, LA BBVA Bancomer USA Diamond Bar, CA State Bank of Alcester Alcester, SD Benton State Bank Benton WI State Bank of Countryside Countryside, IL Citizens Trust Bank Atlanta, GA The First National Bank Fairfax, MN Citizens Union Bank Shelbyville, KY of Fairfax Community Bank of Marshall Marshall, MO The Heritage Bank Hinesville, GA Community Bank - Glen Ellyn, IL The Savings Bank Wakefield, MA Wheaton/Glen Ellyn Washington Savings Bank Lowell, MA Kentucky Bank Paris, KY Webster Five Cents Webster, MA Lake Forest Bank & Trust Lake Forest, IL Savings Bank Liberty Bank New Orleans, LA Wilmington Trust Wilmington, DE Liberty National Bank Paris, TX

Source: FDIC.

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 55 ENDNOTES

1 Uriah King & Leslie Parrish, Center for Responsible Funds: Savings, Assets, Credit and Banking Among Lending, Phantom Demand: Short-Term Due Date Low-Income Households at 89 (Russell Sage Fdn. Generates Need for Repeat Payday Loans, Accounting 2009) (“Insufficient Funds”) (43% of payday users had for 76% of Total Volume at 15 (July 2009) “Phantom paid a late fee on a credit card); Cal. Budget Project at Demand”), available at http://www.responsiblelending 25-26 (54% of payday borrowers have a bank credit .org/payday-lending/research-analysis/phantom- card and 29% had home equity-lines of credit). demand-short-term-due-date-generates-need-for-repeat- 12 Federal Deposit Insurance Corp., National Survey payday-loans-accounting-for-76-of-total-volume.html. of Unbanked and Underbanked Households at 43 2 A remotely created check, often called a demand draft, (Dec. 2009) (“FDIC National Survey”); Texas Apple- is a paper check that is created from the borrower’s seed, Short-Term Cash, Long-Term Debt: A Survey of bank account information and does not contain the Payday Borrowers at 9 (Apr. 2009) (“Texas Appleseed”). borrower’s signature but may be negotiated just like a 13 FDIC National Survey at 42 (38% of underbanked traditional paper check. households that used some form of alternative finan- 3 This data is discussed in further detail in Uriah King cial service credit product did so to pay for basic living and Leslie Parrish, Springing the Debt Trap, Center expenses, 6.2 did for special gifts or luxuries, 15.4% to for Responsible Lending (Dec. 13, 2007), available at make up for lost income, 7.4% for house repairs or to http://www.responsiblelending.org/payday-lending/ buy an appliance, 4.5% for car repairs, 2.3% for medi- research-analysis/springing-the-debt-trap-exec- cal expenses, 1.6% for school or childcare expenses, summary.pdf. and 24.9% for other reasons); Calf. Budget Project at 4 Dan Feehan, CEO of Cash America, remarks made 25 (50% to pay bills; 22.3%, to buy groceries and other at Jefferies Financial Services Conference (June 20, necessities; 10.3% for an emergency; 1.8% to repair a 2007) (transcript on file with the Center for Respon- vehicle); Texas Appleseed at 9 (Apr. 2009) (over half sible Lending). cited the need to pay routine utility bills, to buy gro- 5 Springing the Debt Trap at 2. ceries, gas or to pay rent; 38% had an emergency); 6 Phantom Demand. Michael S. Barr, Payments, Credit and Savings Among 7 Center for American Progress, Who Borrows from Low- and Moderate-Income Households: Evidence Payday Lenders? An Analysis of Newly Available from the Detroit Area Survey, Federal Reserve Bank Data at 7 (March 2009) (analyzing Federal Reserve of Philadelphia (May 22, 2007) (60% used payday Board’s Survey of Consumer Finances). loans to pay for everyday expenses; 11% paid credit 8 California Budget Project, Payday Loans: Taking the card or bank debt). Pay Out of Payday at 31 (Sept. 2008) (“Cal. Budget 14 Dennis Campbell, Asis Martinez Jerez, and Peter Project”) (reporting on study by Calif. Dep’t of Corp.), Tufano, Bouncing Out of the Banking System: An Em- available at http://www.cbp.org/pdfs/2008/080926_ pirical Analysis of Involuntary Bank Account Closures paydaychartbook.pdf. (June 6, 2008) (paper presented at Boston Federal Re- 9 Colorado Uniform Consumer Credit Code Adminis- serve Board workshop on Consumer Behavior and trator, Payday Lending Demographic and Statistical Payment Choice). Information: July 2000 through December 2008 15 Paige Marta Skiba and Jeremy Tobacman, Do Pay- (March 1, 2010). day Loans Cause Bankruptcy? (Oct. 10, 2008), available 10 Jean Ann Fox, Consumer Federation of America, at http://www.law.vanderbilt.edu/faculty/faculty- Testimony on Protecting Social Security Beneficiaries personal-sites/paige-skiba/publication/download from Predatory Lending and Other Harmful Financial .aspx?id=2221. Institution Practices, Subcommittee on Social Security, 16 Michael S. Barr, Financial Services, Savings, & Bor- Committee on Ways & Means (June 24, 2008). rowing Among LMI Households in the Mainstream 11 Rebecca Blank & Michael Barr, Eds., Insufficient Banking & Alternative Financial Services Sectors,

56 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Federal Trade Commission (Oct. 30, 2008) (“Barr FTC Nine Signs of Predatory Payday Loan, Center for Re- Paper”). sponsible Lending, available at http://www 17 Brian T. Melzer, The Real Costs of Credit Access: .responsiblelending.org/payday-lending/tools- Evidence from the Payday Lending Market (Nov. 15, esources/ninesigns.html. 2007), available at http://home.uchicago.edu/%7 26 See generally Lynn Drysdale & Kathleen E. Keest, Ebmelzer/RealCosts_Melzer.pdf. The Two-Tiered Consumer Financial Services Market- 18 Barr FTC Paper. place: The Fringe Banking System and Its Challenge 19 Sumit Agarwal, Paige Marta Skiba, and Jeremy to Current Thinking About the Role of Usury Laws in Tobacman, Payday Loans and Credit Cards: New Today’s Society, 51 S.C. L. Rev. 589, 657-64 (2000) Liquidity and Credit Scoring Puzzles? (January 13, (“Drysdale & Keest”) (examining moral and economic 2009), available at http://ssrn.com/abstract=1327125 underpinnings of usury laws). (study by researchers at the Chicago Federal Reserve 27 See National Consumer Law Center, The Cost of Bank, Vanderbilt University, and the University of Credit: Regulation, Preemption, and Industry Abuses Pennsylvania, concluding that for all credit card users, § 2.2.2 (4th ed. 2009) (“The Cost of Credit”) (tracing the seriously delinquent rate was 6%, while for pay- the origin of the general usury laws on the books in day loan borrowers in this sample the rate was many states today to England’s laws before American around 11%). independence). 20 Paige Marta Skiba and Jeremy Tobacman, Payday 28 See The Cost of Credit § 2.2.3.2. Loans, Uncertainty, and Discounting: Explaining Pat- 29 The Cost of Credit § 2.2.3.2. terns of Borrowing, Repayment, and Default (August 30 Drysdale & Keest at 619 (describing the “direct an- 21, 2008) (determining that by the time loans are writ- tecedent of today’s postdated check [payday] loan: ten off by the lender, borrowers have repaid fees some early salary lenders convinced borrowers to equaling about 90% of their initial loan principal but sign a bank check in the amount of the loan’s princi- are counted as defaults for the full amount of the pal and interest, even though the borrower had no loan), available at http://www.law.vanderbilt.edu/ bank account.”). faculty/faculty-personal-sites/paige-skiba/publication/ 31 The Cost of Credit § 2.2.3.2. download.aspx?id=1636. 32 Christopher L. Peterson, Usury Law, Payday Loans, 21 The effective rate for a pawnbroker loan is very and Statutory Slight of Hand: Salience Distortion in high, but it does not have the rollover problem that American Credit Pricing Limits, 92 Minn. L. Rev. payday loans do. The pawnbroker does not demand 1110, 1119-20 (2008). one TV this week and another one every two weeks if 33 See The Cost of Credit § 2.2.3.2. the borrower cannot afford to redeem it. The real 34 See The Cost of Credit § 2.2.3.2. costs of are also very transparent: the 35 Elisabeth Anderson, Experts, Ideas, and Policy borrower knows that he may never get that TV back, Change: The Russell Sage Foundation and Small Loan so pawnbrokers are clearly a lender of last resort. Reform, 1910-1940 at 2 (Mar. 8, 2006) (“Small Loan 22 R. Peterson & G. Falls, Credit Research Center, Reform”), available at http://www.yale.edu/scr/ Purdue Univ., Impact of a Ten Percent Usury Ceiling: andersen.doc. Empirical Evidence (1981). 36 See Small Loan Reform at 17, 39. 23 See Center for Responsible Lending, NC Consumer 37 Small Loan Reform at 39. Finance Company Lending Reports 2003–2006 (report 38 See Small Loan Reform 36-37, 42. on file with NCLC) (from 2003–2006, the total number 39 Small Loan Reform at 27-28. of loans made of $1,000 or less went up 39%). 40 See Small Loan Reform at 34-39 (discussing RSF’s 24 See Springing the Debt Trap at 9. use of studies related to the Uniform Small Loan laws, 25 See Department of Defense, Report On Predatory which were generally state-specific as opposed to Lending Practices Directed at Members of the Armed systemic). Forces and Their Dependents at 13 (Aug. 9, 2006) 41 See Drysdale & Keest at 623. (“DOD Report”), available at http://www.defense 42 See Drysdale & Keest at 625. .gov/pubs/pdfs/Report_to_Congress_final.pdf; 43 See Drysdale & Keest at 625; The Cost of Credit §

NATIONAL CONSUMER LAW CENTER Stopping the Payday Loan Trap 5 57 7.5.5.5 (explaining the state statutory frameworks that Service Members and Dependents, 72 Fed. Reg. permit or prohibit payday lending). 50,580, 50,587-90 (Aug. 31, 2007). The Military APR 44 See generally The Cost of Credit §§ 2.2.2, 2.2.3, 2.4. (“MAPR”) calculation is based on a finance charge Though exceptions for small, short-term loans have that must include more fees than the finance charge since been carved in many of them, the usury rates under the Truth in Lending Act and Regulation Z. that are still in effect for mid-size loans are typically Compare 15 U.S.C. §§ 1605, 1606; 12 C.F.R. § 226.4. those that would have applied to small dollar loans 57 72 Fed. Reg. at 50,582. before deregulation. See National Consumer Law 58 See FDIC, PR 52-2007, Small Dollar Loan Guide- Center, Consumer Federation of America, Consumers lines, available at http://www.fdic.gov/news/news/ Union, Small Dollar Loan Products Scorecard-- Up- press/2007/pr07052a.html. dated (May 2010) (“Small Dollar Loan Scorecard”), 59 FDIC: Small Dollar Loan Pilot Program, available at available at http://www.nclc.org/issues/payday_ http://www.fdic.gov/smalldollarloans/. loans/content/cu-small-dollar-scorecard-2010.pdf. 60 FDIC, Small Dollar Loan Guidelines. 45 Marquette National Bank v. First of Omaha Serv. Corp., 61 NCUA, Short-Term, Small Amount Loans, 75 Fed. 439 U.S. 299 (1978). Reg. 24497, 24498 (May 5, 2010). 46 The Cost of Credit § 3.4.5.1.1 at 70 & n.165. 62 Id. 47 The Cost of Credit § 2.4.1. 63 72 Fed. Reg. at 50,580. 48 See National Consumer Law Center, Consumer Fed- 64 DOD Report at 7. eration of America, and Consumers Union Small Dol- 65 See 75 Fed. Reg. at 24,499. lar Loan Products Scorecard 2010: Statutory Back-Up 66 See, e.g., Interest Rate Reduction Act, S. 582, United (May 13, 2010), available at http://www.nclc.org/ States Senate (introduced by Sen. Sanders Mar. 12, 2009). issues/payday_loans/content/cu-small-dollar- 67 Furthermore, some forms of credit, like overdraft scorecard-backup-2010.pdf. loans, are not required to disclose an APR, and for 49 See Small Dollar Loan Scorecard. open-end forms of credit that do not have a set repay- 50 See Tyler Evilsizer, Nat’l Institute on Money in State ment period, such as credit cards and lines of credit, Politics, Lenders Couldn’t Buy Laws 6-8 (Aug. 18, 2009), the APR disclosures do not include fees and can be available at http://www.followthemoney.org/ very misleading. Research/index.phtml. 68 Federal Reserve System, Proposed Rules, 74 Fed. 51 See id. at 1. Reg. 43232, 43241-6 (Aug. 26, 2009). 52 See id. 69 A detailed explanation for how the cost and rate 53 See, e.g., Springing the Debt Trap (documenting that are calculated for various types of loans is found in reforms short of rate caps of roughly 36% will not Appendix B. stop payday lending); “Virginia’s ‘Faithful Pledge’ 70 For example, a bill pending in Congress that would Challenges Payday Lenders,” Washington Post (Aug. impose a federal 36% usury cap, including fees, ex- 27, 2007). cludes application or participation fees that in total do 54 The jurisdictions are: Arkansas, Arizona (effective not exceed the greater of $30 (or, if there is a limit to July 1, 2010), Connecticut, District of Columbia, Geor- the credit line, 5 percent of the credit limit, up to gia, Maryland, Massachusetts, New Hampshire, New $120), if the loan is payable over at least 90 days in Jersey, New York, North Carolina, Ohio, Oregon, multiple, amortizing installments, the fees are not Pennsylvania, Vermont, and West Virginia. See Small part of the TILA APR, the fees cover all credit ex- Dollar Scorecard. New Hampshire recently imposed a tended or renewed by the creditor for 12 months, and 36% rate cap, with no fees, on payday loans, but the the minimum amount of credit extended or available state has no rate cap for longer term loans. Georgia on a credit line is equal to $300 or more. See Protecting permits triple-digit auto-title loans. Consumers from Unreasonable Credit Rates Act, S. 55 DOD Report. 500, United States Senate (introduced by Sen. Durbin 56 See John Warner National Defense Authorization Feb. 26, 2009). Act of 2006, Pub. L. No. 109-364, § 670 (2006); Limita- 71 See Elizabeth Renuart & Diane Thompson, The tions on Terms of Consumer Credit Extended to Truth, The Whole Truth, and Nothing but the Truth:

58 5 stopping the Payday Loan Trap NATIONAL CONSUMER LAW CENTER Fulfilling the Promise of Truth in Lending, 25 Yale J. 90 Veridian Credit Union, http://www.veridiancu. on Reg. 181, 186–91 (2008). org/loans/pal.asp. 72 See, e.g., Associated Press, “Payday loan law takes 91 See http://www.watermarkcu.org/html/cc_ml_ effect in Washington state” (Jan. 1, 2010) (due to new pdf.htm. limit of 8 loans in 12 months per borrower, owner of 92 A description of the project and links to the results payday stores said: “We don’t know if we’re gonna be to date are available at http://www.fdic.gov/ open in six months.”); Jeff Shapiro, “Payday-loan smalldollarloans/. fights loom,” The Richmond Times-Dispatch, February 93 See FDIC, “The FDIC’s Small-Dollar Loan Pilot Pro- 29, 2008 (quoting Carol Stewart, Vice President of Ad- gram: A Case Study after One Year” (July 14, 2009), vance America, saying that the industry “can’t live on available at http://www.fdic.gov/bank/analytical/ five [loans]”). quarterly/2009_vol3_2/smalldollar.html. 73 FDIC, Affordable Small Dollar Loan Guidelines at n. 6. 94 See id. 74 at 15. 95 Id. 75 See, e.g., Office of the Comptroller of the Currency, 96 High-fee credit cards marketed to borrowers with Guidelines for National Banks to Guard Against Pred- bad credit are discussed in the next section. atory and Abusive Lending Practices, OCC Advisory 97 The Credit CARD Act of 2009 now requires that Letter AL 2003-2 at 2 (Feb. 21, 2003) (“OCC Predatory monthly statements disclose how long it will take the Lending Guidelines”). borrower to pay off the credit card if only the mini- 76 See 49 Fed. Reg. 7740 (Mar. 1, 1984), codified at 16 mum payment is made. C.F.R. Part 444. 98 Though the Credit CARD Act limits the circum- 77 49 Fed. Reg. at 7757. stances under which a credit card issuer can increase 78 Id. at 7758. rates retroactively on existing balances, it requires 79 National Consumer Law Center, Collection Actions only a 45-day notice before the rate for new purchases §§ 12.4.1.1, 12.4.1.4.1 (2008 & Supp.). can be raised. 80 Id. Appx. F. 99 If the borrower repays in two installments rather 81 49 Fed. Reg. at 7768. than one, and thus does not have use of the full 82 Id. amount borrowed for the full 60 days, the APR with 83 Id. fees is 95%. 84 Id. at 7759. The Credit Practices Rule permits volun- 100 Email to National Consumer Law Center (April 21, tary payroll deduction plans as a repayment device. 2010). However, paper or electronic check holding is not 101 The credit union exploits a loophole in the Truth in voluntary for payday loans. Moreover, like the wage Lending Act that permits some application fees from assignments banned by the Credit Practices Rule, being counted in the APR, though it is not clear that check holding or electronic debit authorizations are Kinecta’s payday loan application fees qualify. used as a collection device, not as a method of making 102 Http://www.e-accessloan.com. recurring payments. They are typically mandatory for 103 Http://www.cuonpayday.com. single payment loans, which often roll over without 104 The one exception is the CUonPayday Loan offered the paper or electronic check being cashed. to members of the Oregon Community Credit Union, 85 See, e.g., OCC Predatory Lending Guidelines; which has a lower rate structure described in the sec- NCUA et al., Statement on Subprime Mortgage Lend- tion above. ing, 72 Fed. Reg. 37569 (Jul. 10, 2007). 105 See Chi Chi Wu, National Consumer Law Center, 86 See 15 U.S.C. § 1665e; 12 C.F.R. § 226.35(b)(1). Fee-Harvesters: Low-Credit, High-Cost Cards Bleed 87 http://realsolutions.coop/assets/2009/7/23/ Consumers (Nov. 1, 2007), available at http://www REAL_Solutions_Overview_final_July_2009.pdf. .nclc.org/issues/credit_cards/content/FEE- 88 http://www.eglinfcu.org/rt.asp?rt=22. HarvesterFinal.pdf. 89 See 75 Fed. Reg. at 24497.

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