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Who would span the payday lending gap?

December 17, 2006 - Richmond, Virginia

Five years ago, tellers at State Employees' Credit Union in North Carolina noticed a different group of people coming in to cash checks: payday lenders with checks written by members of the Raleigh-based credit union.

This concerned the credit union, which realized that its customers paid interest rates in the triple digits, charged by the payday lenders. State Employees' responded by devising a low-cost alternative that provides loans as large as $500 at an annual percentage rate of 12 percent.

Since then, State Employees' has made more than 1.5 million of the loans, amounting to $600 million.

"When we started the program, we didn't expect the volume," said Leigh Brady, senior vice president of education services at the nation's second-largest credit union.

Could this and other alternatives to payday loans work in Virginia?

As members of the Virginia General Assembly prepare to tackle payday-lending regulation during the 2007 session, the experience in North Carolina could provide a road map for alternatives.

The Tar Heel State experimented with payday lending for four years before allowing the statute permitting the activity to expire in 2001. A handful of payday lenders challenged the state's law and continued to do business until losing a legal battle with North Carolina's attorney general earlier this year.

Since then, "We've not received one complaint from a borrower saying, 'Please bring back payday lending,' " said Mark Pearce, deputy commissioner of banks in North Carolina.

In Virginia, some legislators have expressed concern that a sufficient volume of short-term, unsecured credit wouldn't be available if Virginia rescinded its payday-lending statute. Two weeks ago, a House of Delegates committee voted down a bill that would have abolished the state's Payday Loan Act and required payday loans to conform with the 36 percent interest cap that applies to other small consumer loans. Before the House Commerce and Labor Committee voted 10-8 against the measure, some members predicted that cash-strapped consumers would resort to loan sharks and offshore Internet lenders if payday lending disappeared.

Del. John M. O'Bannon III, R-Henrico County, the bill's principal sponsor, said afterward that he would introduce the measure when the General Assembly gathers on Jan. 10. Last week, Del. Jennifer McClellan, D-Richmond, submitted a bill that would repeal Virginia's payday-lending statute in 2009.

In Virginia, as in most states that regulate payday lending, lenders can make available as much as $500 for one week to a month and charge annual percentage rates that often surpass 300 percent. Lenders in Virginia are allowed to collect $15 for every $100 lent, which works out to an annual interest rate of 391 percent for a typical two-week loan.

Lenders, critics and regulators agree on one thing: The business has no trouble attracting customers. Payday-lending stores are convenient, and service is fast.

"Payday lenders do a few things well," said Pearce, the North Carolina deputy banking commissioner. "You walk in with a pay stub and a check, and they give you money in 10 to 15 minutes."

So where do North Carolina residents in search of a few hundred dollars for a couple of weeks turn? Some who live close to South Carolina drive across the state line, where payday loans are readily available, lenders and regulators said. Others resort to pawn shops or take payday loans from online lenders.

Around Fayetteville -- like Hampton Roads, a military area -- some use a loan program at Fort Bragg Federal Credit Union that makes as much as $500 available for a flat fee of $6, said David Elliott, its president and chief executive officer. Fort Bragg Federal adopted the program as part of a stand against payday lending in North Carolina.

"We thought it was socially responsible to step in and fill that need," Elliott said.

State records indicate that more North Carolina residents in search of small loans have turned to consumer finance companies. The number of loans for $600 or less made by these lenders rose 16 percent last year from the 2004 total, according to reports filed with North Carolina's commissioner of banks. A comparison for this year after payday lending was banned entirely was not available.

Still, this lending hasn't been widespread, said Richard Carlton, a lawyer for the North Carolina Financial Services Association, a trade group for consumer finance companies. Making short-term loans of a few hundred dollars each "is not a very profitable business under the current law," he said, because of lenders' rising costs, the risks and the interest-rate ceiling of 36 percent.

Until 2002, payday lending had been a modest part of consumer lending in Virginia. Lenders skirted the state's interest-rate cap of 36 percent for small consumer loans by renting charters from out-of-state banks.

That changed four years ago, when the General Assembly created a regulatory structure that required payday lenders to register with state banking regulators but allowed them to charge triple-digit annual percentage rates. The Payday Loan Act opened the floodgates, and the volume of activity surged. Payday lending in Virginia last year totaled almost $1.2 billion, an 83 percent increase from 2003, the first full year of state regulation. Today, 85 lenders operate more than 800 stores throughout the state. Thirty-one companies have 273 locations in Hampton Roads.

Lenders are quick to defend their business.

"We don't pretend that the payday option is right for everybody. It's not," said Jamie Fulmer, a spokesman for Advance America, Cash Advance Centers Inc., the largest payday lender in Virginia by number of stores. But Advance America's customers understand the cost of the service, he said.

"Our customers are not poor and downtrodden," he said. "They figure that a payday loan is better than the other options," such as bouncing a check or having to pay a late fee on a credit card account.

Consumer advocates respond that lenders rely on chronic borrowing to make money and cite evidence that frequent users often become trapped by the loans' rapidly rising interest expense. Helen O'Beirne, coordinator for a statewide coalition of civic, consumer and religious organizations opposed to payday lending, predicted that credit unions and banks will fill much of the void that a departure of payday lenders in Virginia might create.

Like their counterparts in North Carolina, some Virginia credit unions have come up with low-cost alternatives. Langley Federal Credit Union, whose membership includes military personnel stationed at Langley Air Force Base, devised a "Quick Cash" product two years ago at the request of Air Force officials.

"We have a strong relationship with the Air Force, and Langley Air Force Base noted a real problem among some personnel" using payday loans, said Brett T. Noll, the credit union's senior vice president of marketing. "It was affecting their performance on the job and their family life."

Langley Federal's program allows a member to borrow as much as $1,000 at an annual percentage rate of 18 percent. Most of its Quick Cash loans, said Noll, are for $500. Since mid-2004, the credit union has loaned $7 million under the program.

Noll offers this advice to credit unions thinking about launching their own versions: "Make the product as simple and convenient as possible, because that's what made payday loans attractive."

The pursuit of payday-loan alternatives also has gathered momentum at the federal level. Earlier this month, the Federal Deposit Insurance Corp. distributed guidelines encouraging banks to make small, short-term loans.

"There is a huge demand for small-dollar, unsecured loans, but there are far too few low-cost options available for consumers," FDIC Chairwoman Sheila C. Bair said in a statement that accompanied the agency's guidelines. "It is our obligation as a regulator to encourage those we regulate to create products that are beneficial to both the banks and their customers."

So far, the response from banking organizations, including the American Bankers Association and Consumer Bankers Association, has been cool.

"We certainly support regulators' efforts to find alternatives to payday loans," said Nessa Feddis, senior federal counsel in Washington for the American Bankers Association.

However, bankers question whether the proposed small loans can be profitable and whether conflicts between existing lending rules and new regulations in the Defense Authorization Act of 2007 can be resolved, Feddis said. That legislation includes new interest-rate regulations and disclosure rules for consumer loans made to members of the military and their dependents.

Still, Langley Federal's Noll expressed confidence that credit is available to meet the needs of consumers who have resorted to payday loans.

"Financial education is the key," he said. "A lot of people who turn to payday lenders aren't aware of the alternatives."

News Source

The Virginia-Pilot, Tom Shean, Staff Writer

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