Who’s Missing from the Payday Loan Debate?

Saturday’s Washington Post carried an article with the hopeful headline “Credit Unions Slowly Fill Void as Payday Lenders Leave D.C.” In January-before Ohio enacted its anti-payday lending law, before the Arkansas Supreme Court interpreted that state’s laws to effectively ban payday lending-the District of Columbia capped interest rates on short-term loans at 24%. That meant that traditional payday lending was out of business.

While the article’s headline was hopeful, what followed showed the difficulty these bans face. Credit unions are indeed trying to fill the gap, not just in the District, but nationally. And the Federal Deposit Insurance Corporation (FDIC) has a small-dollar loan pilot underway with 31 banks around the country (although none in the District).

But the article reports that whereas in 2006, the two largest payday lenders in the District made 260,000 loans, so far District credit unions have made only “a few hundred.” More troubling, two credit union executives interviewed said that the loans are “not something we really make money on,” but rather an on-ramp to “traditional banking products,” but “it’s hard to get persons to talk to our financial counselor so that we can get their financial status in a better position.” Officials at the District’s Department of Insurance, Securities and Banking added that some District residents are getting their payday loans in Virginia or on the internet.

Going around a payday lending ban is not limited to the District. New York has long prohibited payday lending. Yet, in a recent study of two low-income communities in New York City by the City’s Office of Financial Empowerment, 9% of the respondents “reported accessing a formal or informal loan with a term of less than one month provided by a friend or family member, Internet or telephone-based business, loan shark, or local business.” As the study’s authors noted, this is a rate similar to the access rate in states where payday lending is legal.

All this suggests that while banning payday lending might be a good start, more is needed if lower income consumers are to really be able to rid themselves of high-price short-term debt. The credit union and FDIC programs are small but important steps toward both creating a good alternative product and encouraging-or requiring-users to build savings as part of the product, so that emergency needs can be reduced and, if they occur, satisfied with savings rather than high-priced credit.

But two parties are missing from the scene, the only parties who could take the alternatives to scale. Namely, the large banks and the payday lenders themselves. Unlike credit unions and many of the banks in the FDIC pilot, large banks and large payday lenders are publicly traded corporations. Their shareholders can’t be very happy right now-bank shareholders for reasons that are well known, shareholders of payday lenders because state after state is destroying their business model. Maybe it’s time for these parties to come to the payday alternative table. With good, scaleable and sustainable alternatives.