Putting new interest in payday loans

Payday loan sign

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KAI RYSSDAL: This might be kind of hard to imagine with all the defaults in subprime mortgages, but there are some risky loans out there that are returning a pretty good profit. Payday lending's probably the best example. Check-cashing outfits offering short term loans at what can be triple-digit interest rates. The government's bank insurer, the FDIC, wants the 22,000 payday lenders out there to lower those rates. And competition's the best way to do that.

From WCPN in Cleveland, Mhari Saito reports.


Mhari Saito: Rita Haynes heads up Cleveland's Faith Community United Credit Union. For more than half a century, she's looked forward to the 15th of the month. That was payday. So people in her black, working-class neighborhood would come in to draw money.

But then in the late 90s, more and more credit union members started writing postdated checks to cover loans and fees from payday lenders. Customers needed money before pay day. And that plunged Rita Haynes into a nightmare. Payday lenders would come in to her credit union on the 15th to try and beat customers to the payday punch.

Rita Haynes: On the 15th the payday lenders would come and get in line and try to cash that post-dated check before the member could come and get money for groceries or whatever.

The result: bounced checks, bank fees, and customers going out to get new payday loans to try and fix the mess. So Haynes created the Grace loan, a one-month loan with a 17% annual percentage rate. The payday lender down the street was charging nearly 400% on a two-week loan.

Haynes: The regulators at first were very afraid that this was going to take us under and all of that. We've found that we've lost very few loans.

The FDIC would like to see more successes like this. So this summer the nation's bank regulator released guidelines for the kind of payday loan they'd like banks to offer: Small, one-month loans capped at 36%. To sweeten the deal, the agency is offering extra credit come exam time. Every year, banks have to show they are trying to meet the federal Community Reinvestment Act by doing business with both rich and poor. The FDIC's Bob Mooney:

Bob Mooney: We will provide very favorable consideration during the examination for a bank to offer this product.

But will that be enough for banks to wade into payday loans? Probably not if the interest rate is capped at 36%, says Wayne Abernathy of the American Bankers Association. Abernathy says on average it costs banks up to $200 in overhead costs and time for credit checks to make a loan.

Wayne Abernathy: What some banks have been willing to do is "Let me give it a try. I know I'm going to lose money at it, but I'm hoping that by starting off with this kind of a loan I'm going to create a relationship that will continue. And then in the end it will become mutually beneficial." Others have said, "I don't know how I can afford that."

But critics say banks aren't interested in making lower-interest payday loans available. That's because many customers have overdraft protection that they otherwise wouldn't take. And that overdraft protection can come with very high interest rates, even as high as what payday lenders charge. Roman Vaccari represents payday lenders at the Financial Service Centers of America.

Roman Vaccari: Really what the FDIC is seeking to do is to have banks cannibalize other products being offered by the banks such as overdraft. Overdraft protection is extremely lucrative.

Bounced check fees from mounting payday loans led 44-year-old healthcare worker Jacqueline Oliver to switch banks for Faith Community United Credit Union. She says their short-term "Grace" loan gave her a second chance.

Jacqueline Oliver: The payday lender that I was using . . . I had gotten behind with it. And when I borrowed from here they didn't hold it against me, and it helped me to pay off the other loan.

Last year, the Credit Union made over 2,000 "Grace Loans" and only seven went bad. Despite the success, Credit Union CEO Rita Haynes admits Grace Loans don't make money. But she says the Grace Loan has helped them grow because borrowers must have direct deposit and save at least $10 every time they get a loan.

In Cleveland, Im Mhari Saito for Marketplace.

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