Monday, October 16, 2006

It wasn't hard for Jim Schrimpf to spot a disturbing trend at Brewery Credit Union: Members were using payday advance loan lenders instead of the credit union for small, short-term loans.

Schrimpf said payday lenders were coming into the credit union regularly to cash checks written to them weeks earlier by Brewery members.

"We estimate probably 15% of our membership either had a payday loan or were doing business with a payday lender within the last 12 months," said Schrimpf, who is president and chief executive of 7,000-member Brewery Credit Union told The Milwaukee Journal Sentinel.

That meant that Brewery members were paying the going rate of at least $20 for every $100 borrowed - which amounts to interest of more than 500% when expressed as a yearly rate - for the typical $350 cash advance.

Schrimpf said he felt compelled to do something.

After seeking guidance from the industry's Filene Research Institute, Wisconsin Credit Union League and Milwaukee consumer finance lawyer Amy Salberg, Schrimpf set up a payday-like program called "Fast Cash," which offers loans to members at less than half the cost of traditional payday loans.

The payday advance alternatives: In Brewery's program, members pay $9.95 for every $100 borrowed. In the process, they receive some financial education and encouragement intended to eventually get them off the high-cost borrowing cycle.

Brewery Credit Union has made about 100 Fast Cash loans to its members since it started last winter, and Schrimpf is hoping the concept catches on to the extent that it poses some real competition to faxless payday loan lenders in the Milwaukee area.

"It's been very well-received," Schrimpf said. "We're proud of what we're trying to do."

It's hard to say whether efforts such as Schrimpf's - and similar programs around the state and nation - will put a dent in the growing payday lending industry. But consumer advocates are happy to at least see someone trying.

"It's a good sign that more mainstream financial institutions are starting to serve the small loan needs of their own customers," said Jean Ann Fox, a spokeswoman for the Washington, D.C.-based Consumer Federation of America.

Fox said no fax cash loan outlets, which critics say add to the burden of people with low incomes or little personal finance know-how, have grown rapidly.

"This industry has spread to the point where you can't turn around without running into a payday loan outlet in low- to moderate-income neighborhoods," Fox said.

Since 2000, the number of payday lending locations in the U.S. has more than doubled from 10,000 to 22,000, said Steven Schlein, a spokesman for the industry's trade organization, the Community Financial Services Association in Washington, D.C.

In Wisconsin last year, there were 442 payday cash loan locations that issued a total of $625.3 million in loans, up 23% from $506.6 million in 2004, according to the state Department of Financial Institutions.

Defending the industry, Schlein said it fills a niche that banks and most credit unions have shunned: small cash loans with little or no collateral. He said it started in the 1990s, when pawn shop operators decided to start making loans of $100 and $200 to people who otherwise would come in to hand over jewelry and other valuables as security for small, short-term loans.

It's "demagoguery" to classify payday loans as predatory lending, Schlein said. He defined predatory lenders as those who cause borrowers to lose whatever they've put up as collateral.

"We want people to pay their loans back," Schlein said.

Giving payday loans their props: Brewery Credit Union's Schrimpf tips his hat to providers of cheap payday loans for one thing: They know how to cater to their customers. And for the credit union to be successful with its loans, it has to treat them just as well or better, he said.

"We knew they would be expecting at least the same type of experience. Because to be honest with you, payday lenders do a really good job of serving people," Schrimpf said. "They are friendly; they do this quickly with a smile on their face and all the rest."

Ken Eiden, who runs Prospera Credit Union in Appleton and has been offering similar fast cash loans since the summer of 2005, agrees it was important that people who are accustomed to regular and/or no fax payday loan stores feel just as comfortable going to the credit union for a payday-like loan.

"It just made sense to make a product that looks like, acts like and feels like something they are already buying. They are already into payday loans," said Eiden, whose credit union has done about $1 million in what it calls "GoodMoney" loans.

The fee on Prospera's loans is $9.90 per $100 borrowed and - crucial to the process - doesn't include a credit check the way a normal loan would. Payday borrowers typically eschew loans that involve credit checks, and credit unions have had difficulty trying to steer them into traditional loans.

The not-for-profit credit unions say they aren't in it to make money on the loans, and the nearly $10 charged per $100 goes toward expenses for running the payday program and to fund a separate loan-loss reserve to cover any debts that go bad.

The credit unions say they have trained their employees to offer non-judgmental financial counseling and gentle nudging toward better spending and saving habits to those who come in for the alternatives to cash loans.

"If all we do is provide a cheaper not-for-profit alternative, that's not good enough in my mind," Eiden said. "We've got to be able to change people's lives and give them different financial futures. That's what we're trying to do."

This entry was posted on Monday, October 16th, 2006 at 12:01 pm and is filed under Wisconsin.