A Credit Union Opportunity Emerges as Payday Lenders Face More Regulation

As more states crack down on predatory payday lenders, there is an opportunity for credit unions to step up and fill the void with healthier alternatives.


Low and middle income individuals, including credit union members, spend over $8 billion each year at payday lenders, check cashing outlets, and pawnshops. Earlier this month, the Ohio State Legislature House of Representatives passed a bill that would restrict payday lending practices in the state. The bill would set the maximum allowable interest rate on payday and title loans to 28 percent. The bill has to be approved by the senate and executive, but if it becomes law, Ohio will join the ranks of states that have effectively cracked down on predatory payday lending practices.

States Ranked by Payday Lending Activity [1]

Many states have already passed legislation that effectively eliminates predatory payday lenders. To date, these include: Georgia, North Carolina, West Virginia, Maryland, Delaware, Pennsylvania, New Jersey, New York, Vermont, Massachusetts, Connecticut, Maine, and the District of Columbia.[1] The most recent addition to this group is New Hampshire, which passed legislation limiting payday and title loans to 36 percent earlier in May. Many other states are considering similar legislation, and last year, the maximum rate on payday loans for military personnel was limited to 36 percent nationwide.[2]

Whenever another state moves toward stiffer regulations, payday lending- affiliated organizations such as the Community Financial Services Association of America are quick to respond with a slew of facts and statistics supporting the practice. Even though such information amounts to little more than propaganda, one of their primary claims rings true. Like it or not, payday loans are a service that many individuals in this country demand. If the legislation causes predatory lenders to exit the marketplace, consumer demand still exists for the types of services they provide.

Many individuals with poor credit believe that mainstream financial institutions would not be willing to grant them a short term loan if the need arises. After legislation forced payday lenders in Georgia and North Carolina to shut down, the Federal Reserve Bank in New York conducted a study that examined the impact of these lenders exiting the market. The report concluded that bounced checks, personal bankruptcies, and complaints about debt collectors jumped significantly across the states when consumers had no access to payday loan products.[3] Credit unions have an excellent opportunity to step up to fill this void and provide healthy alternatives to individuals who have previously utilized payday lenders. Several credit unions have already done so with various products and services:

  • Alternatives for Payday Loans
    Wright-Patt Credit Union ($1.4B in Fairborn, OH) developed its Bridge Line of Credit (BLOC) to provide members with an alternative cash bridge between paychecks. They have also introduced Stretch Pay, which provides members with a fair alternative to payday loans. Due to their success, both programs have been implemented at neighboring credit unions in Ohio and Wisconsin.
  • Prepaid Cards May Begin Relationship With Unbanked Consumers
    CINCO Family Financial Credit Union ($118M in Cincinnati, OH) is committed to reaching the unbanked via the prepaid card product. They believe offering a "micro credit" product that provides members with a friendlier alternative than traditional payday loans is important to fulfilling the credit union's mission.
  • QuickCash at Reasonable Rates and Terms
    Langley Federal Credit Union ($1.25B in Hampton, VA) offers QuickCash as a payday alternative for its members. Originally developed to meet Air Force members' needs, the service is widely used by members of the military and other SEGs. Compared to the 390% APR resulting from the average fee of $15 for each $100 increment charged, Langley's QuickCash program features an 18%APR, which leads to member savings. Bringing unbanked consumers to the credit union is the first step in developing a long term relationship.

In the current economic conditions, demand for short term unsecured loans and other initiatives aimed at providing relief to financially distressed individuals becomes even more important. Many credit unions have developed payday lending alternatives over the last few years and have successfully offered the service to members. These alternatives are offered at rates far below what a predatory lender would charge. Most credit unions also accompany their payday lending alternatives with financial education and other resources designed to help build credit, break the cycle of debt, and transition members into mainstream financial products. Credit unions should publicize that they are willing to work with distressed members. They need to make sure that potential and existing members know that they can provide the services that they require while keeping their best interest at heart.

If you are interested in learning more about payday lending alternatives and serving the unbanked, Callahan will be hosting a webinar about this topic on June 5th. Join other credit unions for a live discussion about what strategies are most effective for reaching the underserved.

[1] Graves, Steve and Christopher Peterson. 2008. Usury Law and Christian Right: Faith Based Political Power and the Geography of American Payday Loan Regulations. Catholic University Law Review 57 (3) Data Source: State Regulatory Authorities, FDIC, Business Directories.

[2] CU Journal, Ohio Would Lower Bar on Payday Loans

[3] Fisher, Marc, Are Payday Loans a Service or Disservice? Washington Post. January 2008




May 19, 2008


  • Due to unforseen financial problems I have about, 14 of these loans. At about 6000.00 I can''t seem to get out of this mess is there any hope.I also have bad credit and I can''t file banruptcy.
    Daniel Newman
  • We continue to call the alternative lending outlets "predatory", although this is a mainstream service consumers demand and accept. The credit union and banking industry should look within, and question whether their "Courtesy Pay" practies would be considered predatory too. Have they ever calculated the APR on a "Courtesy Pay" advance? Example: a $25.00 Courtesy Pay fee to cover a $100.00 check for 10 days? Let''s calculate that APR. Hmmmm sounds very predatory to me. In most cases, a consumer would pay more through Courtesy Pay if they "bounced" a couple checks, than if they received one PayDay Advance to cover their checks - at least in Florida.