Non Profit Payday Loans?

Here's a recent
New York Times article sent to me from Katie at NCHM on payday lending. I know that the NCUD / CTCU-EPA partnership is going to have to create the right program addressing the needs for short term lending for low income families. We don't have the answers yet, but it's definitely on our radar.

APPLETON, Wis. — This city of 70,000 has five McDonald’s franchises, three Pizza Huts, four Starbucks shops — and 19 payday loan stores, brightly lighted storefronts with names like EZ Money and Check Into Cash that offer two-week loans without credit checks.

Peggy Truckey, 53, knows the allure. Last year she owed nearly $1,300 to four of those stores, and was paying about $600 a month in finance fees alone. “I thought I was going to have to take a second job just to pay off the interest,” Ms. Truckey said.

Then she heard about a new nonprofit program operated out of a Goodwill thrift store, one of several hundred lower-cost payday loan products that are now being tried by credit unions around the country. She got a payday loan, at half the finance charge, but also something more: help converting all her two-week payday debts, which charged the equivalent of more than 500 percent annual interest, to a one-year loan at 18.9 percent, bringing her monthly payments down to a manageable $129. A few dollars from each payment go into a savings account, the first she has had in years.

“I have almost $100 in savings,” said Ms. Truckey, who earns $9.50 an hour as a supermarket meat clerk. “I’m in a comfortable position for the first time in many years.”

The program, GoodMoney, a collaboration between Goodwill and Prospera Credit Union, is a response to an industry that has been criticized by lawmakers and consumer advocates as predatory but that has reached as many as one in 20 Americans.

“Our goal is to change behavior, to interrupt the cycle of debt,” said Ken Eiden, president of Prospera, who is also a director at Goodwill.

For Ms. Truckey, as for most payday borrowers, the loans began as a stopgap. After losing her job in 2002 she borrowed $500 from a payday store, which charged $22 per two weeks for every $100 borrowed, or the equivalent of 572 percent annual interest. When the loan came due in two weeks, she could repay only the $110 finance charge, so she rolled the loan over, adding another finance charge.

Soon she took a second loan, from another store, and eventually two more, which she rolled over every two weeks, multiplying the cost of the loans. Even after she found a full-time job, she said, “I wasn’t able to pay my electric bill on time or my other bills on time, because half my paycheck was going to finance charges.”

At GoodMoney, tellers encourage borrowers to consolidate their debt in lower-interest term loans, and to use other credit union services like automatic savings. If borrowers cannot repay a loan after rolling it over twice, they can get the loan interest-free by attending a free credit counseling session with a nonprofit service.

GoodMoney arose out of cases like Ms. Truckey’s, said Bob Pedersen, president of Goodwill Industries of North Central Wisconsin, which provides services to low-income people. A few years ago, Mr. Pedersen said, the organization noticed that both its clients and its employees were struggling with payday loans.

“It wasn’t uncommon to find them a good job, then see them upside down on credit, with debt they wouldn’t be able to pay off in their lifetime,” he said.

Some of Goodwill’s directors, Mr. Pedersen said, initially opposed offering payday loans, even at lower interest. But Mr. Eiden, Prospera’s president, said that “a lot of consumers felt they were a savior.”

Of the $9.90 that GoodMoney charges per $100 borrowed, nearly half goes to writing off bad loans, Mr. Eiden said, and the rest to database service and administrative costs.

Since June 2005, the program has made more than 5,600 payday loans, a negligible dent in Wisconsin’s payday loan business.

Recalling the way the loans had piled up, Mr. McGrath, a 41-year-old maintenance mechanic, said: “We thought, ‘O.K., we can get this one over here and pay off these others.’ But it never works out. I’d need a set of tires for the car: back you go.”

“We sold things out of our home just to eat,” he added.

This brings up some interesting conversations about what a non profit should do and whether a non profit has a right to charge for a service such as this. I'm also having some conversaions about the issue of interest and costs as we think about domestic micro enterprise lending. These are exciting conversations! You can read the whole Times article here.

Q. What do you think? Should a non profit organization charge for a service similar to what is described in the article? What is the church's role in solving problems like this?