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BETTER CHOICE FOR PENNSYLVANIA BORROWERS Federal Reserve Bank of Cleveland June 12, 2008

BETTER CHOICE FOR PENNSYLVANIA BORROWERS Federal Reserve Bank of Cleveland June 12, 2008. PAYDAY LOANS. Payday loans Low-dollar Short-term loans Meet borrowing needs of low-income working families Phenomenal growth by payday lenders 23,000 lenders nationwide

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BETTER CHOICE FOR PENNSYLVANIA BORROWERS Federal Reserve Bank of Cleveland June 12, 2008

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  1. BETTER CHOICE FOR PENNSYLVANIA BORROWERS Federal Reserve Bank of Cleveland June 12, 2008

  2. PAYDAY LOANS • Payday loans • Low-dollar • Short-term loans • Meet borrowing needs of low-income working families • Phenomenal growth by payday lenders • 23,000 lenders nationwide • Numbers of outlets roughly tripled in 3-year period • 2005: $40 billion in loan value and $6 billion in finance charges

  3. TYPICAL PAYDAY LOAN Up to $500, upon proof of regular paycheck $15-25 fee per $100 borrowed ± 18% annual interest rate Two-week term Lump sum repayment required Secured by borrower’s post-dated check or authorized deduction

  4. PAYDAY LENDING DEBT TRAP • Many users borrow full amount of paycheck • Two weeks later, cannot turn entire paycheck over for payday debt and support family • Payday lenders “helpful service”: pay fee again to flip original loan for two more weeks

  5. PAYDAY LENDING DEBT TRAP (cont). Average borrower pays almost $800 to borrow $325 In 2005, 90% of payday loans went to borrowers with 5 or more transactions per year. In 2005, 62% went to borrowers with 12 or more annual transactions. Average of 9 transactions per year for payday borrowers Estimated that 90% of lenders’ revenue comes from fees from trapped borrowers.

  6. BETTER CHOICE PARTNERSHIP • Pennsylvania Credit Union Association • Pennsylvania Treasury Department • Wide footprint to provide convenience

  7. BETTER CHOICE PROGRAM • Designed to prevent borrowers from falling into debt trap and to develop savings habits • Up to $500, maximum fee of $25 • 18% annual rate • Term up to 90 days • Installment payments permitted • No flipping or rolling over • Financial counseling available • Automatic savings component

  8. BETTER CHOICE ONE-YEAR RESULTS Program started in earnest in January of 2007 Initially offered by 37 separate credit unions with 129 separate locations in PA Currently offered by 70 credit unions with 192 locations in PA 2007 results: 5706 loans totaling $2.73 million ($877,000 through 6/30/07) Estimated savings of $1.97 million to consumers compared to typical payday loans of comparable amount and length

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