Short Term Credit Landscape

Meeting the Need: Affordable, Responsible Short Term Credit

The Problem: Lack of Affordable, Responsible Short Term Credit

Woodstock Institutewww.woodstockinst.org

Short Term Credit LandscapeWOODSTOCK INSTITUTE PROGRAMS

Regulation of Existing High Cost Products

Consumer Education

on Alternatives

New Product Development

Short Term Credit ProductsTHE CONSUMER CREDIT LANDSCAPE

Product Availability Cost Constraints

Payday Loan Now High Any Checking Account

Credit Union Varies Low Credit Union Member

Credit Card Application Processing

Low Credit Rating

Overdraft Now High No Repayment Mechanism

Bank-Based Product

Branch Hours Only

Low Change Bank Account

Easy Difficult

Payday lenders in the Chicago market area

Customers have easy access to high cost debt

Minority and lower-income communities see a slightly higher concentration

Short Term Credit ProductsPAYDAY LOANS ARE JUST ONE OPTION

LMI Tract

Payday Loan Store

Short Term Credit Landscape

0.5

0.8

1.2

1.6

0.4

0.8

1.2

1.6

2.0

Minority MUI White LMI Minority LMI White MUI

Income and Minority Tract Composition

Locations per 10,000

Payday lenders in the Chicago market are located in minority and LMI tracts

Short Term Credit Landscape

• 573 percent APR

• Average loan was $331

• Average finance charge $144

• Average attorney’s fee $303

• 98 percent resulted in garnishment

Of 444 debt collection suits filed…

Source: Greed: An In-depth Study of the Debt Collection Practices, Interest Rates, and Customer Base of a Major Illinois Payday Lender. 2004 Monsignor John Egan Campaign

Short Term Credit LandscapeMAKING CREDIT SAFER IN ILLINOIS

Five Key Consumer Protections

• Loan fee limited to $15.50 per $100

• Principal indexed to income

• 7 day recovery period

• Fee-free repayment plan

• Limit of two loans not to exceed 45 days

Source: Payday Lending Under the Illinois Payday Loan Reform Act. 2005 Woodstock Institute

Short Term Credit ProductsTHE CONSUMER CREDIT LANDSCAPE

Product Availability Cost Constraints

Payday Loan Now High Any Checking Account

Credit Union Varies Low Credit Union Member

Credit Card Application Processing

Low Credit Rating

Overdraft Now High No Repayment Mechanism

Bank-Based Product

Branch Hours Only

Low Change Bank Account

Easy Difficult

Small Banks and CUs

Small banks and CDCUs are payday loan alternative innovators

Limited scale and accessibility

Short Term Credit ProductsPAYDAY LOANS ARE JUST ONE OPTION

Austin Bank

Northside FCU

Southside FCU

Large banks and mainstream credit unions offer many of the services of banks

Geographic FOMs allow them to serve entire regions

Short Term Credit ProductsPAYDAY LOANS ARE JUST ONE OPTION

Austin Bank

Northside FCU

Southside FCU

Mainstream CUs

Large banks and mainstream CUs

Short Term Credit ProductsTHE CONSUMER CREDIT LANDSCAPE

Product Availability Cost Constraints

Payday Loan Now High Any Checking Account

Credit Union Varies Low Credit Union Member

Credit Card Application Processing

Low Credit Rating

Overdraft Now High No Repayment Mechanism

Bank-Based Product

Branch Hours Only

Low Change Bank Account

Easy Difficult

Short Term Credit LandscapeCREDIT CARDS

Blindfolded into Debt

• 75 percent of Americans qualify

• Misleading terms and fees

• “Universal Default”

• Only the rate range is advertised

• Convenience checks have different rates

Source: Blindfolded into Debt: A Comparison of Credit Card Costs and Conditions of Banks and Credit Unions. 2005 Woodstock Institute

Short Term Credit ProductsTHE CONSUMER CREDIT LANDSCAPE

Product Availability Cost Constraints

Payday Loan Now High Any Checking Account

Credit Union Varies Low Credit Union Member

Credit Card Application Processing

Low Credit Rating

Overdraft Now High No Repayment Mechanism

Bank-Based Product

Branch Hours Only

Low Change Bank Account

Easy Difficult

Short Term Credit LandscapeHIGH-COST “BOUNCE PROTECTION”

Banking on Bounced Checks

• $25 to $35 per overdraft plus daily fee

• Overdraft privilege included in balance

• Multiple fees for multiple bounced checks

• Cost for a $200 14 day loan• Average Fee $29• Average total fees for 5 debits: $186• Effective APR 2,424 percent

Source: Banking on Bounced Checks: Federal Proposal on Bounce Protection Still Exposes Consumers to Hidden Fees. 2004 Woodstock Institute

Short Term Credit LandscapeGOING FORWARD

• Enforcement of Illinois Payday Loan Reform Act

• Extending protections to other short term credit options, such as title loans

• Monitor the impact of credit cards, bounce protection on lower-income households

• Promote short term credit options at larger regulated financial institutions

• Improve access to these products for lower- income households