CHICAGO -- Concerned that some parishioners were getting too deep in debt to payday lenders, Father Thomas Frayne of St. James Church came up with a solution two years ago.
He created a revolving, $1,000 fund from which parishioners or others in the church's community could borrow up to $200, interest-free, for up to two weeks. The only catch: The borrower must have a relationship with Father Frayne.
"If somebody knows you, your accountability is much greater," he explained.
Though the church can only make five loans at a time, it has to date made 75, and only one borrower has defaulted. The program has been so well received that the Monsignor John F. Egan Campaign for Payday Loan Reform, a Chicago coalition dedicated to providing alternatives to payday lending, recently honored the South Side church on with one of two Vision awards.
"There seemed to be both a supply and demand side to this problem," Father Frayne said.
The late Monsignor John F. Egan formed the coalition of community groups, financial institutions, legislators, and churches in 1999 in an effort to reduce the number of people who get trapped into high debt by payday loan fees. Monsignor Egan died in May, but the coalition continues to work on problems associated with payday lending.
Its other Vision award was presented to North Side Community Federal Credit Union for its seven-year-old "Hot Funds/Cold Cash" program.
Through the program, North Side makes loans averaging about $500 and lasting one year. North Side members who have been with the credit union for a year, have a monthly income of $1,000, and have not been turned down for a loan in the past year are eligible. The monthly installment on a $500 loan, at a 16.5% interest rate, is $48.55.
"It's one thing to say 'Don't take out payday loans.' It's another thing to offer an alternative," said Edward Jacob, manager of the credit union.
These loans make up about 3% of the credit union's loan portfolio. So far 1,627 of these loans worth a total of about $813,500 have been made. About 3.2% have not been repaid, compared with a 1.5% nonpayment rate on the credit union's other loans.
The nonpayment rate on Hot Funds/Cold Cash loans "could be lower, but that would mean we weren't serving the people we're supposed to serve," Mr. Jacob said.
The credit union recently announced it is modifying the program somewhat, thanks to a $20,000 grant from Northern Trust Bank. The grant, which will be put in reserve for loan losses, will allow North Side to drop the one-year minimum membership requirement.
The modification was scheduled to take effect Jan. 1. Northern Trust will receive Community Reinvestment Act credit for its involvement in the program.
Groups that work with payday borrowers hope North Side's program is the beginning of a trend.
"It is at least showing consumers that when you have a financial crisis, you don't have to give up all your rights as a consumer and fall into an endless spiral of debt," said Frank Houston, a legislative associate with the Illinois Public Interest Research Group. "We would definitely like to see other financial institutions follow suit."
Anne Vander Weele, a policy specialist with Metropolitan Family Services, a nonprofit organization that helps families through counseling and legal aid, said people take out payday loans to cover utility bills or rent, or even pay off another payday loan.
North Side's program can help these people, she said. "It is able to pretty comparably meet the kind of product that a payday lender provides with terms less harmful to the consumer."
