The banking industry is stepping in again to address issues tied to a budget crisis.
Community banks in Illinois have started offering payroll gap loans to state employees, as an impasse over the budget has jeopardized pay for an estimated 60,000 workers. Small institutions, which typically shy away from short-term, pay-advance loans, are offering the product as a cheaper alternative to credit cards and other personal loans.
The budget stalemate is a politically divisive moment in Illinois, but bankers are hoping the crisis will give them an opportunity to develop stronger ties with clients who have found themselves caught in the cross hairs. In many ways, it resembles what banks around Washington did during the 2013 federal government shutdown.
"We've never had to provide [these loans] before because any impasse has been resolved before our customers have had a chance to take advantage of the loans," said Eloise Mackus, president and chief executive of the $135-million-asset Security Bank in Springfield, Ill.
The effort in Illinois is taking shape as payroll loans get more attention in Washington. The Consumer Financial Protection Bureau is drafting regulations to impose limits on the payday lending industry a move that could put short-term loan businesses at some banks at risk.
The state's fiscal year ended on June 30, but lawmakers have so far failed to pass a budget for the current year as they remain divided on issues ranging from local property taxes to workers compensation laws.
"There's just a lot of uncertainty," said Dennis Guthrie, chief financial officer at the $289 million-asset Illini Bank in Springfield. "You've got the House and the Senate that are controlled by the Democrats, and you have a Republican governor, and the process has been contentious."
Lawmakers have also been forced to discuss whether the state will be able to issue workers' paychecks on Wednesday.
Gov. Bruce Rauner, a Republican, has vowed to keep paying employees as budget talks continue. But Democratic Attorney General Lisa Madigan sought a court ruling on the matter, arguing that the state lacks the legal authority to pay its workers.
"Illinois occasionally goes through these types of budget impasses," said Linda Koch, president and chief executive of the Illinois Bankers Association. "This isn't the first time, and it won't be the last time."
A Cook County judge ruled last week that state employees could only receive the federal minimum wage until a budget is signed into law. In a separate ruling Thursday, a county circuit judge in southwestern Illinois ordered the state to pay employees in full.
Madigan's office has been considering an appeal of the latest ruling, according to media reports.
Small banks, as a result, have been stepping in to assist state employees, particularly those who live paycheck to paycheck.
"It's a very special circumstance," Koch said, pointing out that "a majority" of banks across the state have begun providing low-cost, short-term loans. She declined to provide details about the number of banks providing the loans.
Security Bank is one of the institutions that has been advertising payroll gap loans, which have no interest for the first 30 days. After that, interest rates apply that are "certainly lower than a personal loan and definitely lower than a credit card," Mackus said.
At Illini Bank, state employees who have been clients since May 1 and use direct deposit can qualify for a no-cost, 90-day loan. Customers can receive funding to cover up to two pay periods, with a cap of $15,000 per household, Guthrie said. Interest rates kick in for customers who fail to pay back the loan in 90 days.
"We're trying to make it as easy as possible for [state] employees who are customers of ours," Guthrie said, adding that there is no penalty for paying off the loans early.
Credit unions are also stepping up. Illinois Treasurer Michael Frerichs said Thursday that his office would provide up to $50 million to credit unions, to help them provide short-term loans to state employees.
Under the terms of the treasurer's program, state employees can receive 30-day, interest-free loans for up to half of their monthly pay. After the 30 days, a 9.9% interest rate applies.
Banks are also eligible to receive funding from the state treasurer, according to a spokeswoman for Frerichs' office, though none of the bankers interviewed were participating in the program.
The road ahead for the Illinois budget is uncertain. The state House passed a one-month, stopgap budget agreement late last week that would authorize pay for state employees. That bill now moves to the Senate, which is set to convene on Tuesday.
"There's enough stress on the state employees, without being concerned about where their next paycheck is going to come from," Guthrie said.