Underbanked

The person-to-person payments company Obopay Inc. has a new tool to reach the underbanked, a market it never intended to pursue.

A privately funded antipoverty program backed by Mayor Michael Bloomberg is paying underbanked residents of New York to open savings accounts at four banks and four credit unions.

Payday lending is on the verge of being outlawed in the District of Columbia, but the fact remains that consumers will still need access to short-term, emergency loans. Credit unions already are marketing what they call lower-cost alternatives to the traditional payday loans, and consumer finance firms offer products that could be attractive to consumers who have used payday lenders. Even bankers, with a nudge from the Federal Deposit Insurance Corp., might consider getting in on the action. The D.C. City Council passed the Payday Loan Consumer Protection Act of 2007 in September, and Mayor Adrian Fenty, a Democrat, signed it last month. The bill, which would cap the annual percentage rate on payday loans at 24%, is in Congress’ hands now. If approved, it would likely go into effect by Jan. 8. Payday lenders have said the caps would make it impossible for them to make loans profitably and likely would force them to stop lending in Washington. Ultimately, they argue, consumers would suffer, because they would have fewer options for short-term, small-dollar loans. But Mary Cheh, the city councilwoman who sponsored the legislation, said in interview with American Banker shortly before the bill was passed that she was confident “the void will be filled” by the likes of finance companies and credit unions. The District of Columbia would join 13 other jurisdictions that have either banned payday lending or capped rates on the loans, essentially forcing payday lenders out. North Carolina was one of the first to ban it, in 2001, though for years many lenders were able to get around the law by entering rent-a-charter agreements with out-of-state banks. It took Attorney General Roy Cooper five years of investigations and lawsuits — not to mention a crackdown on charter renting by federal regulators — to force out all of the state’s payday lenders. Sharon Reuss, a spokeswoman for the Center for Responsible Lending, a consumer watchdog group in Durham, N.C., said the disappearance of payday lenders has saved the state’s residents $150 million a year in fees and interest payments. Alternative loan products, specifically the State Employees Credit Union Salary Advance Loan, have emerged to meet residents’ need for emergency cash, she said. The credit union began exploring small-dollar loans after an August 2000 survey found that many of its members, made up of state and public school employees and their families, had been borrowing from payday lenders. Most could not qualify for conventional loans, because of spotty credit reports and high debt-to-income ratios. “We were trying to figure out why in the world our members were using payday lenders,” said Leigh Brady, the credit union’s senior vice president of education services. “We needed something to get them away from the payday lenders.” A program the credit union began in 2001 lets members take out salary advance loans with a maximum of $500, a minimum of $50, an APR below 18%, and no fees. Every time a loan is granted, 5% of the advance is deposited into a cash account and accumulates interest at the passbook rate. The money is used to securitize the loan, as well as to encourage members to save. “The savings is the best feature of the whole program, because it helps to break the cycle of debt,” Ms. Brady said. Currently, 50,000 members of the credit union use the program. A typical payday lender charges a fee of $15 for every $100 borrowed, but the interest on a $500 salary-advance loan from SECU is $5. The Community Financial Services Association, a trade group for payday lenders, said credit unions cannot make small-dollar loans profitably. “Some credit unions and good will industries are offering payday advances and charging $10 per $100 and losing money,” said Steven Schlein, a spokesman for the group. “It’s not working for them, because the right price for a payday loan is between $15 and $17.” Credit unions “don’t have to pay taxes because they are nonprofit, but they still can’t get away with going that low.” There are 49 payday-lending outlets in Washington, and it is likely that some, if not all, would pull up stakes when the rate caps take effect. In anticipation of that, a coalition of credit unions is marketing Stretch Pay, a $250 or $500 revolving line of credit for which borrowers pay an annual fee of $35 or $70. Customers must repay the loan within 30 days before another advance can be taken. “Credit unions have always been the best option for consumers to get loans, because of their low rates,” said Jennifer Gore, the chief advocacy officer for the Maryland and D.C. Credit Union Association. “At credit unions, we believe that consumers should end up better off, rather than worse off, after getting a loan.” Yasuko Fumoro, a spokeswoman for Microfinance International Corp., a Washington consumer lender that targets the unbanked or the underbanked, particularly Hispanic immigrants, said it offers a consumer product that could be an option for the city’s residents. The loan carries an interest rate of 24% and ranges in size from $500 to $3,000. The biggest difference between its loans and payday loans is that consumers repay them in installments, as they would car or home loans, Ms. Fumoro said. Banks that are based in or do business in Washington could also step in, with encouragement from regulators. The FDIC is taking applications for its Small Dollar Loan program, a two-year test to encourage banks of all sizes to offer payday loan alternatives. So far the FDIC is talking to 57 banks, with $40 million to more than $100 billion of assets, and a Washington bank could very well join that group.

Two developments in payment systems could make it easier for consumers to make their rent or mortgage payments electronically, while streamlining payment processing for property managers and mortgage banks.

Do you want fries with that?

Did you know that this is National Payroll Week?

Bucking a trend, U.S. Bancorp is moving forward with its plans to develop self-serve financial kiosks, despite lingering questions in the industry about whether they can generate profits.

Over the last six years Central National Bank and Trust Co. in Enid, Okla., has reported steady growth in fee income, in part because of its marketing of gift, payroll, and remittance cards in communities where it operates.

A Manhattan Beach, Calif., credit union says its acquisition of a Los Angeles check casher and payday lender should result in more competitive pricing for short-term loans in southern California.

The prepaid card provider Postilion, a division of S1 Corp., and Central National Bank and Trust Co. in Enid, Okla., said Monday that they had formed a partnership to offer prepaid cards to the bank's partner financial institutions.

The mayor of New Haven has introduced a dual-purpose identification and stored-value card aimed in part at improving access to mainstream financial services for the city's illegal immigrants.

Once focused solely on credit cards, Capital One Financial Corp. is expanding rapidly into the debit market and says its latest deal, for one of the top prepaid debit companies, will lure a new slice of customers to its other products.

The payday lender Ezcorp Inc. is offering a reloadable prepaid card that gives $300 in overdraft protection to people who direct-deposit their paychecks onto the card.

Total System Services Inc. said it is processing the prepaid card Wal-Mart Stores Inc. introduced with great fanfare this year.

A nonprofit that works to improve financial services for the underbanked has launched a for-profit investment fund to finance companies that serve such people.

Wells Fargo & Co. will announce today that it will waive or reduce remittance fees for its customers, and that it now offers money transfers to recipients without bank accounts in five countries.

After repeated delays, CheckSpring Bank, a New York City start-up that plans to make check cashing a core service, has secured the necessary capital and hopes to open its first branch, in the Bronx, by October.

H&R Block Inc.'s results showed that the mortgage unit it has agreed to sell continues to lose a significant amount of money, but also provided evidence that it is making progress in building a consumer financial services business to augment its core tax-preparation line.

Wal-Mart Stores Inc. detailed its plan to continue to expand in the money-services business.

After 15 years in subprime consumer lending, Bruce Hammersley says "the opportunity to lead in a market that has tremendous growth opportunity" led him to quit HSBC Holdings PLC for a fledgling marketer of prepaid cards.