Worth re-posting: Payday Pundit wants to shout from the rooftops…

Further to my previous post, here is a Payday Pundit post that illustrates how even award winning payday loan alternatives offered by not-for-profit agencies in the United States still amount to 252% APR:

"Even credit unions and charities could not offer payday loans under annual percentage rate caps of 24%, 28% or 36%"

Will Credit Unions ever be an option for cash advance consumers?

As Canadian Provinces work on their payday loan legislation and look at ways to implement effective consumer protection measures, it is worth reviewing the role that Credit Unions may play in providing short-term, small-sum credit to payday loan consumers.

Some voices in the debate such as Cheri DiNovo, Jerry Buckland, Chris Robinson and Acorn, while they all acknowledge that consumers need access to payday loan style credit, are adamant that if payday lenders were driven out of the market, Credit Unions would step in to fill the void. This view of the Credit Union as the saviour of credit constrained Canadians serves as the pillar upon which they build their argument for payday loan rate caps that would drive existing lenders out of business.

Brad Duguid, Liberal MPP in Ontario, recently described this as a "Pollyanna policy," that would drive payday loan customers to "underground" sources of credit. Mr. Duguid's concern has been echoed by numerous parties including the Consumer Measures Committee and Scott Hannah of Credit Counselling Canada.

Fortunately for policy makers (and payday loan consumers who may be wondering what sources of emergency credit will be available to them in the future) who are trying to reconcile these two positions, the Quebec experience provides some insight into what we might expect from Credit Unions in the absence of payday loan companies.

There are no payday lenders in Quebec as a result of the law in that Province that prohibits lenders from charging more than $1.34 for a $100 loan for 14 days, or 35% APR. If, as Cheri DiNovo and company have predicted, Credit Unions will step in to fill the void left by payday lenders, we would expect to see a robust set of short-term, small sum credit products offered by Credit Unions in Quebec. Readers will be interested to know that this has not been the experience in Quebec.

Here is what has happened:
One financial institution, Desjardins Financial, launched a product called micro-loans that was targeted at previously unbanked individuals. It was launched in 2001 and by 2006 there were 245 branches participating in the program. Over this time, they issued 1,792 loans for a total value of less than $1 million. I cannot ascertain the status of the program today as there is no reference to it on Desjardins' website.

To put this in perspective, a single Money Mart location will issue more than $2 million each year. Also, every payday loan customer must have a bank account, meaning that the only product I could dig up that is even close to a payday loan, was not even targeted at the payday loan consumer. Bottom line: Quebec's Credit Unions did not ride to the rescue of credit constrained consumers in the absence of payday loans in that Province.

One is left to wonder where payday loan consumers are going for their emergency credit in Quebec. Pawnshops are an obvious answer, but I have yet to dig up any good data on the state of the Quebec pawnshop industry. I will do some digging and try to provide some meaningful information as soon as I can. In the meantime, those advocating for Credit Unions to serve the needs of those Canadians who are currently counting on payday loan companies to get them through a tough financial spot should give some thought to where consumers will really go when they are short before payday. If Quebec is any indication, it won't be their local Credit Union.

From MotherJones Blog: Banks make payday lenders look like a bargain

As if to complement 310-LOAN's comments yesterday to the Nova Scotia Utility and Review Board, MotherJones is citing a study today about the high cost of overdraft fees from banks (thanks go to Payday Pundit for this find):

MotherJones Blog: Banks Give New Meaning to Protection Racket:
Payday loans have gotten a lot of bad press lately as state governments attempt to crack down on the 'legal loansharking' outfits that make very short term loans with interest rates going as high as 500 percent. But a new study by Marc Anthony Fusaro, a professor of economics at East Carolina University, found that the overdraft loans given by banks these days make payday lenders look like a bargain.

Hidden Consumer Loans: An Analysis of Implicit Interest Rates on Bounced Checks:
Payday lending attracts attention for its high interest rates, but bounce protection loans are much more expensive. Bounce protection is a program where consumers overdraft – write checks in excess of the checking account balance – and the bank pays the check allowing the account balance to be negative. For this service/loan, banks charge the standard non-sufficient funds (NSF) fee. When the amount borrowed is low and the time outstanding is short, the effective interest rate paid on this loan can be quite high. Using a unique data set we are able to quantify how high the interest rate is. We find that the median implicit interest paid by consumers is over 4,000%.