Program aims to curb payday loan cycle

 

By Bill Donovan
Gallup Times

 

Dozens of Navajo families showed up Saturday to the offices of First Financial Credit Union after they heard that there might be a way they could get out of the payday loan cycle.

People were literally crying as they signed papers that they hoped would mean that they never would have to go to another payday loan company to borrow money again.

The cycle, at least for them, had been broken.

"This is the first option that people have had to the payday loan program," said Ben Hayward, the director of the credit union and the man who developed a program he hopes will end the cycle of unending debt that has plagued thousands of Navajo families in recent years.

People who were signing up for the program on Saturday told horror stories of being required to turn over the major portion of their pay checks every two weeks to as many as a dozen payday loan companies just to pay the interest fees and not seeing the principal reduced a cent.

Hayward reported having some families tell him that they would be getting phone calls every 30 minutes from payday loan companies demanding payment.

Their whole lives have been taken over by the loan companies and until Saturday, they saw no way of getting out of the cycle.

That changed Saturday when the credit union started a program that Hayward had been thinking about for months - a method that he and others at the credit union have devised that they hope will get Navajo families and others in their membership area off the payday loan cycle once and for all.

The program works like this.

People on the payday loan cycle can now go to First Financial and consolidate all of their payday loans. Instead of paying an interest rate that can go up over 500 percent a year, the credit union charges them a fee that amounts to $12 for every $100 borrowed.

Families have to agree that they will not go to a payday loan company while they are on the program. Instead, they can come to First Financial and get the money they need.

First Financial is working with a credit counseling firm called Balance and families in the program must agree to go to money management classes set up by Balance to learn how to budget their money, how to provide for emergencies and basically live within their income.

"They learn how to say no to their teenager who wants a $140 pair of sneakers so he can walk around the mall in them," said Hayward.

Families who continue with the program for a year will have at least 80 percent of the fees and interest they paid put into a savings account so they will not have to live paycheck by paycheck.

Hayward said that as a credit union, First Financial is a nonprofit institution, so it doesn't want to make a profit.

"This allows us to do something because it is the right thing to do," he said.

On the other hand, it isn't allowed by state law to lose money so as the program progresses, credit union officials will assess how much it costs to administer the program and if it turns out to be less than 20 percent, the amount turned back to families will increase.

Not all Navajo families can qualify for the program.

Since First Financial is state-chartered, it can only serve families that live or work in New Mexico. Hayward said he is urging credit unions in Arizona to set up similar program.

Also it can't help people who owe $25,000 to $30,000 to payday loan companies. These families are so far over their heads, Hayward said, that their only recourse is filing for bankruptcy or, if they have the ability, getting a second mortgage on their homes.

The First Financial program is basically meant to help those who now owe $3,000 to $5,000, although people who owe more can qualify.

The two key parts of the program are the counseling and the requirement that families don't go to payday loan companies again.

Hayward said families are required to sign affidavits agreeing to these provisions and although there is no way the credit union can keep people in the program from going to the payday loan companies again, he said the fact that they can come to First Financial and get another loan at 12 percent should convince them that it is in their best interest to do so.

Hayward said that when he came to New Mexico two years ago, he was aware of the payday loan program but he wasn't aware of how much it had taken hold of so many people's lives in this area.

"This is basically an epidemic," he said. "We're talking about families that make $1,800 a month and are paying $1,100 to $1,200 of that to payday loan companies just to pay off the fees and still find themselves owing $4,000 to $5,000."

This leaves very little to pay basic necessities so the families are forced to go to another payday loan company and get another loan, most of which goes to pay the fees of other loans they have out.

Hayward said he has seen this time after time and when he brought this up to the board for the credit union, they also agreed that the credit union should step up and try to help these families.

With $315 million in assets, First Financial should be able to help any family that qualifies for the program, Hayward said.

"We understand there is a risk and that they may be some families who won't pay us back but I have learned since being here that the Navajo people are extremely honest so I'm not worried," he said.

He said that staff at the credit union would emphasize that if families violate the agreement, they will lose the opportunity to have their fees converted into a savings account at the end of the 12 months.

Hayward said that the possibility of having a savings account and the opportunity to continue borrowing at low rates should keep most of the families honest and committed to staying within the terms of the program.

But Hayward, along with Patricia Lundstrom, the state representative from Gallup, realizes that more needs to be done than this program.

Lundstrom said she has been trying for the past five years to get the state Legislature to do something about the payday loan programs and each year her bill has died in the last minutes of the session, mostly because of advocates who warn that the legislation will kill the payday loan program and thereby families will have nowhere to go.

Hayward, however, said this was never true because First Financial, like all other credit unions, are able to do the same things that payday loan companies do for a lot less money.

"We have the ability to loan someone $300 on a short-term basis and allow them to pay us back two weeks later," he said.

Lundstrom said she is more confident than ever that something can be done during the session that begins next week to finally deal with the state's payday loan problem.

Lobbyists for the payday loan industry are continuing to say that forcing the companies to reduce their interest rate - which amounts to 10 percent for every week the loan is out - would force the payday loan companies to close shop, leaving families with nowhere else to go.

"Capping interest rates is not the way to go," Lundstrom said.

What her measures proposes is doing away with rollovers, which allow the company to continue starting their fees by rolling over the debt from one period to another.

She also wants to stop the practice that allows families to borrow from one payday loan company to pay off the fees of another loan, which only gets families deeper and deeper in debt.

Her proposal would set up a data bank that will show each payday loan that a family has out and prohibit companies from issuing a loan to someone who already owes another company.

"If we are able to get this legislation passed and with programs like that started by First Financial, we should be able to stop the abuse," she said.

Hayward said First Financial also plans to support Lundstrom's efforts by urging people to go to the company's Web site and learn who their representatives and senators are so they can contact them and show their support for legislation to control the industry.