Bankers are taking a jab at the payday loan

Bankers are taking a jab at the payday loan industry, with a little help from regulators. Payday lenders say they’re not worried.

Four area banks are part of a small-loan pilot program organized by the Federal Deposit Insurance Corp. They are among 31 banks nationally in the FDIC’s program.

Each of the banks agreed to make small loans to consumers, charging no more than the FDIC allows and giving borrowers ample time to repay. Most also tie the loans to savings accounts.

The FDIC hopes these banks help create a banking industry alternative to payday loans. Typically, a payday loan company cashes a consumer’s check and agrees not to deposit it until payday. Critics argue the cost of payday loans is excessive and leads many consumers to take out a series of loans, each to repay the previous one and the high fees.

“The whole point of this project from FDIC is to get people from the payday loans and into banks,” said Stacy Nickel, lender in the program at the National Bank of Kansas City.

None of the bank’s first six loans, however, went to payday borrowers, she said.

Both borrowers at the Wichita branch of the First State Bank and Trust in Tonganoxie, Kan., had been payday customers, said Chris Donnelly, executive vice president.

“It’s pretty encouraging,” Donnelly said.

Armed Forces Bank at Fort Leavenworth is in the loan program, though its small loans began four years ago after a request from the U.S. Defense Department. It wanted to see members of the military avoid payday loans.

Liberty Bank and Trust Co. of New Orleans, which acquired the area branches of Douglass National Bank, will offer the loans here soon, said Wes Christopher, chief operating officer. It has made eight loans in Louisiana, all to payday borrowers, he said. A payday industry spokesman said bankers and the FDIC should not expect the test program to draw away many of the payday loan industry’s customers.

“I guarantee it won’t,” said Steven Schlein, spokesman for the payday loan industry’s trade group Community Financial Services Association.

Schlein said payday loan customers aren’t likely to visit banks because “banks look down on our customers.”

It’s a point recognized by Jean Ann Fox, director of financial services for the Consumer Federation of America.

The federation is a strong opponent of payday lending and participated in sessions that led to the FDIC’s program.

Fox said surveys of low- and moderate-income consumers show many don’t use banks because of the way they are treated. She said success of the FDIC small-loan program will depend partly on whether payday customers are treated with respect.

She is certain, however, that the banks’ small loans will be affordable when compared with payday loans.

“Having to come up with all the money on your next pay day is very stressful,” she said.

Banks in the FDIC program can give borrowers up to three years to repay the loans, making loan payments small enough to fit into budgets.

Payday customers, however, can ask for a free two-month extension if they can’t repay the loan on time, said Tom Linafelt, spokesman for QC Holdings Inc., an Overland Park company that operates Quik Cash and other payday offices. He said the industry adopted the extensions last summer and have worked to make customers aware they exist.

Bank borrowers will face some costs in addition to the interest rate and any loan fees.

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