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The Annie E.

Low-Cost Payday Loans:

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The Annie E. Casey Foundation

The Annie E. Casey Foundation is a private charitable organization dedicated to helping build better futures for disadvantaged children in the United States. It was established in 1948 by Jim Casey, one of the founders of United Parcel Service, and his siblings, who named the Foundation in honor of their mother. The primary mission of the Foundation is to foster public policies, human-service reforms, and community supports that more effectively meet the needs of today's vulnerable children and families. In pursuit of this goal, the Foundation makes grants that help states, cities, and neighborhoods fashion more innovative, cost-effective responses to these needs. For more information, visit the Foundation's website at .

Low-Cost Payday Loans: Opportunities and Obstacles

By Sheila Bair

Dean's Professor of Financial Regulatory Policy

A Report by the Isenberg School of Management University of Massachusetts at Amherst Prepared for The Annie E. Casey Foundation

June 2005

Sheila Bair is the Dean's Professor of Financial Regulatory Policy at the University of Massachusetts-Amherst Isenberg School of Management. She has previously held positions as the Assistant Secretary for Financial Institutions in the U.S. Department of the Treasury, Senior Vice President of Government Relations for the New York Stock Exchange, Commissioner and Acting Chair of the Commodity Futures Trading Commission, and Research Director and Counsel to Senate Majority Leader Robert Dole. She has a J.D. and B.A. from the University of Kansas. She serves on the FDIC's Banking Policy Advisory Committee and the boards of the Investor Education Fund, the Center for Responsible Lending, and the Insurance Marketplace Standards Association. She has published several articles in the field of financial regulation and has testified before Congress on numerous occasions.

Bair also writes for children, particularly in the areas of money and finance. She has published several articles in Highlights magazine and has twice received that publication's Annual Public Service Award. Her first children's book, Rock, Brock and the Savings Shock, will be published by Albert Whitman & Co. in 2006.

TABLE OF CONTENTS

Executive Summary 3 Introduction 6

I. Overview of the Payday Loan Market 6 II. Why Won't Banks Compete? 8 III. Bounce Protection as an Impediment to Competition 10 IV. Federal Bank Regulatory Treatment of Payday Lending 13

A. The Majority Approach to Third-Party Payday Loan Vendor Agreements 14 B. The FDIC Approach to Third-Party Payday Loan Vendor Agreements 15 C. Regulatory Attitudes Toward Depository Institutions Offering Their

Own Payday Loan Alternatives 16

Case Studies I. The Payday Loan Model 18 Valued Services Acquisition Company 18 Advance America 20 II. Payday Loan Alternative Models 21 North Carolina State Employees' Credit Union 21 North Side Community Federal Credit Union 22 ASI Federal Credit Union 23 Pentagon Federal Credit Union 24 Austin Bank of Chicago 25 LaSalle Bank, N.A. 25 Windward Credit Union 26 III. The Overdraft Protection Model 26 Citibank 27

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