Breaking the cycle: How credit unions can rise again to challenge modern day loan sharks
The rise of loan sharks in America
In the 19th century, the banking industry was relatively straightforward: large urban banks catered exclusively to businesses and the wealthy. Savings and loan associations (thrifts) offered mortgage loans to local depositors, but in areas without thrifts or willing banks, borrowers were left stranded, particularly when they needed small household loans.
This void created the perfect conditions for loan sharks—high-interest lenders who operated outside the formal financial system. Loan sharking became a booming cottage industry, especially in regions west of the Ohio River. Merchants, businessmen, and even clergymen with extra capital eagerly became high-interest lenders, filling the gap left by traditional financial institutions.
The stigma of usury and the birth of the credit union movement
Edward Filene, often considered the father of credit unions, had a vision to bring cooperative credit to everyday Americans. His goal was to free industrial workers from the grasp of loan sharks and eliminate the exploitation they endured. At the time, workers frequently relied on “salary buying”—a system where they sold their upcoming paychecks for discounted cash if they ran out of funds. This practice trapped workers in cycles of debt, fueling the loan shark industry.
Filene’s mission wasn’t just to ease the burden of working-class people but also to remove the stigma of usury—the practice of charging excessive interest—associated with extending credit.
The legalization of loan sharks after the credit union movement began
In 1916, the first Uniform Small Loan Law was passed, legalizing interest rates of up to 3.5% per month on loans of $300 or less. By the 1920s, two-thirds of states had adopted versions of this law, allowing annual interest rates ranging from 28% to 42%. Today, only 13 states have outlawed what we now call payday loans, and in some, the allowable rates are staggering. In Texas, for example, interest rates on payday loans can reach a mind-blowing 664%.
Over the last two decades, the payday lending industry has exploded to over 20,000 locations, outnumbering McDonald’s and Starbucks combined. Meanwhile, the number of credit unions has plummeted to fewer than 4,600, down from a peak of over 23,000 in 1969.
Reviving the credit union movement by starting anew
The latest credit unions chartered in the U.S. are revisiting the original mission of the credit union movement. Instead of serving white industrial workers, these new institutions are focused on minority communities that are currently underserved by traditional financial institutions and preyed upon by payday lenders. These new credit unions aim to break the destructive cycle of debt by offering their communities cooperative financial solutions.
Demand for new credit union charters is on the rise, with applications to the National Credit Union Administration (NCUA) growing from 51 in June 2023 to 63 by June 2024.
What can you do to help?
The CU De Novo Collective Foundation has launched the Louise Herring Fund, aiming to raise $1 million in 2025. This fund will provide the essential capital needed to potentially start 10 new credit unions, with basic services and in-kind donations. To learn more and get involved, visit www.cudenovocollective.org.