The state treasury is making its first investment into Pennsylvania's credit union system — $20 million, designed to help discourage consumers from taking out short-term, high-interest loans from payday lenders.

The Pennsylvania Credit Union Association on Thursday kicked off its Credit Union Better Choice program, designed to compete with storefront or Internet lenders that mainly sell short-term, installment loans.

Initially, 37 credit unions with 129 locations statewide will participate, but the Harrisburg-based association expects many more to sign on in coming months.

The state will invest $20 million in an interest bearing account with the Mid-Atlantic Federal Credit Union in Middletown, a kind of "bankers' bank" for credit unions, said Mike Wishnow, spokesman for the association.

The interest rate and other terms of the deposit still are being worked out, he said. Still, the plan is for the state to earn a market rate of return, and for anything that Mid-Atlantic earns above that to be used to market the Better Choice program.

"We think this is terrific," Wishnow said, "because generally speaking this is the first time that the state treasurer's office has invested in the credit union system."

But Bob Rochford, deputy general counsel with the Financial Service Centers of America Inc., which represents the payday advance industry, said the state's deposit puts the treasury in the position of helping to build competition for a business in Pennsylvania, he said. "There was nothing that prevented the credit unions from establishing this, without the $20 million," he said.

The Better Choice program will allow credit union members, or people who meet membership requirements, to take out 90-day installment loans of as much as $500.

There is an application fee of as much as $25, and the interest rate can be as high as 18 percent — but no credit check is involved, unlike other credit union loans.

The association said rates available in the program are lower than those of payday lenders, and participating credit unions will deposit 10 percent of each loan amount into a savings account in the borrower's name — to encourage saving.

The state Department of Banking also provided guidance for the program, which has been in development for about a year.

Last month, the department sued a payday lender, Advance America of Spartanburg, S.C., in Commonwealth Court, contending that its practices are illegal because interest rates exceed those allowed under state law.

Since June, Advance America stores — including about 20 in Western Pennsylvania — have been selling a $500, short-term line of credit for a monthly "participation" fee of $149.95 and a 5.98 percent interest rate.

An Advance America spokesman declined comment on the credit unions' program yesterday.

Initial credit unions participating in the Better Choice program in the Pittsburgh area include the A-K Valley FCU in Lower Burrell; Cal-Ed FCU in California, Washington County; Keystone United Methodist FCU in Cranberry; Pittsburgh FCU in Mt. Oliver; Pittsburgh Central FCU; VA Pittsburgh Employees FCU and West-Aircomm FCU in Beaver.