Payday Lending

CUs keep recession-ravaged members out of the debt trap.

July 18, 2011
Pay Day Lending

  FOCUS

  • CUs are working to eliminate the “nowhere to turn” scenario,
    launching low-cost payday alternative loan programs for short-term
    borrowing needs.
  • The new CFPB will try to “level the playing field” for consumers.
    Some are concerned new regulations will make it more difficult for
    lenders to help.
  • Board focus: Payday loan alternatives fulfill the fundamental
    CU mission of helping members get back on their financial feet

Credit unions aren’t waiting to find out how the new Consumer Financial Protection Bureau (CFPB) might change the way payday lenders operate. Instead, they’re trying to eliminate the desperate “nowhere to turn” scenario by offering financially distressed consumers affordable borrowing options.

Several credit unions have developed programs that give consumers opportunities to avoid the predatory lending debt trap and take control of their financial futures.

Economic empowermentdatory payday lending is widespread in Missouri. The statistics are staggering, says Patrick Adams, president/CEO of $204 million asset St. Louis Community Credit Union.

St. Louis Community is a community development credit union, a community development financial institution, and a low-to-moderate-income credit union as designated by NCUA.ouri is a haven for the payday loan industry because of loose regulations,” says Adams. The average payday loan, he notes, is $307.56 with an average annual percentage rate (APR) of 444.61%, according to a 2010 survey by the Missouri Division of Finance.

Payday lenders thrive in neighborhoods where people lack easy access to traditional financial institutions. St. Louis Community has opened branches in some of these communities. “We want people to know they have options,” says Adams.

Unfortunately, some members have fallen victim to predatory lending. Many can’t afford the end-of-week repayment due date, says Adams. “Our goal is to break the predatory lending cycle and offer qualifying members a low-cost, payday loan option.”hree years ago, the credit union launched its Freedom “Payday” Loan. “This is a valuable alternative to payday loans offered at outrageous rates and fees,” he says. “Members in good standing can receive up to $500 with repayment in 90 days. The loan comes with a $25 annual fee/25% APR for members with direct deposit and a $40 annual fee/27% APR for those without it.” the outset, the borrower must deposit 10% of the loan amount into an interest-bearing savings account that’s available when the loan is paid off. “Our hope is that the member will be able to eventually use the funds that build up in the account instead of advancing the loan,” Adams says.do members feel about this alternative loan? “They’ve told us they appreciate not having to pay back two to three times the amount borrowed like they’ve done with predatory lenders,” he says. “Many have mentioned they’re thrilled to know they’ve built up savings as a result of the Freedom ‘Payday’ Loan.”

Each loan saves members an average $402 in finance charges and fees compared with a typical payday loan, says Adams. More than 3,400 members have used the program since March 2007, saving them about $5.52 million.

‘Quick Fix’ alterCredit unions aren’t waiting to find out how the new Consumer Financial Protection Bureau (CFPB) might change the way payday lenders operate. Instead, they’re trying to eliminate the desperate “nowhere to turn” scenario by offering financially distressed consumers affordable borrowing options.

Several credit unions have developed programs that give consumers opportunities to avoid the predatory lending debt trap and take control of their financial futures.

Economic empowerment

Predatory payday lending is widespread in Missouri. The statistics are staggering, says Patrick Adams, president/CEO of $204 million asset St. Louis Community Credit Union.

St. Louis Community is a community development credit union, a community development financial institution, and a low-to-moderate-income credit union as designated by NCUA.

“Missouri is a haven for the payday loan industry because of loose regulations,” says Adams. The average payday loan, he notes, is $307.56 with an average annual percentage rate (APR) of 444.61%, according to a 2010 survey by the Missouri Division of Finance.

Payday lenders thrive in neighborhoods where people lack easy access to traditional financial institutions. St. Louis Community has opened branches in some of these communities. “We want people to know they have options,” says Adams.

Unfortunately, some members have fallen victim to predatory lending. Many can’t afford the end-of-week repayment due date, says Adams. “Our goal is to break the predatory lending cycle and offer qualifying members a low-cost, payday loan option.”

Three years ago, the credit union launched its Freedom “Payday” Loan. “This is a valuable alternative to payday loans offered at outrageous rates and fees,” he says. “Members in good standing can receive up to $500 with repayment in 90 days. The loan comes with a $25 annual fee/25% APR for members with direct deposit and a $40 annual fee/27% APR for those without it.”

At the outset, the borrower must deposit 10% of the loan amount into an interest-bearing savings account that’s available when the loan is paid off. “Our hope is that the member will be able to eventually use the funds that build up in the account instead of advancing the loan,” Adams says.

How do members feel about this alternative loan? “They’ve told us they appreciate not having to pay back two to three times the amount borrowed like they’ve done with predatory lenders,” he says. “Many have mentioned they’re thrilled to know they’ve built up savings as a result of the Freedom ‘Payday’ Loan.”

Each loan saves members an average $402 in finance charges and fees compared with a typical payday loan, says Adams. More than 3,400 members have used the program since March 2007, saving them about $5.52 million.

Next: ‘Quick Fix’ alternative



‘Quick Fix’ alternative

Running out of money between paychecks is part of the daily struggle for many low-income consumers throughout the U.S., including Aurora, Colo. But $90 million asset Aurora Schools Federal Credit Union provides relief for low-income families, says Brad A. Johnson, president/CEO.

And when people have critical financial needs, predatory lenders are never far away. New laws in Colorado have increased the amount of time borrowers have to repay their loans. They now have six months to pay, says Johnson. “While this has lowered their payments, it also has increased fees. Payday lenders can now charge an origination fee of up to $75, plus a monthly
maintenance fee of up to $7.50.”

Payday lenders have increased their marketing efforts in Aurora, says Johnson. But the credit union has responded with alternatives.

Its “Quick Fix” loan is modeled after a similar product developed by the Pennsylvania Credit Union League. As the name implies, the program’s small loans have a shorter pay-back period.

“Members pay $20 to apply, and can borrow a minimum of $100 and up to $570 at a rate of 18% for 90 days,” explains Johnson. But 10% of the loan must be locked into a savings account until the end of the loan term, he adds.

Members must sign an agreement saying they won’t use payday lenders while they have an outstanding Quick Fix loan. It’s an important condition, says Johnson. Courtesy pay covering nonsufficient funds items is also suspended during the life of the member’s loan to limit the credit union’s loss exposure.

Aside from helping members with urgent needs, the Quick Fix program also saves them money. “In 2010, we granted 71 Quick Fix loans for a total of $35,247, and our members saved $3,625 in origination fees,” says Johnson.

Desperate people; desperate measures

The number of consumers needing to borrow money for life’s basic necessities increased during the recession and slow economic recovery, says Jack McAdoo, president/CEO of $120 million asset Beacon Federal Credit Union, La Porte, Texas. As a result, many of these consumers turn to payday lenders for temporary relief from their money worries—even if it’s a short-term, expensive solution.

In today’s economy, says McAdoo, desperate people take desperate measures just to survive. “Payday lenders have a strong presence in our community, which makes it easy for consumers to fall into their trap.”

To help members avoid this trap and pay bills between paychecks, Beacon Federal has a loan program called the “Wilson” Payday Loan Alternative. Approved applicants who pay a $20 application fee can borrow between $200 and $550 for 60 days at 17.99%. The credit union doesn’t calculate a debt ratio. The borrower must make a loan payment every 30 days to remain in good standing.

Members must meet a few conditions to be approved for payday alternative loans. They must:

  • Be currently employed and be able to demonstrate six months of steady employment;
  • Have monthly income of at least $1,000 before taxes; and
  • Be able to show their two most recent paycheck stubs.

After loan approval, the member must sign up for direct deposit of paychecks and enroll in the credit union’s free Debt in Focus financial analysis program. And 10% of the loan amount is automatically deposited into a savings account.

The credit union has saved members more than $9,000 since July 2010, says McAdoo, through 83 payday alternative loans. Eighteen of these loans currently have balances, and only one loan was delinquent through the first five months of this year.

Beacon Federal limits payday alternative loans to four per member, per year, and no more than three in a six-month period.

Next: Unintended consequences



Unintended consequences

While it’s too early to tell how the CFPB will affect credit union lending, McAdoo says it might have negative ramifications.

“I’m afraid it will ultimately harm consumers by placing new and restricting regulations on credit unions, while ignoring many of the payday lenders who use consumers for profit,” he says.

Patrick Adams urges the CFPB to put consumers first regarding regulation. “As consumer advocates, we try to make our members’ lives better every single day,” he explains. “But too often regulation and/or legislation have the unintended consequence of driving up costs for consumers.” The bureau should be diligent, yet cautious, as it implements regulations, he says.

“As you add more layers of regulation, it becomes more difficult for low-income borrowers to obtain credit,” adds Johnson. At this time, the credit
union hasn’t seen regulations that would affect its program.

A bigger issue, he says, is the change in focus caused by regulations. This is causing credit unions to gradually move away from one of their core values, which is lending to members of modest means. A lot of credit unions are nervous about making loans, and if they’re marginal loans, then forget it, he says.

“I believe this is the perfect opportunity to increase lending,” he adds. “If our members have survived this long in this financial environment, the risk of default is small. We need to stay focused and not let bureaucracy get in our way. We didn’t cause the problems, but we’re being heavily penalized.”

Resources 

 

REAL NEEDS

There are more payday lending franchises in the U.S. than McDonalds and Burger Kings combined, according to the National Credit Union Foundation (NCUF). So how can credit unions help their members avoid the high cost of fast credit?

One effective option is NCUF’s REAL Solutions® program. Through this program, credit unions in more than 20 states have shared resources to create payday lending alternatives and other services for underserved members.

“Last year, we collaboratively created our paydayloan alternative for REAL Solutions credit unions,”
says Natasha Melugin, director of the Texas Credit Union League’s program. “Members will save roughly 80% in fees compared with fees they’d pay at a traditional payday lender. This plan caps interest rates at 25%.”

Members can repay their loans in installments, based on their pay periods, instead of lump sum or balloon payments.

The REAL Solutions payday loan also gives members the opportunity to build credit, says Melugin. “If someone is using a traditional payday lender, they aren’t necessarily able to build credit even if they always pay on time.” Traditional payday loans don’t allow for a positive reflection of borrowers’ payment histories or any reflection on their credit reports, she explains.

Each REAL Solutions borrower is required to put 10% of the loan into a savings account, which is frozen until the loan is paid off. The program provides free financial budgeting software at the closing of every loan.

“Far too many Americans live paycheck to paycheck without any emergency funds to fall back on,” Melugin says. “Without a safety net, an unexpected expense could send them into a financial tailspin.”

Regardless of whether credit unions offer REAL Solutions loans or other options, she adds, it’s important that they promote payday loan alternatives and make the public aware that credit unions are safe havens for consumers in need.

Monitor the latest developments at cuna.org.