WASHINGTON (12/11/14)--It is time credit unions stepped into the space that predatory lenders have taken over, wrote Henry A. J. Ramos, president/CEO of Insight Center for Community Economic Development (ICCED), in an opinion piece that ran in The Huffington Post's blog recently.
"Payday lenders often plant themselves right next to mainstream financial institutions, offering complementary loan services that credit unions could be providing at a lower cost," Ramos said, citing a recent study by Filene Research Institute.
Ramos also writes that the economy as a whole suffers when consumers patronize payday lenders instead of credit unions.
A study by the ICCED found that payday loans, which often carry astronomically high interest rates that can trap consumers in vicious cycles of long-term debt, sucked $943 million and 14,000 jobs out of the economy in 2011.
Credit unions, however, can make a huge dent in the $44 billion-per-year payday loan industry, Ramos said, especially if the loans improve on the payday-loan structure by offering convenience and longer, more affordable repayment schedules.
And, if the loans carry lower interest rates.
"A number of credit unions already offer such loan products to consumers with limited access to credit," Ramos said. "However, most credit unions have concerns about internal capacity and loan losses, and lack information about best practices that can reduce risk."
If credit unions employed payday-lending products the right way--with a persuasive message, encouragement from various statewide and national leaders, financial incentives and a viable model--credit unions could adopt the service widely, Ramos said.
Ramos points to the Pennsylvania Credit Union Association as a prime example of how those strategies can be effective in popularizing the products at credit unions.
Launched in 2006 using loan reserves from the Pennsylvania Treasury, the league's statewide small-dollar loan and savings product, Better Choice, is now offered at 65 credit unions in the state.
With the "Credit Union Better Choice" product, credit unions can offer 90-day loans of up to $500 with a $20 origination fee, 18% annual interest and no credit reports. It has a default rate of below 5%.
"Additional credit union loan products, now in testing or implementation phases in credit unions across the country, can be adopted by credit unions at scale," Ramos said. "Intermediaries are needed to provide strong program leadership, training and technical assistant toward implementation. We must not forget the value of incentives and influence in this equation."