WASHINGTON -- The ongoing fight to further regulate or eliminate payday lending in different states and provide consumers with alternative products for short-term loan needs continues to percolate and change, drawing in new media and opening new fronts.
One of the new battle fields is in Pennsylvania, where the state and credit unions have collaborated to develop an alternative loan product to give consumers a lower cost option for short-term loans that will not drag them into the "debt trap" that critics of payday lending allege often happens.
The new product, dubbed the Credit Union Better Choice loans, has a longer term than payday loans--they can be repaid in 90 days versus 14 for the average payday loan, require a $25 application fee and carry an 18% interest rate. The loans also carry a savings component, requiring borrowers to place 10% of the face value of the loan into a share account where it cannot be removed over the loan term.
The loan product is the result of a collaborative effort between the Pennsylvania Credit Union Association, Pennsylvania's Department of the Treasury, and the Pennsylvania Department of Banking. The regulator cooperated in helping state-chartered credit unions make the loans and carry them on their balance sheets, while the Treasury Department deposited $20 million with the Mid-Atlantic Corporate Federal Credit Union to assist with the program. Once deposited, the PCUA is able to take the difference between the market rate Mid-Atlantic paid for the deposit and the interest it earned on the money to help fund marketing for the program and defray 50% of the losses participating credit unions might expect from participating in the program.
The three partners announced the loan program in October 2006 but it didn't draw much attention until more recently as the number of participating credit unions has grown. Currently, the PCUA said, 65 credit unions are signed up for the program and another two or three are expected to come on board later this year. Those 65 CUs offer the loans at 182 branches across the state.
According to Department of the Treasury and the PCUA, participating credit unions made 5,706 of the loans in 2007 for a total of $2.7 million. Consumers who took out the loans saved almost $2 million in fees.
"I am extremely pleased to see that so many Pennsylvanians have taken advantage of this important loan product, and I look forward to its further expansion," Treasurer Robin Wiessmann said. "By making the Better Choice, consumers are not only receiving the short-term loan they need, but are also making an investment in their financial future, through the program's savings and fiscal literacy
The Commonwealth and credit unions compared the Better Choice loans to average payday loans, making the case that over 90 days, based on a rate of $15 per every $100 borrowed and a 90-day term, consumers would spend $450 in fees for $500 loan. By comparison, a $500 Better Choice loan would cost the consumer $42.50 in fees and allow them a start saving with a $50 deposit in a share account.
But the payday lenders have nonetheless attacked the loans on a new media venue the industry has launched.
The Community Financial Services Association of America, the trade association representing more than half the payday loan industry, called the Better Choice loans a "scam" on its new Weblog, Payday Pundit (http://paydaypundit.wordpress.com/).
"If they really want the loan, they must join the credit union, which means getting together enough money to open a new credit union account," CFSA charged. "This is not an easy thing for somebody who needs $300 to fix their water heater. Of course, they could always go down to their regular bank and either close that account or use a portion of that account to open their new credit union account."
But Mike Wishnow, spokesman for the PCUA, said the CFSA had gotten its facts wrong. While its true that the Better Choice loans require that 10% of the loans face value be put into share account where it earns interest, he explained, that deposit, should the borrower wish to use it, could be the opening deposit in the member's share
account so the borrower would not have to scramble for the money.
He also challenged the part of the critique that focused on the interest rates. Looking at one example of a Better Choice loan, one made by the $123 million Riverfront Credit Union headquartered in Reading, Pa., the CFSA charged that the CU was making a killing on the interest on the savings component of the loan.
"The math is pretty simple here, folks," CFSA complained. "In this example, the Better Choice program forces consumers to pay RFCU 18% APR to borrow money for deposit in a compulsory savings account which pays the borrower a return of only 1.75% APY. That's a nifty little margin of 16.25% for the credit union. Can anybody explain why the Pennsylvania Better Choice program isn't a consumer scam?"
"It's not a scam for a number of worthy reasons but in this particular instance because the interest on the savings portion of the loan is rebated to the member once the loan is paid off," Wishnow explained. "Because the core operating systems of most credit unions will not allow a loan to carry two separate interest rates, for example 18% on $500 of the loan and 0% on the $50 savings portion, the only way to do it is to rebate the additional interest later. It's an operational issue, not an underwriting or policy issue."
Meanwhile, sources familiar with the ongoing tussle over payday lending were not surprised that one of the chief CU champions, the Center For Responsible Lending, an affiliate of the Durham, N.C.-based Self-Help Credit Union, has come under attack from conservative U.S. Congressman Patrick McHenry (R-N.C.) who has differed with his state's credit unions on other issues as well. The congressman once tussled with NCUA and credit union trades in the legislative arena concerning mutual savings bank conversions.
McHenry has written House Financial Services Committee Chairman Barney Frank (D-Mass.) seeking a hearing on the issue of individuals and organizations allegedly using non-profits to manipulate real estate and other markets
McHenry used the Center for Responsible Lending as an example of this possible manipulation.
In October 2007, a wealthy hedge fund manager named John Paulson gave the CRL $15 million, in part, McHenry suggested, to help the organization further its position in favor of allowing federal judges to restructure mortgage loans -- a position the CRL has long held. Paulson stands to benefit if such a law were passed, McHenry wrote in his letter.
"In October, he gave $15 million to the Center For Responsible Lending, which has been leading the charge in lobbying for a law that would let bankruptcy judges restructure mortgage loans. By forcing servicers to accept lowered monthly payments, market values would likely fall even further, and Mr. Paulson would most definitely benefit financially."
Kathleen Day, a spokesman for the CRL denied there was anything untoward about the contribution and added "every penny of the [Paulson] money is set to help people stay in their homes." She added that the group has employed a detailed process to find local housing assistance groups that can best use the money and is expected to make an announcement of the first round of donations the first week of March.
Day and others were not surprised at the McHenry attack and saw it as another attempt to drag down CRL because of its opposition to payday lending. "This is nothing new," she said. "In some ways we have come to expect it."