The NCUA's letter to federal credit unions (see related story, page 1) laid out examples of permissible and impermissible credit union payday alternatives. The permissible products NCUA outlined helped members meet small, short-term credit needs. At the same time, products with interest rates exceeding the agency's 18% cap were impermissible.
After the agency released its letter, the National Consumer Law Center in Boston, which had filed the complaint with NCUA, praised the agency's guidance on the issue and Lauren Saunders, managing attorney for the organization, made it clear that she saw it leading some credit unions back to the work they were called to do.
"This really got started during the debate over credit union regulations last year when we saw references to some of these credit union products and programs," Saunders explained. "And when we looked into them a bit more closely, I was really shocked. We had examples of credit unions who were supposed to be offering their members alternatives to payday loans but who were really just offering them payday loans."
The NCLC had criticized some credit unions in an unpublicized January letter to NCUA, asking the agency to rein in the credit unions and their subsidiaries. "Many credit unions have developed responsible alternatives to payday lending that have significantly lower rates, longer repayment periods, and other features for those in need of short-term credit," the NCLC wrote. "Yet, the accomplishments of these credit unions and the reputation of the industry risk being tarred by a growing number of credit union payday loans that differ little or not at all from predatory, destructive traditional payday products."
The NCLC charged that both federal- and state-chartered credit unions they found used a wide variety of techniques to offer payday loans. These included excessive application fees, large participation fees and working through CUSOs to avoid state and federal payday lending regulations. The NCLC cited specific credit unions and CUSOs as examples of credit union payday lending.
Among them, the NCLC criticized the $814 million Nevada Federal Credit Union for its ADVANCPay program, which offers members of the Las Vegas headquartered credit union seven- to 14-day loans with fixed fees. Calculated as an annual percentage rate, these were equivalent to between 206% and 650%, the NCLC asserted.
The NCLC also knocked the $4 billion Kinecta Federal Credit Union, headquartered in Manhattan Beach, Calif., for using a check-cashing CUSO to offer payday loans at 459% APR. The organization also suggested that Kinecta adopted this organizational approach to avoid California's payday lending limits restricting the check used to secure the loan to $300, including all fees.
The $149 million Prospera Credit Union, headquartered in Appleton, Wis., and its GoodMoney program, was criticized by NCLC for its 252% APR. GoodMoney is an approach the National Credit Union Foundation's REAL Solutions program has offered as a possible credit union payday loan alternative.
The $396 million Mazuma Credit Union's XtraCash product, which it offers through a CUSO the credit union owns, drew criticism both for the product's annual percentage rate and for the way it makes the loans. The NCLC charged that the CUSO subverts regulations in the three states where it makes loans.
The NCLC's pointed critique threw a spotlight on a debate within the credit union industry over what their overall posture toward payday loans should be. Is it better for credit unions to offer the short-term loan products their members want at a somewhat better price and somewhat better terms than other payday lenders? Or should credit unions stick to offering potentially less popular short-term products that would eventually move their members away from needing the short-term loans at all?
"The first thing you need to understand is our market in Las Vegas," said Nevada FCU CEO Brad Beal. "These types of products are enormously popular across the consumer spectrum, and if we don't offer these products we know they are just going to get them from somewhere else and pay more for them."
Beal defended the credit union's ADVANCPay product as charging roughly half as much as other payday lenders and offers an option, its Break-the-Cycle Loan, which allows a borrower to move their payday loan to a fixed-rate loan they can pay off over a year. The borrower can only apply for another loan after the original one is paid off and the borrower has completed financial counseling over the phone through BALANCE. Nevada Federal includes a brochure from BALANCE, a financial counseling program specialized for credit unions and their members, with the paperwork that accompanies every ADVANCPay Loan, Beal said.
The credit union also defended its stated 0% interest on its ADVANCPay product by insisting it is not a loan but a service. "These are not considered a loan but a service, so there is no calculated APR associated with the product," a spokesman for the credit union said.
Beal argued that the credit union's lawyers had vetted its ADVANCPay fees to make sure they complied with the Truth in Lending Act and the Federal Reserve's Regulation Z. Because its fees are fixed and do not vary according to loan amount, it is compliant, he explained. "A borrower seeking a $200 loan pays the same fee as a borrower seeking $700," he said. In addition, the credit union charges the fee regardless of whether or not the borrower is approved.
Only members can apply for the loan, and members with direct deposit are charged a $60 fee; members without direct deposit pay $70.
The NCLC's critique made the point that TILA exempts application fees from being included in the APR for some loans, such as mortgages, to cover the costs of credit investigations and appraisals. However, the NCLC wrote, "Payday lenders do not use credit reports, credit investigations or appraisals. Indeed, payday lending, promoted for being fast and needing no credit check, has minimal processing costs."
Uriah King, senior policy associate with the Center for Responsible Lending, an affiliate of $347 million Self Help Credit Union, scoffed at the distinctions Nevada drew to justify its program, accusing the credit union of "splitting hairs" to perpetuate the program.
King praised the NCUA's payday lending letter as "a strong document" but said the center was waiting to see how the agency implemented the letter.
"I think the letter lays out very clearly what criteria NCUA expects credit union short-term loan programs to meet, and it will be up to examiners to make sure that federal credit union programs meet those criteria," King said.
He continued, "What we have now is a lot of splitting hairs about whether some programs meet the letter and the spirit of the 18% rate cap," King said. He added that the CRL expected the agencies examiners to put the agency's guidance into action.
Kinecta FCU responded to the NCLC critique by pointing out that it had already changed its payday loan program in April of this year, after the NCLC letter and before the NCUA's letter.
Now Kinecta says it, not the CUSO, funds the loans and charges a flat application fee of $39.95 and a 15% APR on them. The fee does not vary by the loan amount, and Kinecta said it has "numerous protections" built in to ensure that it does not trap members in a cycle of debt.
"We also offer payment plans to assist our members-if the member is unable to pay at the scheduled time-they may repay us over time with no additional fees," the credit union said.
Ken Eiden, CEO of Prospera Credit Union, defended its GoodMoney program along similar lines to Beal's statements.
He also said that these products were what members wanted. "I really have to decide if I am going to judge my members for choosing financial options which are not good for them, or am I going to meet my members where they are," Eiden said.
Eiden said Prospera developed the product after the CU noticed how many of its members were using payday loans. As a credit union executive, he wanted his members to come to the credit union to meet their financial needs, even those for short-term loans.
Eiden pointed out that the credit union did not make money on the product and only aimed not to lose money. He also noted the loan's flexible terms that allow members to pay out their loans over time.
"People focus a lot on the APR, but I think the terms of the loans are really what make payday loans bad for consumers," he said.
Leo Neofotist, general manager for XtraCash, reported the CUSO has five credit unions with 22 branches that offer the loans funded by the CUSO. He also argued that the product is good for consumers even if it has an annual percentage rate higher than 18%.
"While the APR on XtraCash loans is admittedly higher than 18%, the APR is lower than storefront payday loan locations," Neofotist wrote in a response to the NCLC critique. "The fees charged are also lower than other member alternatives-overdraft protection fees, NSF fees, late payment charges, etc."
He also argued that, while imperfect, the XtraCash program is at least making the attempt to meet a real consumer need.
"Where is their solution?" Neofotist asked. "They don't have one, or at least a realistic one. Can payday-type loans be done at 18% APR? Yes, but the credit union will lose money with the high loan losses typically associated with this type of lending, and the other members of the credit union will be subsidizing the program to make up for the loss."
"Perhaps NCLC and others should give it a test. Start with $1,000 in capital, make 10 $100 loans, have just one of them not pay off, make payroll, pay rent, utilities, etc. out of their funds and then start other rounds of loans and see how long their capital lasts at 18% or even 36%. The math just doesn't add up."
The math does seem to be the rub. Pennsylvania credit unions can offer a payday loan alternative called the Good Money loan, but do so with the assistance of a government subsidy, according to the Pennsylvania Credit Union Association.
The Good Money loans, which the NCLC did not criticize, are capped at $500, carry a one-time $25 fee, and must be repaid within 90 days. They also require that 10% of the loan be deposited and held in a savings account until the loan is repaid and carry a financial counseling element as well.
But they are also subsidized with some of the interest from a $20 million state government deposit in Mid-Atlantic Corporate Credit Union, administered by PCUA, which covers half the costs of loan losses from the program. Since its inception in early 2007, its 82 participating credit unions have made about 15,000 of the loans worth more than $6 million.
But PCUA spokesman Mike Wishnow acknowledged that the loans would likely not be offered if not for the subsidy. "Credit unions want to do the right thing and help their members, but they don't want to lose too much money at it," he noted.