CU Payday Loans Blasted Again
o A report from the National Consumer Law Center charges some CUs with payday lending.
o Named credit unions defend their programs on several grounds, including costs.
o Other credit unions counter that short-term, low-dollar loans can be profitable.
The National Consumer Law Center has charged that certain credit union payday loan alternative products are little more than payday loans sold under a credit union label.
"Though credit union loans dominate the field of good alternatives described in this report, a growing number of credit unions offer triple-digit payday loans," the NCLC said in a report.
"Even some federal credit unions are exploiting loopholes to offer payday loans at triple-digit interest rates, including California-based Kinecta Federal Credit Union's 14-day loan with an annual percentage rate, or APR, that the report estimates at 362%," the organization said in announcing the report's availability.
The last time the organization charged some credit unions with offering credit union branded payday loans was in August 2009, when the watchdog group published a letter it had previously sent to the NCUA outlining its concerns about some credit union payday loan alternative programs.
Since then, some of the credit unions named in the group's letter have changed their loan products or have withdrawn from the market for short-term, low-dollar amount lending. The NCUA has published a proposed regulation addressing this type of lending and even more credit unions have adopted some sort of payday loan alternative program, many through the National Credit Union Foundation's REAL Solutions.
In leveling its criticisms, the organization offered a collection of qualities for an "affordable" short-term, lower value loan that Lauren Saunders, managing attorney in the NCLC's Washington office, said the group drew from various sources, including the FDIC's guidance to banks and the practices of some lenders with a great deal of experience in the area.
Affordable short-term loans should have an annual percentage rate of no more than 36%, NCLC said. Second, they should have a term of at least 90 days or one month per every $100 borrowed. Third, they should require or at least allow multiple installment payments rather than one large payment, and last, they should not require a post-dated check or electronic access to a bank account for repayment.
The other elements of its guidance reflected what the NCLC has learned after studying this type of lending for some time, according to Saunders.
"We have long thought that emphasis on the interest rate alone failed to recognize some of the most predatory things about payday loans and alternatives that look like payday loans," Saunders explained. The term of the loan is very important because it's the inability to have enough money to live on after paying off the first payday loan is what often leads the borrower to take out another. Paying off a loan off over time helps break the cycle, and not taking a post-dated check lets the borrower prioritize where the loan repayment will fall in the monthly demands on their money, she added.
The report praised a number of credit union payday loan alternatives, including the Credit Builder and Score Building loan products from Alternatives Federal Credit Union in New York and other credit unions, such as Navy Federal, which have flexible policies on its signature loan programs that allow them to function as payday loan alternatives.
In addition to Kinecta, the credit unions criticized included Prospera Credit Union in Wisconsin for its GoodMoney payday loan alternative program that Prospera also licenses to other credit unions and credit unions that use the CU Access CUSO's e-access loan program.
Kinecta spokesman Laura Oberhelman defended the payday loan alternative it offers through a check-casher it owns.
"We launched a new small-balance loan product with a short repayment term in April of 2009," Oberhelman wrote in an e-mail. "It is competitively priced and is in compliance with all federal regulations. It's important to point out that, in many cases, these loans are less costly and can save the consumer money as compared to overdraft fees on a checking account."
In the past, former Prospera CEO Ken Eiden has defended the GoodMoney loan program on the grounds that it is a viable alternative to payday loans and that it had to be structured as it was to avoid losing too much money. Eiden retired from Prospera in 2009, and the credit union did not return calls for comment on the NCLC report.
John Arens, managing partner of the CU Access CUSO objected to the NCLC report, arguing that the organization had "compared apples to oranges" when examining the e-access loans and comparing them to others.
"Our loans are not closed-end loans," said John Arens, managing partner for CU Access. "Our loans are open-ended loans which can't be evaluated under the same terms."
Arens insisted that, contrary to the report, it only charges 18% interest on the loans and that it allows the loans to be repaid over as long as six months. He acknowledged, however, that the firm charges $20 per month for each month a person takes to pay the loan so that a $300 loan, paid back over six months, would cost at least $120 in fees plus interest. These participation fees are completely allowed, Arens said, and help defray the costs of the loans which are very high due to losses. "The NCLC report doesn't even talk about losses," Arens complained. He added that credit unions offering payday loan alternatives under terms that NCLC praised must be losing money. "They're just not being honest about it," Arens said.
He also said that the CUSO was changing the loan product to lower some of the fees and the new product would include a savings and education component.
For her part, Saunders argued that loans that claim to be payday alternatives cannot simply be a bit less expensive than the most predatory payday loans.
"Alternatives to payday loans must stand on their own merits," Saunders argued in the report. "The question is not whether a loan is cheaper than traditional payday loans; it is whether it is affordable enough to be used sustainably by borrowers. The point of reference is the borrower's well-being, not the cost of the most extreme products on the market."
Jim Blaine, CEO of the State Employees' Credit Union, headquartered in Raleigh, N.C., whose credit union was not mentioned in the report, largely agreed with Saunders. SECU offers a payday loan alternative product with an interest rate of 12% and no fees and gets a 4% return on assets invested.
Blaine noted that out of that 12% interest, the CU sees four percentage points for loan losses, pays two points for costs of funds, and two points in overhead costs. "The rest is pure gravy," Blaine said, adding "when car loans are 5% and mortgage loans are 3.75%, who wouldn't want to make a 12% loan?"
Blaine acknowledged that there are losses, but noted that the CU manages those losses by only allowing members to default on any loan once. If a member defaults on any loan, whether a payday alternative loan or any other, the CU keeps them as a member but restricts their membership to a share account until the loan is brought current or paid off. "Most people aren't looking to stiff you," Blaine said. "Something comes up in their life or whatever, but it wouldn't be fair to ask the members who pay their loans on time to pay for those who don't."
Lois Kitsch, national program manager for the National Credit Union Foundation's REAL Solutions program largely agreed with Saunders and Blaine, reporting that the credit unions offering payday loan alternative programs through REAL Solutions either break even on the programs or make a small profit.
She reported that foundation research had found that the best method of lowering losses on the program was to restrict payday alternative loans to members who had been with the credit union at least 90 days.