Payday Loans Are Credit Unions' Business
Washington State Employees Credit Union created Q-Cash, a payday loan alternative, after tellers noticed checks were cashed on the line for common payday loan amounts and made payable to known storefront for-profit payday lenders. Branches in more economically depressed areas or near military bases saw the most member activity related to the payday loan industry.
So we began asking questions: How many members were going outside the credit union to get a product we didn't offer? What were our members' needs that were going unmet? Was finding an in-house solution a decision that made sense financially, philosophically and from a brand perspective?
Transaction analysis and additional data extrapolation over six months brought to light that WSECU members had borrowed more than $6 million from storefront payday lenders, paying more than $900,000 in interest during the previous year.
We looked initially at existing consumer loan programs and quickly found that these were not easily adapted to meet the need filled by a payday lending product. Small loans with traditional underwriting for short periods simply cost too much to provide at typical rates and present too much risk for most credit unions to take them on.
WSECU set out to create a better payday loan, seeking to keep the convenience features attractive to consumers but designing WSECU's solution with better rates and longer terms. In addition, we would build on the strong relationship between credit union and member. WSECU launched Q-Cash, the WSECU payday loan alternative program, in 2004. Starting first with a pilot program, it quickly expanded to all WSECU branches and partner credit unions delivered via One Washington Financial, WSECU's CUSO.
Q-Cash has evolved some over time. Current rates, terms and product features are:
oA rate of $12 per $100 borrowed, 20 points below the market rate and equivalent to an APR of 73% based on a 60-day term.
o A 60-day term.
oRepayment over two installments. In addition, the credit union commitment to work with members in distress is always in effect. This means that we are extremely flexible in customizing repayment plans.
oFree access to consumer counseling at any time.
The cost of short-term loans-both to consumers and to the institutions that offer them-has been the topic of vigorous national and state-level policy discussions. Current public debate about payday loans is often centered around rates, with two extremes holding court and trying to sway public policy: those who want the loans to be priced at an unrealistically low level making them a loss leader and unsustainable and those from traditional payday lending organizations whose rates stretch as high as law allows, leading to claims of usury.
National consumer advocacy groups have settled firmly in to a position, pronouncing a 36% APR cap to be the ideal and only acceptable rate for these loans. Their argument states that such a rate still provides for reasonable earnings for the lender while being affordably priced for the consumer.
The profitability of 36% APR doesn't hold up under scrutiny.
WSECU's initial rate was $10 per $100 borrowed for the first five years we offered Q-Cash loans. Over that period, when set against our investment in the development of the product, including extensive IT resources, administration, marketing and overhead, we showed no profit. In IT costs alone WSECU has spent nearly $600,000 on Q-Cash. These investments include the creation of proprietary software, research and development costs to create an online automated channel and general ongoing maintenance of our system.
In 2009, we adjusted our borrowing rates up from $10 to $12 per $100 borrowed, still 20 points below the competition. At this rate, we have finally turned a modest profit of $2.42 per loan.
In the six years WSECU has provided Q-Cash loans, had we capped the rate at 36% APR and offered the loan with a $20 application fee as most lenders do, the loss to the credit union over that period would be more than $900,000. There would still be no earnings a full six years into offering the loan product.
Both in our pricing and overall service model, WSECU has found what we believe is solid middle ground: offering a better short-term loan product for credit union members at fair rates and terms that benefit consumers and allows for a sustainable line of business.
Credit union payday loan alternatives bring better products to market that benefit consumers by offering lower rates and more favorable terms. It, and other similar credit union short-term loan programs, can also be a source of modest revenue for cooperatives. Those earnings are then returned to members in the form of improved service or expanded product offerings following the credit union model.
In their 100-year history in the United States, time and again credit unions have flexed to meet the needs of consumers not served by traditional financial institutions. We seek solutions, we innovate and above all, we serve.
Mark Allen is SVP of mortgage and investment at Washington State Employees Credit Union and CEO of One Washington Financial.
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