Growth in Payday Loans: A Sign of the Times
Unemployment, rising debt and financial uncertainty are continuing to change the perception of those who are using payday loans.
Lon Neofotist, managing director of XtraCash LLC, a payday lending alternative CUSO, said that is certainly the case lately given the nation’s economic downturn and its attempts to recover.
"It’s been an ongoing hurdle," Neofotist acknowledged, to get past the stigma even within the credit union industry. "Payday loan consumers are smart, they’re educated, and they’re middle income."
In most states, the stubborn stall in unemployment had led some members and consumers to rely on credit cards, family and other outlets to pay bills. Neofotist said he’s hearing people in higher income brackets are starting to turn to payday loans to make ends meet.
As a result, XtraCash has experienced steady growth since it launched in March 2007. The CUSO is a division of CU Holding Company LLC, which is a wholly owned subsidiary of the $420 million Mazuma Credit Union, Kansas City, Mo. That growth is traced to an estimated 30 million U.S. households that are either unbanked or underbanked or rely on alternative financial services, according to XtraCash. Many of these estimated 60 million adults are credit union members, Neofotist said.
Between 2007 and 2010, XtraCash said it saved its partner credit unions and members more than $2.8 million. Since opening for business, the CUSO has processed nearly 24,000 loans with a total loan value of more than $9.1 million. XtraCash has also grown to serve 23 branches located in Kansas, Missouri and Florida and will continue its plans to expand throughout the U.S. where allowed by law.
In 2010, loan volume increased 34% and $3.6 million in loans were distributed, Neofotist said. While XtraCash did not sign on any new credit unions last year, the CUSO recently secured a contract with one and just hired a business development representative to nurture existing relationships and build new ones. The focus is more on providing the payday loan to more members at credit unions already served by XtraCash rather than securing new credit union contacts, Neofotist said.
Meanwhile, delinquencies have decreased consistently over the past two years even in this troubled economy, he added. Still, as has been the case in the credit union industry and elsewhere, there has been a slight spike in bankruptcies among payday loan users, Neofotist noted.
XtraCash incurs all loan losses for its credit union clients, Neofotist said. The CUSO provides loan origination training, underwriting, collections, servicing and licensing, if applicable. It also pays quarterly based on loan volume with a percentage per loan. Marketing materials are provided at no cost.
"With all the credit tightening everywhere and with unemployment going up, you would think delinquencies would have gone up, but they’ve fallen over the last two years," Neofotist said.
In 2009, credit unions offering payday loans and alternatives came under scrutiny from the National Consumer Law Center, comparing them to traditional payday lenders, which draw the ire of some consumer protection groups. The NCUA has said a well-run program can be an opportunity to improve the lives of its members by providing low cost, small loans. However, the program should be designed ultimately to try to help members end their reliance on payday loans and guide members toward credit unions' more mainstream financial products and services, including financial counseling, the regulator said.
Several states have passed legislation that keeps consumers from getting in over their heads. Florida, for instance, makes it difficult to get caught in the nonstop spiral of payday debt some find themselves in. Neofotist said by law, Floridians cannot take out another loan until an existing loan is paid off. At the time of the NCLC’s report, Neofotist said payday loans were serving those who may have run out of options. He still feels the same today.
"If they’re used correctly, they can be an option. If you look at, it’s cheaper than bouncing a check or paying insufficient fund fees," he said. "[Members] save by using XtraCash instead of a typical storefront payday lender, because their credit union offers lower-cost short-term loans and provides financial education."