The CEO of a small credit union criticized for allegedly making payday loans strongly defends her institution, arguing the CU's loans help members escape short term, high interest debt.
Rhonda Hotard, CEO of the 25,000-member, $174 million Louisiana Federal Credit Union in the small, primarily industrial community of LaPlace near New Orleans, sharply disputes the allegations made by the National Consumer Law Center and the Center for Responsible Lending in a joint May 16 letter to the NCUA
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The two organizations praised the agency for its work so far to eliminate the loans, which those organizations consider abusive, and to point out that nine federal credit unions, including Louisiana FCU, still make the loans.
Hotard agreed that the credit union makes the short-term loans to its members, but she pointed out that the credit union does so for 15% interest and not the 145% that the letter alleged.
NCLC and CRL arrived at that figure by including the $15 application fee that LFCU charges for the loans as part of the interest rate for the notes, a practice that Hotard acknowledged as unfair to consumers.
But Hotard maintained that LFCU's $15 charge is not of that sort, that the fee is a true fee that the credit union charges all loan applicants whether the CU makes the loan or not.
“I don't know how the other credit unions on that list structure their programs,” Hotard said, “but in our case, the fee we charge is a true fee. If we make you the loan or not, we are still going to charge you that $15.”
In addition, unlike payday lenders which take the fee out of the loan amount, LFCU makes its members pay the fee up front so it does not become part of the loan balance – yet another disincentive to taking out the note.
Hotard explained that the fee helps defray the costs of the loans, which she described as being a “very high-touch” product, but mostly serve as an incentive to members to make them think twice about the loans.
She emphasized the fees do not make the loans a money-making product for her credit union, saying the roughly 175 loans per month bring in roughly $30,000 per year.
“Believe me, $30,000 is not going to make or break my credit union,” she said.
Hotard explained that under the current program, which the CU has offered since 2008, a $300 loan that a member takes out the day after a payday is going to cost that member $16.73 total, that is the $15 fee plus the roughly $1.73 in interest that the loan will accrue if the member has it for a full two weeks.
“If the member has it for less time, of course the interest will be less, but at this point we’re are talking about pennies difference,” she said.
Hotard said the fees that LFCU charges for the loans are sharply lower than any of the other payday loan shops that surround her credit union and plague her members, and that LFCU has structured the loans to help move members away from using short-term borrowing.
For example, if a member wants one of the loans from LFCU, he or she cannot have but one other payday loan outstanding with any other payday lender, and the credit union employs a service similar to a credit reporting bureau to check to make sure they don't. In addition, if a member has gotten into trouble with multiple payday lenders, the credit union offers a consolidation loan that will pay off all the short term debt at a much lower interest rate and with a much longer term with payments the member can meet.
LFCU began offering the loans, Hotard recounted, after it became aware of how many of its members had begun using payday lenders.
Oh my God,” she said, “the first thing we would get when we opened the call centers in the morning were the calls from the payday lenders who wanted to verify there was money in our members' accounts to cover the checks. Then they were bringing in the checks or converting them to ACH so we started seeing them in the ACH file.”
In the end, LFCU launched its payday lending program when an analysis revealed that fully 21% of its membership was using payday lenders.
“We knew we had to do something,” she said.
But the reality is that there are members who don't and Hotard sees the credit union's role as helping to keep them out of serious payday loan trouble until they may, finally, get to a place where they want to stop using them.
Over time there are always a few that manage to get to a place where they don't have to use the service anymore,” she said. “But that is usually a slow development and, in the meantime, they still need us.”
LFCU has two fully accredited financial counselors on staff and Hotard said some financial counseling is part of every payday loan process, but the credit union also learned early on that it cannot make financial counseling a condition of making the loan. “People just say, 'Yeah, I have heard all that, now give me my money,’” Hotard said. “They know what they are doing is not perfect, but they are in a place in their life where this is part of what they need and we believe they are far better with our loans on our terms and with us than with these others who never want to see them get out of needing the loans,” she added.