La. CEO Defends Loan Program
The CEO of a federal credit union criticized for making payday loans has strongly defended her institution, arguing the loans help members escape short-term, high-interest debt.
Rhonda Hotard, CEO of the 25,000-member $174 million Louisiana Federal Credit Union, headquartered in the small, primarily industrial community of LaPlace, sharply disputed the allegations made by the National Consumer Law Center and the Center for Responsible Lending in a joint May 16 letter to the NCUA. The two organizations praised the NCUA for trying to eliminate the loans, which the organizations consider abusive. The letter named nine federal credit unions, including Louisiana FCU, that 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 fee 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 that 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.
Hotard explained that the fee helps defray the costs of the loans, which she described as being a “very high-touch” product, but mostly serves as a 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 about $30,000 per year.
“Believe me, $30,000 is not going to make or break my credit union,” she added.
Hotard explained that under the current program, which the CU has offered since 2008, a $300 loan will cost the member $16.73 total, that is the $15.00 fee plus the $1.73 in interest that the loan will accrue if the member has the funds for two weeks.
“If the member has it for less time, of course the interest will be less, but at this point we are talking about pennies difference,” she said.
Hotard said the fees that her credit union 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 themselves into trouble with multiple payday lenders, the credit union offers a consolidation loan that will pay off all the short-term debt at a lower interest rate and 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.
“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.”
LFCU launched its payday lending program when an analysis revealed that 21% of its membership were using payday lenders. “We knew we had to do something,” she said.
Hotard acknowledged that the short-term loans are not perfect or preferred. “I wish all my members managed their money so well they would never need anything like this,” 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 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.