Opponents Seat Payday Loans In NCUA’s Cross Hairs Again
Two long-term opponents of payday lending said that nine federal credit unions in five states continue to offer members payday loans with triple-digit interest rates.
The May 16 letter from National Consumer Law Center and the Center for Responsible Lending to NCUA Chairman Debbie Matz noted that 52 of the 58 credit unions that had been identified in the 2010 report have left the business and praised large numbers of credit unions that found innovative and creative ways to help meet their members’ needs for small short-term loans.
The nine federal credit unions offering payday loans mentioned in the letter are Tri-Rivers FCU of Montgomery, Ala.; Kinecta FCU of Manhattan Beach, Calif.; Buckeye Community FCU of Perry, Fla.; Martin FCU of Orlando, Fla.; Orlando, FCU of Orlando, Fla.; Railroad & Industrial FCU of Tampa, Fla.; Tallahassee FCU of Tallahassee, Fla.; Louisiana FCU of LaPlace, La.; and Clackamas FCU of Oregon City, Ore.
The letter brought up to date a report that NCLC prepared on payday lending in 2010.
The Center for Responsible Lending is a subsidiary of the 49,000-member $590 million Self Help Credit Union, headquartered in Durham, N.C.
But NCLC later said that Clackamas had thought it had ended its relationship with XtraCash, the CUSO that made the loans two years prior and noted that XtraCash no longer listed Clackamas on its website.
The letter singled out Kinecta for special mention, noting that it is the largest federal credit union to offer the loans through its check cashing subsidiary.
“The largest credit union making payday loans of which we are aware is Kinecta Federal Credit Union in California, which has been directly offering payday loans at its Nix Check Cashing locations. Kinecta discloses a 15% APR for its two-week loans, but it adds an ‘application fee’ on each loan that brings the true APR on a $400 loan to 223%. Kinecta may not legally charge more than 18% APR. Other credit unions use a similar ruse,” the NCLC and CRL wrote.
They also mentioned credit unions partnering with CUSOs to do the same thing and avoid the loan cap. The organizations also said that that NCUA is alone among federal financial regulators not to have done anything on the topic recently.
“The credit union loans we have identified have all of the same hallmarks of predatory lending as do traditional payday loans and bank deposit advance products. In 2001, NCUA warned credit unions that payday loans ‘normally have high fees, are rolled over frequently and can result in offensive lending practices.’ Yet the NCUA’s 12-year old letter has not stopped a handful of credit unions from offering abusive payday loans to their members. More needs to be done.”
John Neusaenger, CEO of Orlando FCU, reported that his credit union offered the loans to help keep members away from other payday lenders and that Florida has built in safeguards around the practice.
“Florida has very strict rules constraining payday lending,” Neusaenger wrote in an email. “Borrowers may only have one payday loan outstanding from a Florida payday lender at one time. The borrower must pay off the one loan 48 hours before obtaining another loan. Florida maintains a database, via a contractor, to monitor this activity. These constraints offer some assurance that Florida payday borrowers will not end up as deep into the payday lending cycle as other states allow their citizens.”
Orlando FCU offered the loans in hopes of moving members away from the payday loan cycle and into more traditional, lower cost credit union consumer loans, he explained. “We know some of our members are using payday loan products to get from one pay period to the next, but the demographics of the average payday borrower is not what the media typically portray,” he added.
NCUA Board Chairman Matz expressed sympathy with NCLC and CRL on the issue.
“I care very deeply about protecting consumers from predatory payday loans and providing credit union members with affordable alternatives.”
“Like the National Consumer Law Center and the Center for Responsible Lending, I share a passion for ensuring that consumers have access to credit that will enrich their lives. Our ultimate goal is to empower borrowers to break free of their reliance on payday loans by improving their credit scores and qualifying them for lower-priced financial services,” she said.
“Of the nine institutions NCLC identified in its report of May 2013, six are making short-term loans through third-party vendors over which we have no statutory enforcement authority. I am very troubled that these vendors are making high-priced loans using the names of credit unions. In the three instances where federal credit unions are charging high fees for short-term loans, we will review each case and use every tool at our disposal to resolve the situation.”
XtraCash, the CUSO through which Orlando FCU makes the loans, weighed in to defend the lending. Even though the CUSO, which is owned by CU Holding Company LLC and that, in turn, by Mazuma Credit Union, was not named in the letter, five of the nine federal credit unions listed in the joint letter are XtraCash clients.
Asa Groves, general manager for the CUSO, stressed that the CUSO and its 10 credit union clients see the payday loans as a service to both the credit union members and the credit unions themselves.
“While the interest rates are higher than the 18% or 28% that NCUA allows,” Groves said, “they are far less expensive than storefront payday lenders.” Although the fees vary from state to state, Groves said in Florida the fee comes in at between $8 and $9 for every $100 borrowed, compared to significantly higher fees at the other payday lenders.
He also stressed that the loans help members meet emergency financial needs and that the CUSO makes the loans in a far more responsible way than do storefront payday firms.
For example, the CUSO does not allow a borrower to have more than one loan open with them at a time and puts borrowers through additional scrutiny who seek to take out one of their loans while having other payday loans open with other lenders.
“Florida, doesn’t even allow a borrower to have more than one open loan at a time,” Groves said, “and we check.”
Groves also pointed out that if credit unions were to try to offer these sorts of short-term loans under the existing guidelines from the NCUA, they would not be able to offer them without losing money. “The other credit union members are going to have to subsidize that,” he pointed out.
Further, Groves noted that his CUSO and its credit union clients are not the only ones engaged in this type of high-cost lending. Compare the CUSO’s fees and interest to those consumers pay on a bounced check and the payday loan becomes far less expensive, he observed.
But Lauren Saunders, managing attorney for NCLC, countered with the observation that making payday loans that are not as bad as the others doesn’t make yours good.
“Bank payday loans are cheaper than traditional payday loans, too. And yet the OCC, FDIC and CFPB all found that the loans put many consumers into a cycle of debt,” she wrote in an email.
“Saying that ‘our product is not as bad as that terrible one over there’ is not exactly a justification. The problem is not just the fee. It is also the short-term and balloon payment structure, which can create a cycle of debt even if the loan were free. If credit unions want to help their members avoid a cycle of debt, they need to offer longer term installment loans, at an affordable price that don’t perpetuate that cycle.”