RALEIGH, N.C. – It was standing room only for a payday lending breakout session at CUNA's GAC, portending what could be a more aggressive stance by credit unions to take on payday lenders. Twenty-five thousand members of the $9 billion State Employees' Credit Union use a payday loan-like product monthly, according to Jim Blaine, SECU CEO. "We are having a profit on this [payday loan alternative] product, after all expenses and losses, of 3%. Our average Return-on-Assets this year is 1.46%. This is one of the most profitable products that we have," Blaine told attendees at CUNA's 2003 Governmental Affairs Conference. "[The allegation] that you cannot do it because it costs too much is not correct. You can do it in this environment and it can be very profitable," Blaine added. The revelation of the number of SECU members who use the payday loan alternative, along with the fact that the credit union makes money offering the product, might be enough to tip the scale on credit unions getting more involved with the controversial type of loans, according to Blaine and other credit union executives familiar with this sort of small dollar, short-term lending. According to Kevin Foster-Keddie, CEO of the $918 million Washington State Employees Credit Union, headquartered in Olympia, Washington, the State of Washington is poised to authorize state chartered credit unions to obtain licenses to offer their members payday loans. And Foster-Keddie pointed out that credit unions cannot afford to ignore their members' need and desire for this product. "The United States doesn't make television sets any more," Foster-Keddie observed, because American television manufacturers ignored the Japanese steady eroding of their market "slice by slice." "If I were one of these payday lenders," Foster-Keddie said, "I would concentrate on building relationships with my customers for this loan product and then on cross-selling them other products. Some of those products will be things we should be offering as credit unions," he said. Both Blaine and Foster-Keddie said their conviction about the product grew after they both found evidence that both their members and employees used payday lenders. Blaine began noting how many checks each month were presented to SECU by payday lenders. Foster-Keddie reported that the majority of merchant verifications at his credit union came from payday lenders. His credit union also estimated that its members and employees spend over $1 million per year in fees to payday lenders. Defending the Practice While both credit union CEOs sought to justify their version of payday loans with the argument that credit unions should offer a more affordable alternative to unscrupulous payday lenders, William Webster, CEO of Advance America, the largest payday lender in the country, defended his industry's business. Webster countered the charge that payday lenders' fees were too high by noting that they were comparatively low when compared with other banking fees on the same 14-day term. Using an industry standard fee of $15 per $100 lent on a $300 loan, Webster argued that payday lenders fees came out on the bottom. "On that basis the annual percentage rate on a payday advance is 391%," Webster said. "But when you have a $100 credit card balance with a late fee, the annual percentage rate is 756%; a $100 check with a $35 dollar overdraft privilege fee, the annual percentage rate is 913%; $51 in fees on a bounced check of $100 loaned is an annual percentage rate of 1,329%," he said. In the context of bank fees, Webster argued, the annual percentage rate of his product is no more exorbitant than that of any of the alternatives customers also have to choose from daily. Webster also pointed out that payday lenders lack some of the advantages that credit unions have. In addition to being able to cross sell other products, Webster noted the credit union "tax advantage" (which he said he supported) "gives credit unions a 40% advantage getting up in the morning that I don't have." Likewise a payday lender has no recourse if a customer's check bounces. "It's just not going to pay for a payday lender to go to civil action for a $255 dollar loan," he said, and also noted that even threatening to do so goes against the industry's standards of behavior that the industry's trade association, the Community Financial Service Centers, was trying to promulgate. Credit Union Competition? SECU's program appeared to bear out some of Webster's observations. SECU requires any of its members who use its payday loan product to have direct deposit, have a job the credit union can verify and not be under bankruptcy. Further, Blaine said that, beginning on March 1, the credit union would begin requiring anyone who used the product to pay back $5 extra on each loan and setting aside that money in a special account for the members designed to make using payday loans unnecessary (CU Times, Feb. 19). With these parameters in place, Blaine explained, the credit union charges 1% more per loan than its normal rate for unsecured lending, or 11.75% and has a yearly charge-off rate of 4% on the program. During the question and answer portion of the program some in the audience challenged Blaine's using the credit union's overall average cost for all of its loan programs of 3% rather than tracking and breaking out the cost of the program that, the questioners suggested, would be higher than Blaine had allowed. But Blaine countered by asking who would assess the value of their body part-by-part and suggesting that all of the credit union's programs shared the overall cost structure. Going Forward A number of credit union executives suggested that the widely-attended program indicated the level of credit union interest in offering a payday loan product may well be rising. Sixty-four percent of credit unions responding to CUNA's recent survey of credit union activity with lower income people reported that they offer members' loans for $300 or less. Not everyone was pleased with the notion of credit unions going forward with payday loan products that did not have some educational component or that members would access on a monthly basis. National Federation of Community Development Credit Unions President Cliff Rosenthal noted that credit unions offering this type of product did not automatically mean the product would fill a member's long-term needs. He also expressed suspicion about Webster's observation that payday lenders could not require the direct deposits that credit unions could. "For a long time in New York we have been fighting the argument that check-cashers should be allowed to offer my depository-like products," Rosenthal said, a development that he viewed as "pernicious." But contacted in his Spartanburg, South Carolina headquarters, Webster denied that payday lenders had any designs on being able to offer depository services short of being actually purchased by a depository institution. He blamed the fights in New York on check cashers trying to defend themselves from the criticism that, on the one hand, they do not offer any other services like savings accounts and the reality that they are forbidden by law from doing so. -


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