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It is unfortunate that credit unions seem to have forgotten their primary mission. A federal credit union is a cooperative association organized for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purpose. I was shocked when I read the article in USA Today about a credit union charging $70 dollars for a payday loan. The justification was that it is half of the amount that the street is charging. I suspect that Antonio would have lost his case if the merchant of Venice only requested half a pound of flesh. Wrong seems to be wrong no matter how you slice it. The NCUA has come out with a timely letter to credit unions that states that credit unions can structure a product to compete with payday lenders. It provides broad guidelines. The NCUA letter states that a fee can be charged consistent with the costs of processing a loan. It cites specific examples of types of fees that can be charged to recover the costs of processing an application for credit. Potential loan losses and legal costs, unless you have a legal review on each loan application, should not be considered potential fees to process the payday loan application. The article in Credit Union Times [page 1, Aug. 12] cites a need to cover the costs of loan loss and legal cost as justification for the $70 charge given by the proponent of the virtues of payday lending. The NCUA should clarify this matter and clearly spell out for credit unions what fees can be legally charged for processing an application for a payday loan. Loan losses and legal reviews to set up a payday loan program are not fees consistent with the cost of processing a loan and seem to be a violation of Regulation Z. I would just suggest that incoming NCUA Chair Deborah Matz and the examination staff look closely at the cost calculations that each individual credit union uses to justify the recovery. I suggest that Matz have these cost calculations independently verified by a disinterested third party to prevent sticky Reg. Z violation claims. Actually, all credit unions should be demanding that the irresponsible among us clearly demonstrate compliance because bad press paints everyone with the same brush. Matz should also direct the examination staff to use the wisdom of the judge in “The Merchant of Venice” by demanding that the fee on this type of loan be exactly equal to that fee and not a penny more. I am a credit union traditionalist. I believe, and will never change my understanding, that credit unions are not for profit, not for charity, but for service. Charging $70 for a payday loan smells of putting profits before people. The NCUA’s letter suggests that a compliant payday loan should be paid back over a six-month period but appears to be silent about banning 14 day or less repayments. If a $1,000.00 loan at 18% is provided for a year, the interest is $90. If an unfortunate member uses a payday loan advance every 28 days because the credit union has the member in a predatory trap, he or she would pay $910 in fees. Clearly, the virtue of only charging half an abusive fee still seems quite usurious. Abusive payday loans should not be the solution to the current economic problems in the credit union industry. Credit unions strapped for income are making decisions inconsistent with their primary mission. CU trades groups will rise to their defense because they need dues dollars from credit unions making enough income to pay dues. The NCUA will not get aggressive because it needs credit unions to earn enough income to cover the losses incurred by the bad loan and investment decisions made in the last couple of years. The little guys will not complain because they are only being abused half as much. They get twice as long to suffer with their problems at their friendly credit union. Some credit union will lose an embarrassing legal challenge because it violated Regulation Z by charging a fee for potential loan losses that cannot be considered costs to process an application, and the innocent of the industry will be punished for this indiscretion. It seems to me that somewhere we have lost our way when this type of activity is tolerated without an outcry of anger from the industry about the wolves in sheep’s clothing that are exploiting the good name of the industry. The longer we tolerate it, the more Snidely Whiplashes will come to the industry as a way to easy riches. I truly hope responsible credit unions lead the charge in combating the ravages of this cancer on our industry. Credit unions should not be associated with inflicting pain on the less fortunate members of our society. Putting a smiley face on usury is not the answer. Bill Brooks Certified Financial Planner CU Prosper Rehoboth Beach, Del.

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Peter Westerman

 

Credit Union Times

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