If, as many expect, Congress creates the Consumer Financial Protection Agency and if the new CFPA limits or eliminates payday loans, what should credit unions do?
No one knows for certain exactly how many credit unions across the country compete with payday lenders by offering their members small-dollar, short-term loans. But the National Credit Union Foundation's REAL Solutions program reports that credit unions in 34 states now participate in REAL Solutions and that many of these offer payday loan alternatives.
If a new financial regulatory agency does away with payday loans, will credit union payday loan alternatives also go away since there will no longer be payday loans? Or will these programs actually become more important as credit union members who use payday lenders have to find another source for short-term loans?
Jim Blaine, CEO of the $18 billion State Employees' Credit Union, headquartered in Raleigh, N.C., said he looks forward to the day when payday loans go away and that this may mean credit unions go back to doing more of the sorts of lending they used to do.
“These were the kinds of loans that we used to make when I was just starting out,” Blaine said. “Small amounts of money to members who were employees of the credit union sponsoring group or SEG. We got away from that when more automation came in and made other kinds of lending more prominent, but maybe we need to get back to that.”
Blaine's thoughts echoed some of the history reported in “Payday Lending: The Credit Union Way,” a white paper written by Nancy Pierce for the CUNA Lending Council and REAL Solutions in May 2008. Pierce's research showed that, as Blaine suggested, credit unions used to play an important role in helping their members manage their need for funds.
“Credit unions used to make payday loans. In fact, that was a large part of their business in early years, helping employees within their employer-based memberships get by until payday,” Pierce wrote.
“Credit union people who have been around for a few years can tell many stories about walking through the worksite and making small loans to workers out of hand carried cash boxes, after securing their signatures on brief notes. But somewhere along the way credit unions decided small loans were unprofitable and walked away from them. So the payday lenders came along, recognized a niche market and need, and learned that small, short-term loans could be made profitably,” she added.
But David John, a financial services and banking analyst with the politically conservative Heritage Foundation, noted that the financial lives of most Americans has changed since then and that banks and credit unions need to recognize that they have helped create the demand for these sorts of small, short-term loans.
“Banks and credit unions always used to do that sort of lending to their strong members and customers, but its not clear they would do that sort of lending to some of their more marginal customers or members,” John said, “and those are the folks who are more likely to need a payday loan.”
John also called any move to limit or eliminate payday loans a “stupid move” because it would fail to address the underlying need for these sorts of loans and would simply remove the supply. “I am genuinely afraid some people may wind up going back to loan sharks again,” John said. “I want to stress that in no way do I endorse payday lenders or their interest rates, but at least they are licensed businesses and not part of organized crime.”
This closely tracks the position on the question of the future of payday lending taken by the payday lenders themselves.
David Beck, a spokesman for the $73 million Self Help Credit Union, said he was not sure what would happen if payday loans eventually go away. He pointed out that the Center for Responsible Lending, a subsidiary of Self Help, released a report in July that indicated that most of the consumer demand for payday loans had its roots in the payday lender's procedures than in any genuine consumer demand for the loans.
Called “Phantom Demand: Payday Lenders Create Their Own Demand With Loan Terms That Generate Rapid Re-Borrowing,” the report made it clear that while there may always be some small-value loans that consumers can use to address emergency expenses, those needs can be met through a credit union loans or credit union programs that help build savings so there would be no crisis, Beck observed.
“Our report, 'Phantom Demand,' shows that it's very common for payday borrowers to take out their next payday loan on the very first day on which state regulations allow,” said Leslie Parrish, senior researcher at the CRL and co-author of the report. “Rather than serving as a bridge to get a borrower past a financial emergency to their next payday, the data clearly show payday loans work more like a shovel into deeper debt.”
For its part, the payday loan industry argued that the thousands of people who rely on its loans provide it with the best defense against any attempt to ban them.
“It is obvious from the letters that people who have used payday loans fully understand the terms, greatly appreciate the option and do not want Congress to limit their credit choices,” said D. Lynn DeVault, president of the Community Financial Services Association of America when announcing a grassroots letter writing campaign to protect the loans.
“The payday lending industry is unique in that customers like the product exactly as it is. I don't think banks, credit cards or even credit unions can say the same. So-called consumer advocacy organizations are pushing federal legislation that would ultimately ban payday loans. But let's be clear, these organizations, who have nothing to lose, do not speak for the 19 million American households who use payday loans. The real-life impact of a ban would be devastating to many families,” said DeVault.
Ed Jacob, CEO of the $9 million North Side Credit Union, headquartered in Chicago, expressed doubt that payday loans would ever go away but supposed, if they did, that credit union payday loan alternatives such as the one North Side offers would become more important, not less.
“People will still need access to loans to help them meet urgent, unexpected expenses,” he said. “Credit unions will only become more important if payday lenders wind up leaving the market.”
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