Does a payday loan alternative program have to be unprofitable to be good for members?
That is the question being raised after some credit unions whose payday loan alternative products have been criticized have responded by suggesting their loans have to be structured and priced the way they are in order to not lose money.
The National Consumer Law Center released a report on June 8 called Stopping the Payday Loan Trap: Alternatives That Work, Ones That Don't. The report praised credit unions such as the $68 million Alternatives Federal Credit Union, in Ithaca, New York for offering affordable payday loan alternative products and criticized organizations like the CU Access CUSO for offering products which, NCLC charged, function as less expensive payday loans.
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CU Access denied the allegation and complained the NCLC did not understand its loan products, which it said are open-ended, and had inappropriately compared them to other, closed ended, loan products. CU Access managing partner John Arens also challenged some of the NCLC's basis for criticizing the loans.
"The NCLC report doesn't even talk about losses," Arens complained. He also charged that credit unions that are offering payday loan alternatives under terms that NCLC praised must be doing so at a loss. "They're just not being honest about it," Arens said.
But Jim Blaine, CEO of the $20.5 billion State Employees' Credit Union, headquartered in Raleigh, N.C., whose credit union was neither praised nor criticized in the report, challenged Arens' assertion.
SECU offers a payday loan alternative product with an interest rate of 12% and no fees and gets a 4% return on assets invested.
Blaine noted that out of that 12 perentage points of interest, the CU loses 4 percentage points to loan losses, pays 2 percentage points for costs of funds and 2 percentage points in overhead costs. "The rest is pure gravy," Blaine said, adding "when car loans are 5% and mortgage loans are 3.75%, who wouldn't want to make a 12% loan?"
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