o A report from the National Consumer Law Center charges someCUs with payday lending.

o Named credit unions defend their programs on several grounds,including costs.

o Other credit unions counter that short-term, low-dollar loanscan be profitable.

The National Consumer Law Center has charged that certain creditunion payday loan alternative products are little more than paydayloans sold under a credit union label.

“Though credit union loans dominate the field of goodalternatives described in this report, a growing number of creditunions offer triple-digit payday loans,” the NCLC said in areport.

“Even some federal credit unions are exploiting loopholes tooffer payday loans at triple-digit interest rates, includingCalifornia-based Kinecta Federal Credit Union's 14-day loan with anannual percentage rate, or APR, that the report estimates at 362%,”the organization said in announcing the report's availability.

The last time the organization charged some credit unions withoffering credit union branded payday loans was in August 2009, whenthe watchdog group published a letter it had previously sent to theNCUA outlining its concerns about some credit union payday loanalternative programs.

Since then, some of the credit unions named in the group'sletter have changed their loan products or have withdrawn from themarket for short-term, low-dollar amount lending. The NCUA haspublished a proposed regulation addressing this type of lending andeven more credit unions have adopted some sort of payday loanalternative program, many through the National Credit UnionFoundation's REAL Solutions.

In leveling its criticisms, the organization offered acollection of qualities for an “affordable” short-term, lower valueloan that Lauren Saunders, managing attorney in the NCLC'sWashington office, said the group drew from various sources,including the FDIC's guidance to banks and the practices of somelenders with a great deal of experience in the area.

Affordable short-term loans should have an annual percentagerate of no more than 36%, NCLC said. Second, they should have aterm of at least 90 days or one month per every $100 borrowed.Third, they should require or at least allow multiple installmentpayments rather than one large payment, and last, they should notrequire a post-dated check or electronic access to a bank accountfor repayment.

The other elements of its guidance reflected what the NCLC haslearned after studying this type of lending for some time,according to Saunders.

“We have long thought that emphasis on the interest rate alonefailed to recognize some of the most predatory things about paydayloans and alternatives that look like payday loans,” Saundersexplained. The term of the loan is very important because it's theinability to have enough money to live on after paying off thefirst payday loan is what often leads the borrower to take outanother. Paying off a loan off over time helps break the cycle, andnot taking a post-dated check lets the borrower prioritize wherethe loan repayment will fall in the monthly demands on their money,she added.

The report praised a number of credit union payday loanalternatives, including the Credit Builder and Score Building loanproducts from Alternatives Federal Credit Union in New York andother credit unions, such as Navy Federal, which have flexiblepolicies on its signature loan programs that allow them to functionas payday loan alternatives.

In addition to Kinecta, the credit unions criticized includedProspera Credit Union in Wisconsin for its GoodMoney payday loanalternative program that Prospera also licenses to other creditunions and credit unions that use the CU Access CUSO's e-accessloan program.

Kinecta spokesman Laura Oberhelman defended the payday loanalternative it offers through a check-casher it owns.

“We launched a new small-balance loan product with a shortrepayment term in April of 2009,” Oberhelman wrote in an e-mail.“It is competitively priced and is in compliance with all federalregulations. It's important to point out that, in many cases, theseloans are less costly and can save the consumer money as comparedto overdraft fees on a checking account.”

In the past, former Prospera CEO Ken Eiden has defended theGoodMoney loan program on the grounds that it is a viablealternative to payday loans and that it had to be structured as itwas to avoid losing too much money. Eiden retired from Prospera in2009, and the credit union did not return calls for comment on theNCLC report.

John Arens, managing partner of the CU Access CUSO objected tothe NCLC report, arguing that the organization had “compared applesto oranges” when examining the e-access loans and comparing them toothers.

“Our loans are not closed-end loans,” said John Arens, managingpartner for CU Access. “Our loans are open-ended loans which can'tbe evaluated under the same terms.”

Arens insisted that, contrary to the report, it only charges 18%interest on the loans and that it allows the loans to be repaidover as long as six months. He acknowledged, however, that the firmcharges $20 per month for each month a person takes to pay the loanso that a $300 loan, paid back over six months, would cost at least$120 in fees plus interest. These participation fees are completelyallowed, Arens said, and help defray the costs of the loans whichare very high due to losses. “The NCLC report doesn't even talkabout losses,” Arens complained. He added that credit unionsoffering payday loan alternatives under terms that NCLC praisedmust be losing money. “They're just not being honest about it,”Arens said.

He also said that the CUSO was changing the loan product tolower some of the fees and the new product would include a savingsand education component.

For her part, Saunders argued that loans that claim to be paydayalternatives cannot simply be a bit less expensive than the mostpredatory payday loans.

“Alternatives to payday loans must stand on their own merits,”Saunders argued in the report. “The question is not whether a loanis cheaper than traditional payday loans; it is whether it isaffordable enough to be used sustainably by borrowers. The point ofreference is the borrower's well-being, not the cost of the mostextreme products on the market.”

Jim Blaine, CEO of the State Employees' Credit Union,headquartered in Raleigh, N.C., whose credit union was notmentioned in the report, largely agreed with Saunders. SECU offersa payday loan alternative product with an interest rate of 12% andno fees and gets a 4% return on assets invested.

Blaine noted that out of that 12% interest, the CU sees fourpercentage points for loan losses, pays two points for costs offunds, and two points in overhead costs. “The rest is pure gravy,”Blaine said, adding “when car loans are 5% and mortgage loans are3.75%, who wouldn't want to make a 12% loan?”

Blaine acknowledged that there are losses, but noted that the CUmanages those losses by only allowing members to default on anyloan once. If a member defaults on any loan, whether a paydayalternative loan or any other, the CU keeps them as a member butrestricts their membership to a share account until the loan isbrought current or paid off. “Most people aren't looking to stiffyou,” Blaine said. “Something comes up in their life or whatever,but it wouldn't be fair to ask the members who pay their loans ontime to pay for those who don't.”

Lois Kitsch, national program manager for the National CreditUnion Foundation's REAL Solutions program largely agreed withSaunders and Blaine, reporting that the credit unions offeringpayday loan alternative programs through REAL Solutions eitherbreak even on the programs or make a small profit.

She reported that foundation research had found that the bestmethod of lowering losses on the program was to restrict paydayalternative loans to members who had been with the credit union atleast 90 days.

–[email protected]