WASHINGTON — Two community development credit unions testified last week on how they are battling predatory lenders to educate their members on better financial options.
North Side Federal Credit Union CEO Ed Jacob and Faith Community United Credit Union CEO Rita Haynes provided testimony on the alternatives they are offering members to steer them away from predatory lenders during the March 21 Domestic Policy Subcommittee of the House Oversight and Government Reform Committee hearing entitled, "Foreclosure, Predatory Mortgage and Payday Lending in America's Cities."
Jacob explained that his credit union developed its Payday Alternative Loan (PAL) with assistance from public and private partners, including the NCUA, the Community Development Financial Institutions Fund, as well as local banks for financial and technical support. The $500 loan is 16.5% for a six-month term, which was designed to get members away from rolling over their small dollar loans. "Realistically, few borrowers have the ability to re-pay the entire loan after two weeks or one month–so they begin to be caught in the trap of an ongoing cycle of debt," Jacob said.
The loan requires a 580 minimum credit score, but that is waived if they agree to go through the credit union's financial training program. "We want to work with them, but they also have to show us a commitment that they want to improve their financial knowledge and their financial future," he added. The credit union has made over 4,200 PALs in the last five years totaling over $2.1 million.
The three main things North Side FCU discovered in its experience were that these loans are not used for one-time emergencies; there are profitability issues, especially for federal credit unions because of the 18% interest rate cap; and it is difficult to move people out of this cycle.
"We are pleased with the results of our work over the past few years in this area," Jacob said. "It has been a successful product for North Side–we have established it in a sustainable way, and it has helped us grow our membership and provided ancillary marketing benefits. But more importantly, it has been a successful product for the community and our members. Every dollar that is paid in interest and fees to a payday lender represents a drain on the local community."
Haynes' testimony was not available as of press time. –scooke@cutimes.com
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