A recent hearing in the U.S. House addressed legislation requiring banks and credit unions to calculate overdraft protection fees as an annual percentage rate under the Truth in Lending Act (TILA). Bank and credit union officials testified that APR was not an accurate measurement of short-term credit.

See testimony excerpts from the American Bankers Association, Credit Union National Association, Independent Community Bankers Association.

Credit unions once offered short-term, unsecured credit to their members, 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.”

“Payday Lending: The Credit Union Way” by the Credit Union National Association Lending Council & National Credit Union Foundation/REAL Solutions(R), looks at the history of the payday loan product, customer demographics and offers guidance to credit unions who offer payday loan alternatives.

The white paper finds:

• Payday lending customers are capable of making rational decisions
• 15-25% of credit union members use payday lenders, credit union employees are also likely customers
• Payday loans can be cheaper than the alternatives, including credit union “courtesy pay”
• Credit unions can exclude application or participation fees in their APR calculations for payday loans. Fees are charged even if credit application is denied.
• Consumer groups fail to recognize that banning payday loans does not eliminate the need for short-term credit
• Credit unions can use varying strategies to mitigate risk

In the interesting article in the Milwaukee Sentinel, Eric Richard of the Credit Union National Association, argues against regulating credit unions like banks.  One of the reasons?

Richard said credit unions sometimes will provide services to members even if they know they won’t necessarily make money. Fast-cash loans as an alternative to payday lenders is one example.

“We are not profit maximizers,” Richard said. “We don’t try to maximize our return on assets or returns to investors. There are different ways you regulate the different kinds of institutions.”

Of course, the payday lending industry happily competes with all comers, even against credit unions that offer unprofitable services.