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

The Credit Union Journal is surveying their readers to find out if credit unions, “given the economy”, are offering payday loan alternatives.

Survey: Given the economy, we:

Are considering offering a payday loan alternative

Have implemented a payday loan alternative

Have long had a payday loan alternative in place

Aren’t considering a payday loan alternative

 

 

We’ll watch and report back on the results.

Wait.  What?  Credit unions can’t serve all payday lending customers if payday lenders are forced to close?  Who knew? From the Arizona Republic…

If payday lending becomes more scarce down the road, credit unions won’t be willing or able to fill the entire void.

Payday-loan customers tend to be higher-risk, lower-margin borrowers. Credit unions can’t afford to serve everyone in this market if it undermines their strength. As it is, about 40 percent of Arizona’s credit unions are losing money.

Ohio’s Coalition for Responsible Lending (“OCRL”) has issued a press release filled with deceptive information and fabrications. They should be held accountable and asked to back up their irresponsible claims with facts. It is important that people see through the hype surrounding the issue and consider the facts.

CRL Claims: A “compromise” is threatening the payday lending legislation and “outraging” advocates.

• The Truth: The industry has not put forward language for a compromise bill, but has talked to legislators that are interested in preserving some version of small loan choice for consumers and not putting thousands of people out of work. Our goal has always been to be part of a solution that addresses the concerns of policymakers and provides responsible protections for consumers. This type of scaremongering by OCRL underscores the fact that they do not want to help consumers. They refuse to support legislation that would actually help consumers by addressing issues such as cycle-of-debt. Their goal is not reform, it is an outright ban.

CRL Claims: The industry tapped into an almost never-used provision in Ohio Revised Code that allows credit unions to charge fees of $10 per $100 on top of the 18% APR allowed. Credit unions never took advantage of the provision because it was predatory.

• The Truth: This is misleading. Credit Unions asked for the provision in HB 81, sponsored by Geoff Smith and enacted in April 2006. In fact, the two credit union alternatives frequently referenced by the Bill Faith and OCRL charge more for a first time borrower than payday loan companies do.

For example:

The “Stretch Pay” payday loan alternative, offered by credit unions across Ohio and championed by OCRL and others as a better choice for consumers, comes with an 18% APR plus an annual fee of $35 (for a $100 advance) or $70 (for a $500 advance).

“Grace” Payday Loan offered by Faith Community United Credit Union- Cuyahoga County, OH is 17% APR plus a $15 application fee per loan.

CRL Claims: The industry wants borrowers to pay for industry’s taxes

• The Truth: Like any other product ot service, the costs associated with providing a payday loan dictates the pricing for consumers. Due to their not-for-profit status, credit unions are exempt from federal and state income taxes. And they do not have to pursue a profit. They are, therefore, able to offer payday loan alternatives at break-even or less. Credit Unions do not have the resources or the infrastructure to handle the loan volume after payday lenders leave. In order to continue offering payday loans in Ohio, for-profit payday lenders would need to not only break-even, but pay taxes and make a reasonable profit. The industry welcomes credit unions and any other financial service providers into this market. We believe consumers should have more choices, not fewer, and select the one that best suits their needs.

CRL Claims: First-time emergency borrowers would pay 469% APR…Currently, payday lenders charge $15 per $100, or 391% APR.

• The Truth: The numbers don’t add up. The fee per $100 will go down from $15 to $10.00, the truth is that the only additional fees discussed were for tax liability obligations, but CRL claims the APR will go up from 391% to 469%. This is blatantly false.

Makes the Payday Pundit sad to see this, but banks and credit unions are blaming each other for scuttling federal legislation to better help credit unions compete with banks.    This article in The Hill newspaper says the bill also helps credit unions provide “alternatives” to payday loans.  From the article:

The bill would allow credit unions to offer alternatives to payday loans and to expand their geographic reach. But banks complain that, due to an overbroad definition of so-called “underserved areas” by the credit union regulator, credit unions would have free rein to lend throughout broad geographic areas like Washington, D.C., Philadelphia and Houston without requirements to serve low-income consumers.

Business loans made in such areas would be exempt from the usual credit union caps on business lending.

“They would have the ability to make unlimited business loans from Northwest Washington, D.C.,” said the vice president of congressional affairs for the Independent Community Bankers of America (ICBA), Ron Ence.

How convenient for credit unions that shortly after payday lending was effectively banned in the District of Columbia, they may get federal legislation to step into the short-term loan market in places like the District.   As the saying goes, as cynical as you are, it’s hard to keep up.

Payday lenders, employees and customers are testifying before the Colorado legislature in an effort to keep their livelihood and consumer finance options intact in the face of special interest groups that want to destroy the payday advance industry.  Some of the key points brought out in this Rocky Mountain News item include: 

          “Employees expressed concern about their jobs, while customers testified that the loans got them through tough times.” 

As the nation totters on the edge of a full-blown recession, should state legislatures really be adding to the problems of unemployment and fewer personal finance options?  You may recall a recent Federal Reserve Bank study that outlined the problems working Americans faced following previous payday advance bans, so why in the world would Colorado want to put its people through the same misery, which may well be even worse if the economy does slip into recession?

Then there’s this little chestnut the special interests like to toss around from time to time when people talk about destroying jobs and eliminating consumer choice by banning the payday advance industry:         

          ‘”Innovative businesses” and credit unions “would step into the void,” he (State Sen. Peter Groff) said.’

Right.  Payday Pundit has already exposed how one credit union plan in Pennsylvania forces customers to borrow more than they need to just so the lender can sock consumers with high loan interest fees while paying a veritable pittance in returns.  Meanwhile other bank fees are soaring.   

And by the way, why would a legislature want to create a marketplace “void,” in the first place?  This just doesn’t pass the smell test.

Between adding to unemployment woes, reducing consumer choice and forcing borrowers into higher priced alternatives, it’s no wonder the Rocky Mountain News has editorialized in favor of letting the payday advance industry remain in marketplace.