After 'Shocking' Lesson, Day Air Offers Alternative
Bill Burke still recalls what it felt like to be at town a hall meeting in his home community of Dayton, Ohio, four and a half years ago. The meeting had been called by community leaders who wanted to know what, if anything, could be done about an explosion in the number of payday lenders locally.
What Burke recalled is that far from being seen as the guys in the white hat, for many of the residents who turned out for the meeting, credit unions, along with banks, were viewed more like what the horse leaves behind. He set out to change that, and since that meeting, his CU, Day Air Credit Union, and other credit unions in his area have given those same residents good reason to join.
"Some of the things we learned (at the meeting) were just shocking," said Burke in comments during CUES Annual Convention. "What I learned was not everyone viewed payday lenders as a bad thing. The people who use payday lenders view banks and credit unions as a bad thing, and that hurt. People said they tried banks and credit unions. They said, 'We told them what we needed, and we had to fill out long forms, and then were told no. So don't take the payday lenders away from us.'"
The issue is hardly unique to Ohio. "Go back and ask your tellers, 'Do you see checks being presented from payday lenders?' And the answer will be 'yes,'" said Burke.
Seeking a resolution, Day Air initially partnered with its largest SEG, the University of Dayton, where a senior level management class did a project on how to battle payday lenders. Their proposal: launch outlets similar to payday lenders, but with more attractive pricing.
Not wanting to invest that level of capital, Day Air opted against that business plan. Instead, Burke said the credit union developed a simpler alternative, a "Salary Advance Loan," which it has offered for the past several years. It offers a $250 loan with an APR of 18%, and an annual fee of $35. While most payday lenders have a repayment term of two weeks, Day Air Credit Union's loans are for 30 days. It added the annual fee because it didn't believe the 18% APR would cover loan losses, and in Ohio the annual fee also doesn't count against the usury cap.
Burke said payday lenders in Ohio typically charge $15 per $100 borrowed, an amount he has seen as high as $25 per $100 in some states.
Credit Report Pulled, But...
Day Air does pull a credit report on borrowers, but does not use it as a basis for a loan decision, and instead just seeks to confirm income. Criteria for approval include a minimum age of 18, a person has to be a member for at least 60 days, that individual has to have some type of income (doesn't have to be a salary, but a verifiable stream of income), the member cannot have caused the credit union a loss in the past or be filing for bankruptcy.
Over the past three years Day Air has made more than 4,000 such loans, with just 33 defaults, and DACU has made money on the program. Eight other Dayton-area credit unions, including Wright Patt CU, also participate, and those credit unions just recently launched a non-profit CUSO that will act as a guaranty fund from which will be paid 90% of the loan losses by participants.
"This really leverages the cooperative nature of credit unions," said Burke. "This may not be the best model, but what's important is we need to stop talking about what model will work and actually get out and start doing something. We think it works, and we invite you to assess this problem for your credit union and your members, and what will you do about it? Obviously, the payday lenders are making a boatload of money, there is a business case to be made here. You're not going to generate a lot of revenue, but you are going to cover your costs and help a segment of the membership that needs helping."