ALEXANDRIA, Va.-Recent negative, national publicity surrounding certain credit union lending practices has led to a movement-wide effort to respond.
A USA Today story quoted several sources critical of some of the short-term, low-dollar loans offered by CUs as an alternative to higher-priced payday loans, suggesting the credit union offerings are priced as high as the payday lenders' products. An attorney with the National Consumer Law Center stated the credit union products are generally more favorably priced, but in some cases the advantage is only marginal.
The piece also included comment from Lois Kitsch, national program director for the National CU Foundation's REAL Solutions program, in which she explained that many CUs offering the alternative loans encourage savings, and allow up to 90 days to repay the loan, instead of the traditional 14 to 30 days. The story led to a letter-to-the-editor from NCUA, which the paper published in response.
"NCUA is aware than an increasing number of FCUs are interesting in establishing short-term loan programs that are more advantageous to their members than programs available from traditional payday lenders and pawn shows," NCUA's Office of General Counsel said in statement to CU Journal. "NCUA believes a well-run loan program can be an opportunity for an FCU to improve the lives of its members by providing low-cost, small loans."
The agency said it's Letter to Federal Credit Unions 09-FCU-05 highlights the potential benefits a well-designed, small loan program can provide to members and credit unions. It also alerts CUs to the risks, compliance issues and responsibilities associated with operating a payday-lending program. "NCUA's recent letter to federal credit unions includes clear examples of legally permissible short-term loan programs, which were drawn from real-life credit unions," NCUA noted. "If NCUA learns of impermissible loan programs, the agency will take action to shut them down."
In seeking to respond to the USA Today coverage, CUNA said it's strategy "was not to blow it out of proportion," according to Pat Keefe, VP, communications. "They payday lending story was picked by a wire service, but any activity has already dissipated."
NAFCU has put the message to its members to share positive words about CUs, and offered its media relations services, "but no one has called us about it," said Jay Morris, SVP, communications.
CUNA has estimated that payday lending volume in the U.S. is fluctuates between $28 billion and more than $40 billion annually, with 10% and 20% of CU members opting to borrow from payday lenders. The trade group said approximately 60% of CUs that offer payday loan alternatives use the open-end credit terms, while closed-end terms extend to 30, 60 or 90 days. About 95% of all CUs offering payday loan alternatives require the loan be paid in full before another advance is made. CUs also usually add a savings component to the loan.
XtraCash LLC, a Lenexa, Kan., CUSO, responded to NCUA's letter, applauding the agency for acknowledging the need for CUs to offer small loans to their members. "My response to these criticisms from consumer interest groups would be 'Where is their solution?' They don't have one, or at least a realistic one," said Lon Neofotist, managing director. "Can payday type loan be done at 18% APR? Yes, but the credit union will lose money with the high loan losses typically associated with this type of lending and the other member of the credit union will be subsidizing the program to make up for the loss.
"Perhaps (National Consumer Law Center) and others should give it a test," Neofotist challenged. "Start with $1,000 capital, make 10 $100 loans, have jut one of them not pay off, make payroll, pay rent, utilities, etc., out of their funds, and then start other rounds of loans and see how long their capital lasts at 18% or even 36% APR. The math just doesn't add up. Somebody is going to have make up the difference, and in this case, unfortunately it is the other members of the credit union."
