Even as some expect the debate over the Consumer Financial Protection Bureau's proposed rule aimed at curbing predatory payday lending to heat up, one possible credit union-based solution is picking up steam.
About a year ago, credit union think tank Filene Research Institute teamed up with QCash Financial and Washington State Employees CU to create a pilot lending program that would develop consumer-friendly alternatives to payday loans that sometimes charge annual percentage rates as high as 400 percent to 600 percent.
Based in Olympia, Wash., QCash is a digital lending platform that offers "relationship-based" underwriting, without a credit check, to people in search of small, short-term unsecured loans. The CEO of QCash, Ben Morales, is also an original Filene i3 innovator as well as chief technology and operations officer at Washington State Employees Credit Union (WSECU), a $2.6-billion institution based in Olympia, Wash. Morales has been researching payday loan alternatives at the credit union over the past decade.
Now, almost twelve months after the pilot program commenced, Erin Coleman, impact director for Filene, said the collaboration between Filene Research and QCash Financial has been "going great."
"We have lots of interest from credit unions across the U.S. and Canada that are looking for new solutions to better serve their members," she said. "The early stages of the pilot has focused on building awareness and education around what a small-dollar, short-term credit program is and its value proposition to a credit union's membership."
Coleman noted that under the pilot program, there are two kinds of loans available: short-term, fee-based loans and near-term, interest-based loans. "The terms are also customizable," she added. "We've seen a range of terms from two weeks to 36 months."
The flexibility and customization of the program is part of what makes it unique, Morales suggested. "While the QCash Financial platform allows you to configure any term/fee/rate, typically we are seeing in the external market the fee-based product configured to a 14-day term and $12 to $15 per 100," he explained. "The interest-based product is usually a nine- to 36-month term with a fee and an interest rate of 36 percent."
The fee-based loans are typically around $400 in size, while interest-based loans are approximately $2,500.
Morales said that the pilot program is now "on track" to book about 30,000 small-dollar loans. "The data-gathering is currently taking place with some preliminary findings targeted for [release in] spring of 2017," he said.
Morales noted most customers for these loans are members with "short-term liquidity needs." "However, we do see users of all ages and income levels using the product," he observed. "We assume that a large part of these other users are those that are 'credit-invisible' or leverage the speed of access for convenience."
The big question that is too soon to answer, Morales noted, is what the loan loss rate will be on these loans. Still, WSECU has sufficient history to track such loss rates. "They [generally have] between 5 percent and 14 percent loss rates," he stated. "Probably more revealing is looking at this from a static pool analysis based on originations, [where] we are seeing a 5 percent expected loss rate for the last three years."
Thus far, WSECU is the only credit union to participate in the pilot, but several other credit unions are in the "early stages of [joining] the process," Morales noted.
On a broader basis, the payday loan problem is worsening in the U.S. Citing data from The Pew Research Center, Coleman said some 12 million households per year take out payday loans. On average, she said, a borrower takes out eight loans of $375 each per year and spends $520 on interest. Also, 69% of borrowers use payday loans for everyday expenses, like rent and groceries. "The need for short-term liquidity is real," she lamented.
Morales noted that while payday loan products that charge 400 percent to 600 percent APRs are declining due to tougher state and federal regulations, there are still providers in the marketplace filling the need for instant liquidity.
"The struggle is real for those who lean on these products to bridge the income and expense gap," he said. "Simply eliminating the existing distribution outlets does not solve the need for quick small-dollar loans."
This past summer, the Consumer Financial Protection Bureau (CFPB) proposed a rule designed ending payday "debt traps" by making sure lenders make sure that consumers actually have the ability to repay such loans.
While credit unions largely favor putting curbs on predatory payday lending, CU advocates and the National Credit Union Administration have expressed concern that the CFPB's efforts may have unintended consequences for credit unions that are trying to offer consumer-friendly short-term loans, such as NCUA's Payday Alternative Loans (PALs) program.
Indeed, NCUA Chairman Rick Metsger has asked the bureau to exempt PALs from the final rule. In the agency's comment letter to CFPB, Metsger wrote that PALs offered by federal credit unions provide "a safe, more affordable product" than the typical payday loans.
In the wake of the recent election, some consumer advocacy groups are concerned that NCUA won't need to worry about such an exemption—because they fear Congress will block efforts to implement the rule, regardless of any possible carve-outs for consumer-friendly alternatives.
"Almost immediately after the election, the House of Representatives' Financial Services Committee Chair, Texan Jeb Hensarling, said one of his first orders of business would be to bury [the CFPB's payday lending] rule," the Center for Responsible Lending (CRL) said in a statement.
To bring awareness to the perils of predatory payday lending, CRL explored just how much more expensive holiday shopping becomes if a consumer uses a payday loan to fund it.
The consumer advocacy group took a list of hot toys for this holiday season that was put together by toy store chain ToysRUs and showed the list price for those toys, then calculated what they would cost if the cost of the "average" payday loan is factored in. CRL noted the average payday loan has an APR of 391% and gets "flipped" eight times, with a fee for each extension.
