WASHINGTON-Is there any such thing as a "good" payday loan?
That is the debate at the heart of a move by the National Consumer Law Center and Center for Responsible Lending to urge NCUA to crack down on nine credit unions that allegedly engage in predatory payday lending practices.
The credit unions however, maintain that they are providing a service their members want and need at a more affordable price than is offered by the traditional payday lenders. Moreover, the CUs say, they are helping members to break that cycle and transition to more affordable loans.
NCLC insists there simply isn't any such thing as a good or better payday loan and that these credit unions should instead be offering a more traditional, longer-term loan product that is in line with more traditional loan products.
NCUA, for its part, maintains that none of the credit unions cited by NCLC are violating any of the agency's rules or regulations and that six of the nine CUs' programs in question are run through CUSOs, over which the agency has no oversight, though NCUA Chairman Debbie Matz did say the agency is reviewing the matter.
"We are encouraged that NCUA is looking into the matter and that they have done so in the past, and the amount of this activity is definitely down from where it was, " said Lauren Saunders, managing attorney of NCLC's Washington office, noting that after a similar report in 2010 found that 58 credit unions were making payday loans, that number is now down to just nine.
Debate Over Authority
But Saunders told Credit Union Journal that despite NCUA's insistence that it doesn't have the regulatory authority it needs to address this, NCLC is convinced that simply isn't true. "We don't think that's accurate," she said. "We believe NCUA has the authority to address a credit union's relationship with a CUSO. And the agency should be able to address it when a credit union advertises a loan on their website that they can't legally make."
If illegal, as alleged by Saunders, then how are the loans being made? In six of the nine cases, the credit unions aren't actually making the loans and are instead referring members to a CUSO that can make the loans for a finder's fee. In the case of those credit unions that are doing it in-house, the APRs are at the high-end of what is allowed under NCUA's usury rate cap of 18%, with most of these loans priced at about 15% APR. Those loans, however, include an application fee that, if it were blended into the APR rather than tacked on separately, would boost APRs as high as 269%, according to NCLC.
But a number of the cited credit unions said that the loans being offered are still less expensive than those from traditional payday lenders, and come with the added bonus of giving the credit union a chance to help wean the member off such loans.
"We've had our own program in-house for five years now, ever since we did a survey that found 21% of our members were using payday loans. We realized we had a serious problem," said Rhonda Hotard, CEO of $174-million Louisiana FCU, La Place, La. "We try to steer our members away from abusive payday lenders by offering a lower-cost alternative. The application fee of $15 is charged on all loans. We try to get members into financial counseling. We have counselors on staff and we offer numerous seminars. That application fee helps cover the cost involved in processing the application.
"On a $300 payday loan with us, it costs the member about $16.23, versus $50 or more somewhere else," continued Hotard. "That's a real savings to them. As for us, we're not making any money on this. We get about 175 applications per month. So, we're talking about $2,400 that we're making. This is not our book of business. We're just trying to help our members."
And those members absolutely go somewhere else if the credit union doesn't offer this product, she said, noting that there are 10 payday lending shops within a mile and a half of one of its branches-and that's the branch that does the vast majority of these loans. "Almost no payday loans are done at any of our other branches."
Most of the other cited credit unions are working through CUSOs, as is the case at Buckeye Community FCU, a $74-million CU in Perry, Fla. "We saw that our members were getting these loans somewhere else, and when we talked with some of the members getting these loans, we learned they were typically paying about $25 on the $100, but we had one that had paid $90 on the $100," CEO Charlton Knowles told CU Journal. "When they do it through the CUSO [XtraCash] they're typically paying $9 or $10 on the $100."
And what about that finder's fee the credit union makes? "We get $1 for every loan that is actually closed. Since we begun doing this in October 2011, we've received $814 in that whole period of time. NCLC makes it sound like we're hurting our members and making piles of money. That simply isn't the case," Knowles said. "Sometimes these consumer advocacy groups really do more harm by taking away a better alternative."
All of the credit unions interviewed for this article noted that although these loans are mentioned on their websites, they are not actively marketing these loans. "You have to get at least three clicks into our website before you find anything about this," Beskovoyne said. "We are not pushing this product."
Hard To Wean Borrowers
All of the credit unions also noted that they've been examined-in some cases four or five times-by NCUA since having the program in place and the agency determined there was nothing wrong with what they were doing.
But all of them also conceded that it's very rare that they are successful in weaning a member off the payday loan cycle.
At least one credit union told Credit Union Journal that it may seriously consider ending its program. "I will bring the publicity about all of this to the board so that they can consider whether we should stop doing this," said Martin FCU's Beskovoyne. "And certainly, if NCUA tells us to stop it, we will."
But most of the credit unions have no intention of ending their programs, saying they believed they were still doing something good for their members.
