Providing an alternative to payday lenders is only the first step in keeping members from doing business with the predatory industry, so one credit union is taking a carrot-and-stick approach.
First Financial Credit Union in January will begin offering a payday lending product with a substantial twist: up to 80% of the loan fees will go into a 12-month certificate of deposit-but the borrower only can collect if he or she refrains from visiting other payday lenders for one year and completes a financial literacy program from the credit union.
Ben Heyward, First Financial Credit Union's CEO, told The Credit Union Journal the new program is long overdue, and already is drawing strong, negative reactions from payday lenders in the state.
"Payday lending is a rampant problem in New Mexico," he declared. "In Gallup, a town of just 30,000 people, there are 46 payday lenders. Our new program is drawing a lot of interest because legislation has failed. We're doing this because it is the right thing to do. Someone has to try to help these people."
Not What You're Expecting
The average payday borrower might not fit one's expectations, Heyward said. First Financial Credit Union's recent research discovered many who use the services are college educated and have "good" jobs.
"My concept of people who use payday lenders are people who push shopping carts under the freeway was blown away," Heyward offered. "Some are poor, but most are not. They are just bad at handling cash. They run out of money at the end of the month. And payday lenders charge $35 on every $100 borrowed, which adds up on a $500 loan."
First Financial is a $315-million credit union that serves 46,000 members-most in New Mexico, but some in Arizona and Southern California.
Heyward said in March it began offering an alternative payday lending product for half the fees of the traditional lenders.
However, he noted, it "failed" for two reasons: borrowers simply added the credit union to their list of stops, and, "we became a payday lender, which we didn't want. So we decided to teach them how to save."
But even the "failed" current payday lending product has been a bonus for First Financial Credit Union, Heyward said.
Since March, new checking accounts have opened at triple the normal rate, and direct deposit use has increased five times.
The Current Plan
As currently planned, the new payday lending product will charge $15 per hundred borrowed, or $12 per hundred if the member has direct deposit.
Heyward said loans will be made in amounts up to $2,000, but most are expected to be $500 to $800.
If a borrower takes out $500, it would cost him or her $60 in fees, he explained. Up to $48 will go into the CD.
"We want to use the same trap as payday lenders. Every time someone renews a payday loan, it increases the amount in the savings account. They don't want to lose that."
According to Heyward, First Financial Credit Union won't police the rule of one visit to another payday lender causing forfeiture of the CD.
"Because these people aren't patient. We make money 100 different ways," said Heyward. "We don't need these fees, we want to put it back. Our hope is by the fourth month of the financial literacy, we can break the payday lending habit."
The credit union will use a third party to provide the financial literacy training, which Heyward said would not be a classroom environment.
Instead, it will consist of budget training and teaching people how to say "no" to frivolous expenses that cause monthly shortages.
"We can administer loans cheaper than the payday lenders have, because we have a true banking environment," Heyward suggested. "We will be working with people's checking accounts and direct deposit, while the payday lenders have checks they must manually cash."
