Much has been reported lately in the consumer press-from The New York Times to 60 Minutes-about the practice of unregulated payday lending. Payday loans offer "hassle-free" cash in exchange for a post-dated check. It's a $25 billion-a-year industry and is outpacing all the other forms of borrowing.
In just three years, the industry has more than doubled, and it's growing by leaps and bounds each year. And while payday lending is increasing at an alarming rate, many consumers do not understand the dangers they face by going to a predatory lending operation for a small sum of money for a short period of time.
Consider the scenario of a person who desperately needs to repair a car, is short on rent money or must pay an out-of-pocket medical bill, but who does not have access to funds until the next payday. The availability of quick, high-interest loans has been the answer for many of these individuals.
Often referred to as cash advances or deferred deposit loans, payday lending typically allows borrowers to receive small sums of money within hours of signing up for the service.
The loan is normally due in two to four weeks, and only then does the borrower realize the extent of the damage. For example, if someone borrowed $300, he might have to put up $50 and, following an automated clearing house (ACH) debit of his account for the amount due on the next payday, find himself in need of another payday loan.
Down the road toward being hooked into the payday lending cycle, another $50 charge would be deducted from his account, with another loan until the next payday. And so the cycle continues. One military publication, The Officer, tells of a soldier who spent $7,000 to pay off a $1,900 loan, and that was without touching the principal!
Small Loans, Big Consequences
Extensions can, and often do pile up over months and months, resulting in irrevocable debt. One report documented an interest rate on such loans of 340%. An estimated $3.4 billion has been paid by consumers who incur 12 or more loans per year.
Payday loan operations are also becoming more and more pervasive. In one area of Arkansas, there are more payday lenders than there are McDonald's. Payday lenders remain largely unregulated and unlicensed by federal or state authorities.
They often prey on uneducated or unwary consumers by subjecting them to misleading and incomplete information, and sometimes even falsification and outright fraud. Only 14 states have taken steps to make predatory lending illegal, likening it to racketeering.
NAFCU, and our member credit unions, are taking the payday lending threat to heart. Credit unions are second to none in terms of combating predatory lending. Some offer their own payday loans of a much different character-at reasonable rates, often with a requirement for financial education. Others offer alternative, short-term loans, again with low rates and often with member education.
We all know that federal credit unions are prohibited by law from engaging in some of the practices that have been associated with predatory lending, and, of course, they have a federal usury ceiling. Federal credit unions cannot charge more than 15% per year on any loan, unless an alternative rate is established by the National Credit Union Administration. Currently, NCUA has set that rate at 18%, far lower than the rates charged by unregulated payday lenders. And, federal credit unions are prohibited from charging pre-payment penalties to their members.
Support For Legislation
NAFCU continues to support legislation proposed by members of Congress that are concerned about this issue and want to expand less costly credit union services to those who need it most. Such legislation would allow credit unions to cash checks and provide wire or money order services to anyone in their field of membership, regardless of whether the individual has joined the credit union.
Recently NAFCU testified before the House Subcommittee on Rural Enterprise, Agriculture & Technology on the impact of payday lending on the military. Indeed, predatory financial practices-especially on our nation's military bases-have become so pervasive that The New York Times published a series of ground-breaking stories that led to legislation being introduced in Congress to protect service members from sales abuses associated with insurance and mutual fund products as well protections against excessive interest and fees charged on loans. This legislation is spearheaded by U.S. Rep. Sam Graves (R-MO), who will be participating in the Defense Credit Union Summit at NAFCU's Annual Conference and Exhibition in Las Vegas.
Credit unions serve 86 million Americans. That's not the entire U.S. population, but it's a good place to start. We must spread the word about credit unions, that they are not-for-profit and member-owned, and that they offer a safe and sound alternative to unscrupulous payday lenders.
I know that credit unions are helping to combat predatory lending in their communities, whether through education, outreach to the underserved, credit counseling programs or by simply offering their own version of payday lending-short-term loans at better rates with financial education. NAFCU will do its part by continuing to seek ways to ensure the public is aware of the benefits of credit union membership.
Fred Becker is CEO of the National Association of Federal Credit Unions. He can be reached at fbecker
