RALEIGH, N.C. — State Employees' CU's Salary Advance Loan is so profitable and so beneficial to members that its president recommends banks offer the same product.
In fact, Jim Blaine said the $27 billion-asset credit union's payday loan is not only profitable, it's the CU's most-profitable product, with an annual return on assets of 4%.
"It's a huge rate of return for any institution," Blaine said.
SECU's payday loan has encouraged members to open savings accounts, something that many had never done, according to Blaine. The loan is easy to administer and should be adopted by other financial institutions, he added. Its annualized loss ratio of outstandings is 4%.
But concerns are mounting that such products are on regulatory life support, according to industry insiders and analysts.
The Consumer Financial Protection Bureau has anything that looks like a payday loan squarely in its sights and there's very little that bankers can do about it, noted Stan Orszula, a banking lawyer at Quarles & Brady in Chicago.
"The CFPB just opened it up where people can complain online about the various supposed violations of payday lending," Orszula said. "Quite frankly, that's the tip of the iceberg."
There are plenty of influential bankers and former regulators — including Sheila Bair, former Federal Deposit Insurance Corp. chairman, and Sendhil Mullainathan, the CFPB's former assistant head of research — who believe there is a need for small-dollar, short-term consumer loans.
Regardless, Blaine said feedback he received from a recent visit from CFPB representatives was far from encouraging. SECU invited the bureau to come and see how its loan works.
Blaine said he got the impression that the CFPB was going to require payday loans to be installment loans, per a recent recommendation from the Pew Charitable Trusts. And he believes the CFPB will require lenders to fully consider a borrower's ability to repay.
Either move would force SECU to discontinue its product, according to Blaine. "We're perhaps going to have to be thrown under the bus," he said.
CFPB Director Richard Cordray, at a House Financial Services Committee meeting in September, told lawmakers that more financial institutions could offer small-dollar loans, and that it would not be cost-prohibitive for them.
It "would be helpful to provide more of that kind of credit to people who need it, and potentially could avoid some of the higher cost cycles of indebtedness that they get into," Cordray said. A CFPB spokesman declined to comment further.
Meanwhile, the FDIC is working on guidance for deposit-advance loans, according to spokesman Greg Hernandez, who declined to comment further.
Mullainathan has said that payday loan-type products that include a savings account have the potential to address a need for short-term credit without becoming a burden on consumers.
