FAIRBORN, Ohio -
Five credit unions joined within a year, by 2007 there were 20 credit unions participating. The idea is simple, yet compelling. Members have the option of signing up for as many loans as they need - $250 short-term loans at 18% with an annual fee of $35 or $500 loans for an annual fee of $70. Loans must be paid in full before an additional loan is made.
The economics of the program are attractive for the member. If a member takes out one $250 loan 12 times during a year, the member's annual cost would be roughly $70. If that same member goes to a payday lender, the cost would be more than $600 based on prevailing rates in Ohio. That's a savings of $530 for the member.
The annual fee for the loan goes to the CUSO to pay for the loan loss reserve. Wright-Patt has $700,000 in this program, a loan portfolio that yields 18% with loan losses already set aside. Fecher doesn't expect to either make money or lose money.
"Low-income members can't be served like other members, not just rate, but access and loan repayment are all different," said Fecher. "Credit unions don't pay state or federal income taxes, this gives something back to the community that we wouldn't normally have. We owe this because of our favorable tax treatment."
Fecher believes that an attitude change is needed in serving low-income communities. "Credit unions used to be one size fits all, which no longer applies."
Those interviewed for this report suggest that credit unions consider low-income groups as SEGs and determine needs and appropriate products. Pricing is different for low-income markets. The example of Wright-Patt's payday loan alternative is priced at 18%, which may seem high, but compared to the payday lenders it is a bargain.
One REAL Solution
The National Credit Union Foundation's REAL Solutions project has been working on a series of projects to better serve low-income groups. Some 13 leagues are currently participating in the program. The project offers business models and programs tailored for low-income Americans.
REAL Solutions Director Lois Kitsch said that low-income people have a need for specific products that are different from other members. Products that are more appropriate for low income people, according to Kitsch:
* Check cashing facilities
* Alternatives to predatory car loans
* Tax preparation, ensuring that members have alternatives to high fee tax refund programs
* Alternatives to payday lending
* Bill payment and other services to pay bills
* International wire transfers for immigrants
* Bi-lingual staff
* Savings products, especially for those who lack savings, counseling to helping establish savings programs
* Wealth accumulation-assets such as car and homes
* Helper loans-loans offered by credit unions that have a reduced interest rate or reduced mortgage closing costs.
Financial counseling and education is critical, but can't be forced on members who don't want it. If you force financial education as a first step for a loan, members will go elsewhere for a loan. It is more likely to be embraced after a trusting relationship is established, said Kitsch.
"Products should match the education-if you offer a seminar on home buying, but lack attractive mortgage products, the education is not particularly useful," said Kitsch.
