DAVIS, Calif. – A new study by the University of California Graduate School of Management questions whether payday loans offered by credit unions are a preferable to traditional payday lenders and whether such credit can be provided profitably.
The study, "Are Credit Unions Viable Providers of Short-term Credit," suggests that severely strapped borrowers may prefer to pay high rates for small, short-term loans than participate in credit union programs that have strings attached such as a savings component or a financial education requirement, like programs offered by credit unions in Pennsylvania and Ohio.
The study, by Prof. Victor Stango, comes as credit unions are petitioning regulators to increase charges on payday loans, prompting NCUA to propose an exemption to its 18% interest-rate cap to allow higher rates for such products. Credit unions in Texas are also opposing an effort by state regulators to limit payday loan fees.
The study found that after adding all fees, payday loans offered by credit unions are similar to those offered by payday lenders. In addition, credit unions have tougher credit standards, such as automatic deposit "that make risk-adjusted prices on credit union payday loans no lower than those on standards payday loans," it stated.
The study also found that payday lenders are generally more convenient than credit unions and that default on a payday loan at a credit union may harm one’s credit score, while not so at a payday lender.
The study that the low profitability is the main reason why few credit unions have adopted a payday loan program. Recent data from NCUA shows only 479 of 7,749 credit unions, roughly 6%, offer some kind of payday loan. A survey conducted for Prof. Stango concluded that low profitability was the main reason.
Michael Wishnow, spokesman for the Pennsylvania CU Association, which helped organize the state’s "Better Choice" payday loan program conceded several of the points, including the low profitability. "It’s basically break-even," he said of the program for which the Pennsylvania Treasurer’s Department helps subsidize loan losses.
"The thing that differentiates our program from a traditional payday lender is the intent of the program itself," Wishnow told Credit Union Journal yesterday, of Better Choice, in which 80 Pennsylvania credit unions participate. The main aim, he said, was to move people from using predatory products into mainstream financial services. The program, with a savings component and financial education requirement, not only helps the borrower, but also provides access to other lower-cost credit union products and services, like car or credit card or home loans.
The study also reviewed the Ohio CU League’s Stretch Pay program in which 100 credit unions participate; Prospera CU’s GoodMoney; and programs offered by Rivermark CU, 1st Financial FCU, Four Corners FCU, Nevada FCU and several others.
In his study, Prof. Stango asserts that for credit union payday loan programs to be viable two things must be true. First, the pricing must be advantageous. Second, borrowers must find the terms of the loan attractive. "Even if credit unions offer lower-price payday loans, those loans cannot compete with standard payday loans if they have qualitative characteristics that potential borrowers find unattractive, or that would screen potential borrowers out of the market," he concluded.
A separate survey of payday borrowers had some interesting conclusions.
"The survey evidence paints a negative picture of how consumers view credit union payday loans," said the study. "Most payday borrowers indicate a strong preference for a less restrictive but high-price standard payday loan; very few prefer the credit union version of a payday loan. Borrowers’ distaste for the credit union payday loan is driven most strongly by credit unions’ shorter hours of operation, a lack of privacy conferred because credit union payday loans do not "keep my payday borrowing separate from my other banking, for personal reasons," and the fact that defaulting on a credit union payday loan harms one’s credit score."
