This tax season US Federal Credit Union has partnered with a free tax assistance program for low-income residents called AccountAbility Minnesota (AAM) to help protect consumers from paying high fees for borrowing money against their tax refunds.
Together, the partners will grant up to 100 short-term, interest free loans up to $5,000 each. Called Express Refund Loans, they mirror Refund Anticipation Loans in convenience, but have no interest and no fees.
But more than providing quick cash, the $576-million asset USFCU is using the program to build relationships with these people and teach them how to take control of their finances.
"While the goal is to do 100 of these loans, we are not going to be too disappointed if we don't reach that," said David Tolle, director of operations at USFCU. "Our first priority is to establish that savings relationship."
In fact, added Marty Kelly, VP/Marketing at USFCU, the CU wants these people to see the RAL as the last resort.
"The message that we want to make sure is out there is that you don't have to wait that long for your money in today's world," he said. "You can have it directly deposited into your account within a few days and avoid paying any fees."
Lack of education and feelings of not being accepted by traditional financial institutions are among the main reasons low-income residents seek out RAL brokers and check-cashing entities that charge exorbitant fees, Kelly said.
Tolle, who has spearheaded this three-year pilot program, said CU officials trained AAM staff to tell their clients about USFCU's products and services.
"We don't want them to discourage people from getting loans if they need it, but we want them to let people know how they can also get to their funds through ATMs, checking accounts and savings accounts," Tolle said.
USFCU, which has been a leader in reaching out to the underserved, sees this partnership as another opportunity to help more people establish a solid relationship with their neighborhood credit union, Kelly said
"This is very simply the right thing to do," said Bill Raker, CEO of USFCU. "Refund Anticipation Loans take full advantage of those who can afford them least. Many who use RALS are seeking a fast refund to pay for everyday living expenses-food, shelter, clothing. Exorbitant fees only take away from their ability to pay for life's necessities."
According to a new study by the Children's Defense Fund of Minnesota, thousands of that state's residents pay an APR of more than 200% for RALs-short-term loans which use anticipated refunds as collateral. These loans offered by numerous tax preparers typically carry a fee of $100 for an average refund of $1,549.
In 2004, these tactics diverted an estimated $5 million from low-income Minnesotans.
One of the partnership's first recipients, who had been paying a local payday lender $50 to cash her paychecks, said she had no idea that she could use a credit union for the same services at no cost to her.
"She was in the credit union that week to start building that great relationship," Tolle said.
Credit union officials reviewed her credit, gave her a small loan to help establish credit and help her set up some long-term financial goals.
AAM is encouraged by the partnership that will increase the number of Express Loans available in 2007 and 2008.
"US Federal Credit Union has been instrumental in getting this program off the ground," said Bonnie Esposito, executive director of AAM. "There's a tremendous opportunity for other credit unions-both here in Minnesota and across the country-to follow their lead."
