Banks and CUs Are Seeking Part of The Payday Lending Market

The Wall Street Journal is reporting that banks and credit unions are hoping that the Trump Administration will block the Consumer Financial Protection Bureau (CFPB) proposed payday lending rule and will scrap 2013 guidelines that forced banks to abandon the short-term loan market.

The article notes that "[s]ome credit unions continue to offer payday alternative loans"; however, the proposed requirement that lenders assess borrowers’ ability to repay could make this product too expensive to offer.

Proponents argue that letting banks and credit unions offer payday loans would benefit U.S. households that have paid billions in fees annually to payday and auto title lenders.

Read the article (subscription required).

NCUA Requests CFPB Exempt PALs from Payday Lending Rule

National Credit Union Administration (NCUA) Board Chairman Rick Metsger wrote the Consumer Financial Protection Bureau (Bureau) to exempt payday alternative loan (PALs) made by federal credit unions (FCUs) from the Bureau's final payday lending rule.

“We respectfully request the Bureau exempt FCUs completely from its final rule for loans made under and consistent with NCUA’s PALs regulation,” Metsger said in his letter. “As the prudential regulator for federal credit unions, NCUA already ensures that members receive the type of protections the Bureau is seeking to address. The Bureau should therefore defer to determinations of the FCU prudential regulator about this product."

In addition, NCUA recommended that the Bureau provide a small creditor exemption for credit unions making fewer than a threshold number of covered transactions during the preceding year. NCUA contends that without a small creditor exemption, small credit unions may be kept from extending short term, small dollar loans to their members due the increased compliance burdens.

Also, NCUA requested that Bureau clarifies in its "final rule that it does not intend to narrow or otherwise alter the circumstances in which a credit union can use a Congressionally-authorized statutory lien."

Furthermore, "the Bureau proposes a second exemption from the ability-to-repay (ATR) requirements for longer-term loans. The availability of the second exemption depends partially on whether a creditor has a default rate of not more than five percent in the creditor’s portfolio of similar loans. NCUA recommends the Bureau consider a slightly higher default rate."

Read the letter.

Left-Wing CU Execs Get the Federal Government to Shut Down Competition

The Free Beacon published a story on how left-wing credit union executives have benefited from their lobbying the Federal government to shut down their competitors.

The article focuses on Martin Eakes, the founder of the Center for Community Self-Help (CCSH) in Durham (NC), and his efforts to shut down payday lenders that competes with Self-Help Credit Union, which is a division of CCSH.

The article discusses the role that Eakes and others associated with the Center for Responsible Lending, which is also aligned with CCSH, have played in advising the Federal Deposit Insurance Corporation with regard to Operation Choke Point -- an effort to eliminate the ability of businesses that federal regulators deem distasteful, exploitative, or dangerous to obtain financing from banks.

The article further points out that by restricitng payday lenders through regulation or legislation Self-Help Credit Union has benefited from these actions.

Read the story.

Lawsuit Alleges CU Allowed Online Payday Lender Unauthorized Access to Bank Account

A lawsuit by James Dillon alleges that San Antonio-based Generations Federal Credit Union and three bank defendants allowed online payday lenders to initiate unauthorized debits of the plaintiff's checking account.

According to the complaint, the plaintiff obtained five payday loans over the internet from lenders based offshore or on Indian reservations, which carried interest rates ranging from 139 percent to over 700 percent and, in some cases, thousands of dollars in finance charges.

According to the plaintiff, these loans violated North Carolina’s usury statute and various other state laws.

The plaintiff alleges that the Originating Depository Financial Institutions (ODFIs) should have known that the lenders were engaged in making payday loans in states where the loans were unlawful and that they violated RICO by knowingly facilitating the collection of usurious loans through the ACH Network.

Beginning on paragraph 100 of the complaint are the allegations against Generations Federal Credit Union.

"On or about July 1, 2013, CashCall initiated a debit transaction in the amount of $313.96 from Plaintiff’s checking account in North Carolina through the ACH Network. The ODFI originating this transaction was Defendant Generations.

On or about August 2, 2013, and September 20, 2013, CashCall initiated debit transactions in the amount of $294.46 from Plaintiff’s checking account in North Carolina through the ACH Network. The ODFI originating these transactions were Defendant Generations.

CashCall has subsequently sold Plaintiff’s debt to another third-party collection company which continues to initiate unauthorized debits from Plaintiff’s checking account through ACH debit entries originated by Defendant Generations."

In April, a U.S. District Judge the denied the defendants' motion to dismiss the lawsuit.

Read the complaint.

Read the Judge's opinion and order.

Accusations of Payday Lending at Credit Unions

The National Consumer Law Center (NCLC) and the Center for Responsible Lending (CRL) wrote NCUA Chairman Debbie Matz asking NCUA to stop federal credit unions from making triple-digit payday loans.

The letter alleges that some federal credit unions are making balloon-payment, short-term loans with APRs approaching 300 percent -- well-above the legal 18 percent usury cap.

NCLC in a recent study names nine federal credit unions in five states for making triple digit payday loans (see below).

The letter also states that the reputation of the rest of credit union industry is at risk because of the behavior of these few credit unions.

The letter notes that in some cases credit unions are partnering with credit union service organizations (CUSOs) to make the loans.

The two consumer groups recommend that "[w]hen FCUs offer their name to CUSOs, NCUA should tighten up its finder’s fee rule to ensure that FCUs are not incurring third party risk and profiting off of loans that are illegal for them to make directly."

CU Payday Loans: Putting Profits Ahead of People?

An investigative article published in the Washington Post on May 27 about credit unions offering payday loans raises doubts about the credit union industry's claim that "credit unions put people ahead of profits."

The investigatative article found that at least 15 credit unions are offering high-cost loans that closely resemble traditional payday loans, including Mountain America FCU in Salt Lake City (see image) and Kinecta FCU in Manhattan Beach (CA).

The article cites the case of Sam Heredia who borrowed $400 every two weeks for the past year from Nix Check Cashing, a subsidiary of Kinecta FCU. This means that Heredia paid $1000 in interest and fees over that year on $400 that was revolved every two weeks. Nix charged Heredia an application fee each time the loan was renewed.

Thomas Glatt, a credit union industry consultant, is quoted as saying:

"Not every credit union is as pure as they could be. If they are offering something similar to what is sold on the street corner, you have to wonder if that is keeping with the credit union philosophy."

While there are credit unions that are responsibly offering payday loan alternatives, it is clear that some credit unions are putting profits first.

Read the Washington Post article.

A longer version of the article appears on the iwatch news website.

Group Accuses Utah CUs of Making Predatory Loans

The Salt Lake Tribune is reporting that the Coalition of Religious Communities, a social justice advocacy group, has charged eight Utah-based credit unions of offering predatory payday loan-type products to members and wants the credit unions to stop offering these products.

The group cites that the annual interest rates on these short-term loans range from the equivalent of 254 percent to 312 percent.

“This is not what I expect from my credit union,” Linda Hilton, a coalition spokeswoman, said, who noted that she is a member of America First Credit Union. (emphasis added)

The eight Utah credit unions offering these loans are Alliance, America First, Cyprus, Family First, Heritage West (which failed on December 31, 2009), Mountain America, Southwest and USU Charter.

But I do have a comment to Ms. Hilton -- if you do not like the behavior of America First, move your money.

ABA's Comment on NCUA's Short-term, Small Amount Loan Proposal

The following is what ABA wrote to NCUA on its proposed short-term, small amount loan program.

Dear Ms. Rupp:

The National Credit Union Administration (NCUA) Board is proposing to amend its general lending rule to enable federal credit unions (FCUs) to offer short-term, small amount loans (STS loans) as a viable alternative to payday loans. The proposed amendment would permit FCUs to charge a higher interest rate for an STS loan than is permitted under the general lending rule, but the proposal will impose limitations on the permissible term, amount, and fees associated with an STS loan.

ABA believes this proposed rule points FCUs back toward their basic charter purpose, which many FCUs have largely abandoned. NCUA reported that only 532 FCUs offered micro consumer loans and only 279 FCUs (or 5.9 percent of all FCUs) offered payday loans at the end of 2009. Congress in 1934 created FCUs for the purpose of making “credit for provident and productive purposes more available to people of small means.” The intent of Congress when establishing FCUs was for FCUs to be an alternative to nontraditional financial services providers, such as payday lenders, for people of small means.

NCUA needs to have realistic expectations regarding its STS loan program. Banks that have participated in FDIC’s Small-Dollar Loan Pilot Program Guidelines have found such loans to be in general unprofitable. According to the FDIC, very few banks after the first year in its pilot program have achieved, or expect to achieve, short-term profitability from the small dollar loan program. Instead the program is viewed by some banks as a way to build a long-term relationship, while others viewed it as a vehicle to build community goodwill. Additionally, the delinquency rate for the small dollar loan program was typically higher than that for other consumer loans, at 7.3 percent of loans outstanding, and the charge-off rate was 3.4 percent of loans originated under the pilot. ABA recommends that the NCUA Board conduct consumer research to determine which features of the product are important to potential payday borrowers and survey FCUs that are currently offering payday loans to determine their experience with respect to STS loans.

In conclusion, ABA believes that NCUA’s proposed STS loan program would point FCUs back toward their basic charter purpose of serving people of small means. The Board should conduct consumer research to ensure that its sets realistic expectations regarding this STS Loan program.

Sincerely,

Keith Leggett
Vice President & Senior Economist

Are Credit Unions Viable Providers of Short-term Credit?

That is the question posed by Victor Stango at University of California, Davis Graduate School of Management. It is a particularly relevant policy question given that some credit unions and their trade associations have been championing legislation at the state level to shut down traditional payday lenders.

The following discussion highlights some of the key findings of the study.

The study found that according to NCUA data "fewer than six percent of credit unions currently offer payday loans, and credit unions probably comprise less than two percent of the national payday loan market."

Stango writes that "most credit unions do not offer payday loans because they see little chance to break even on a low-priced payday advance product - either because the rates/fees they would charge are too low, or because payday loans are too risky."

"Despite much lower nominal loan APRs, credit union payday loans often have total fee/interest charges that are quite close to (or even higher than) standard payday loan fees. Further, credit union payday loans have tighter credit requirements, which generate much lower default rates. Together, the combination of only slightly lower total charges and significantly lower default rates raises the possibility that risk-adjusted prices on credit union payday loans are no lower than those on standard payday loans."

"Further evidence on non-price terms reveals that tighter credit requirements are not the only negative feature of the credit union payday loan. Credit unions typically have locations and business hours that consumers find less convenient than those of commercial payday lenders. Application times are longer at credit unions. And, default on a credit union payday loan may harm one's credit score, while default on a standard payday loan does not harm one's credit score."

Citing results from a survey of payday borrowers, the study found that very few payday borrowers preferred the credit union approach to payday loans. Borrowers dissatisfaction with the credit union payday alternative arose from shorter hours of operation, a desire to keep separate payday borrowings from other banking activities, and a default on a credit union payday loan could harm one's credit score. However, these survey findings are based on a small sample of 40 payday borrowers.

Based on these findings, Stango concludes that it is unlikely that credit unions could viably serve this market.