If, as many expect, Congress creates the Consumer FinancialProtection Agency and if the new CFPA limits or eliminates paydayloans, what should credit unions do?
No one knows for certain exactly how many credit unions across thecountry compete with payday lenders by offering their memberssmall-dollar, short-term loans. But the National Credit UnionFoundation's REAL Solutions program reports that credit unions in34 states now participate in REAL Solutions and that many of theseoffer payday loan alternatives.
If a new financial regulatory agency does away with payday loans,will credit union payday loan alternatives also go away since therewill no longer be payday loans? Or will these programs actuallybecome more important as credit union members who use paydaylenders have to find another source for short-term loans?
Jim Blaine, CEO of the $18 billion State Employees' Credit Union,headquartered in Raleigh, N.C., said he looks forward to the daywhen payday loans go away and that this may mean credit unions goback to doing more of the sorts of lending they used to do.
“These were the kinds of loans that we used to make when I was juststarting out,” Blaine said. “Small amounts of money to members whowere employees of the credit union sponsoring group or SEG. We gotaway from that when more automation came in and made other kinds oflending more prominent, but maybe we need to get back tothat.”
Blaine's thoughts echoed some of the history reported in “PaydayLending: The Credit Union Way,” a white paper written by NancyPierce for the CUNA Lending Council and REAL Solutions in May 2008.Pierce's research showed that, as Blaine suggested, credit unionsused to play an important role in helping their members managetheir need for funds.
“Credit unions used to make payday loans. In fact, that was a largepart of their business in early years, helping employees withintheir employer-based memberships get by until payday,” Piercewrote.
“Credit union people who have been around for a few years can tellmany stories about walking through the worksite and making smallloans to workers out of hand carried cash boxes, after securingtheir signatures on brief notes. But somewhere along the way creditunions decided small loans were unprofitable and walked away fromthem. So the payday lenders came along, recognized a niche marketand need, and learned that small, short-term loans could be madeprofitably,” she added.
But David John, a financial services and banking analyst with thepolitically conservative Heritage Foundation, noted that thefinancial lives of most Americans has changed since then and thatbanks and credit unions need to recognize that they have helpedcreate the demand for these sorts of small, short-term loans.
“Banks and credit unions always used to do that sort of lending totheir strong members and customers, but its not clear they would dothat sort of lending to some of their more marginal customers ormembers,” John said, “and those are the folks who are more likelyto need a payday loan.”
John also called any move to limit or eliminate payday loans a“stupid move” because it would fail to address the underlying needfor these sorts of loans and would simply remove the supply. “I amgenuinely afraid some people may wind up going back to loan sharksagain,” John said. “I want to stress that in no way do I endorsepayday lenders or their interest rates, but at least they arelicensed businesses and not part of organized crime.”
This closely tracks the position on the question of the future ofpayday lending taken by the payday lenders themselves.
David Beck, a spokesman for the $73 million Self Help Credit Union,said he was not sure what would happen if payday loans eventuallygo away. He pointed out that the Center for Responsible Lending, asubsidiary of Self Help, released a report in July that indicatedthat most of the consumer demand for payday loans had its roots inthe payday lender's procedures than in any genuine consumer demandfor the loans.
Called “Phantom Demand: Payday Lenders Create Their Own Demand WithLoan Terms That Generate Rapid Re-Borrowing,” the report made itclear that while there may always be some small-value loans thatconsumers can use to address emergency expenses, those needs can bemet through a credit union loans or credit union programs that helpbuild savings so there would be no crisis, Beck observed.
“Our report, 'Phantom Demand,' shows that it's very common forpayday borrowers to take out their next payday loan on the veryfirst day on which state regulations allow,” said Leslie Parrish,senior researcher at the CRL and co-author of the report. “Ratherthan serving as a bridge to get a borrower past a financialemergency to their next payday, the data clearly show payday loanswork more like a shovel into deeper debt.”
For its part, the payday loan industry argued that the thousands ofpeople who rely on its loans provide it with the best defenseagainst any attempt to ban them.
“It is obvious from the letters that people who have used paydayloans fully understand the terms, greatly appreciate the option anddo not want Congress to limit their credit choices,” said D. LynnDeVault, president of the Community Financial Services Associationof America when announcing a grassroots letter writing campaign toprotect the loans.
“The payday lending industry is unique in that customers like theproduct exactly as it is. I don't think banks, credit cards or evencredit unions can say the same. So-called consumer advocacyorganizations are pushing federal legislation that would ultimatelyban payday loans. But let's be clear, these organizations, who havenothing to lose, do not speak for the 19 million Americanhouseholds who use payday loans. The real-life impact of a banwould be devastating to many families,” said DeVault.
Ed Jacob, CEO of the $9 million North Side Credit Union,headquartered in Chicago, expressed doubt that payday loans wouldever go away but supposed, if they did, that credit union paydayloan alternatives such as the one North Side offers would becomemore important, not less.
“People will still need access to loans to help them meet urgent,unexpected expenses,” he said. “Credit unions will only become moreimportant if payday lenders wind up leaving the market.”
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