Earlier this month journalist Felix Salmon wrote an article about the tale of a college professor who sought loan help from her local credit union, only to be turned away and sent into the arms of a predatory loan shop. She paid an exorbitant rate (40.4%) because her credit union insisted that her credit wasn’t good enough to obtain a loan.
In the end the professor was able to turn her credit around with the “loan company” loan and move on, no thanks to her credit union. In fact according to Salmon’s article, the credit union suggested that the professor go to a “loan company” to improve her credit.
Salmon, a credit union supporter, was baffled and couldn’t believe that the credit union turned away the kind of member most credit unions strive to help. He spoke with the credit union’s CEO to find out why this occurred.
The bottom line is that the professor’s credit union didn’t offer an alternative loan program and the CEO found it difficult to believe that a loan officer advocated going to a loan company to boost credit. “We always try to make the loan,” he said. “I can’t imagine anybody in 30 years has told somebody to go to a loan company. It makes no sense to do that.”
Furthermore the CEO expressed his remorse regarding how the deal went down. “I think we did fail her,” he says, “and I don’t think we did what we should have done.”
That being said, are instances like this the rule or the exception? Our research produced numerous credit unions that offer solid, low rate “second chance” type credit union programs on both the loan and deposit side so how difficult is it to find a credit union with an alternative loan program?
Credit Unions Design Wealth Building vs. Wealth Stripping Product
According to Michael A. Wishnow, SVP/Communications and Marketing at the Pennsylvania Credit Union Association, more and more credit unions in his state are realizing the importance of offering an alternative to payday lenders.
Recently, his group released a product that looks like a payday loan, smells like a payday loan but acts like a credit union product.
The Credit Union Better Choice loan is a packaged second chance type loan product that allows Pennsylvania credit unions to offer a product that is tailor made for someone like the professor in Salmon’s piece. Credit unions can simply add the product to their loan menu in an effort to reach out to a broader base and help the member rebuild credit and, often for the first time, cultivate savings.
“It’s the credit union better answer to payday lending,” Wishnow explains. “What we did was rather than take a position on legislation, it made more sense to bring an alternative to the marketplace that would be a fair, small dollar loan product designed to get people that are in a wealth stripping financial serving arena and bring them into a wealth building arena.”
Wishnow explains that there are two types of financial service systems. “One that builds wealth like banks, credit unions, financial planners…they make money to help the consumer to better his or her situation.”
The other side of the coin are the wealth strippers. “Wealth stripping financial system are the payday lenders, pawn brokers, rent to loan people. They make a lot of money off consumer, but do not leave the consumer better off at the end of the transaction.”
He says that people live in one of two worlds. Most middle class and upper class live in the wealth building atmosphere. “However, the hard working, lower income folks live in wealth stripping.” Wishnow says that this group cannot get ahead and continue to live within a cycle where they can never catch up.
Rather than pushing the consumer toward wealth stripping, the Pennsylvania Credit Union Association’s product provides a short term loan with the intent of helping the member build savings and credit. Features include:
90-Day Repayment Term
Flexible Monthly, Bi-weekly, or Weekly Payments
$20 Application Fee
$200 Minimum Loan
$500 Maximum Loan
18% Annual Percentage Rate (APR)--as opposed to the 40% and beyond found at a payday lender
A Built-In Savings Benefit
Optional Financial Counseling
Currently, 81 credit unions are offering this product since it’s creation in late June 2011. Wishnow says that the product was developed with the credit union mission in mind. “It’s designed to be a break-even product to transition and cultivate members to become a viable, productive member.” He adds that it’s easier for a credit union to embrace this type of product since credit unions are non-profit.
In the coming months the association will study trend data to determine if the product has been instrumental in transitioning those stuck in the wealth stripping wheel into healthy wealth builders.
Credit Union CEOs Express Frustration With Predatory Lender Competition
Located in “predatory lender row” Orlando Federal Credit Union ($160 million, Orlando, Florida), finds itself constantly trying to reach out to members to make changes. CEO John Neusaenger says that education is the main crux of his credit union’s payday loan alternative program.
“This is a huge challenge as we have found that the payday borrower knows how much they are paying but needs the money and is willing to pay for it,” he explains. “We have an education component to our XtraCash payday loan competitive product that is a way for members to reduce the cost of the loan. They, generally, do not have any interest in reducing that cost; they just want the proceeds quickly and easily.”
“Our plan is to be able to identify members using our payday loan competitive product and be able to offer them a small, unsecured loan with longer repayment terms to help them out of the payday loan cycle,” he continues. “We have not been particularly successful with this plan and we continue to see the same members using the payday loans.”
Education is also key for Frankenmuth Credit Union ($223 million, Frankenmuth, Michigan) as well. CEO Vickie Schmitzer says that by keeping her front line staff poised to talk about its payday loan alternative, members are learning the difference.
“By staff knowing the members we work with, we can talk to those that may use predatory pay day lenders and ask them to keep their business with those that they trust and know, their local credit union.”
Schmitzer says that her credit union’s strategy is to refer to published reports and run the numbers. “By publishing samples of the costs of conventional predatory pay day lending compared to credit union pay day lending, members will be shocked at the better deal the credit union has. Frankenmuth Credit Union also does this by utilizing our on line calculators to show side by side comparisons when we have a one on one conversations with our member.”
Although credit unions are champions of member education and may offer a highly competitive program, Neusaenger laments that competing with the “quick and easy” payday lender is challenging.
“The challenge is to offer a product that is similarly quick and easy to access but offers longer repayment terms,” he explains. “With the high risk (typically a 20% loss ratio) of payday loans, it is very difficult to compete within the lending restraints NCUA imposes on federal credit unions. A good start is to educate consumers on the products offered by the credit union that can be a substitute for a payday loan with more lenient repayment terms. Consumer don’t know that they can borrow $300 to $500 from their local credit union and perceive that payday lenders are the only option for very small, unsecured loans.”
Need a short term loan, but may be a little “light” in the credit department. Find a credit union that offers payday loan alternatives.