The Center for Public Integrity’s Ben Hallman has an excellent investigation at iWatch News exposing how some credit unions are getting into the payday lending game. He reports their regulator, the National Credit Union Administration, is encouraging them to do it to provide an alternative to for-profit lenders and their exorbitant interest rates.
But CPI found fifteen credit unions that “offer high-cost loans that closely resemble the payday loans they are meant to replace.” And it found many more that charge interest rates of 100 percent or more.
Credit unions, of course, are supposed to be the kinder, gentler, customer-owned alternative to for-profit banks out to grab every red cent they can. That some credit unions would gouge their customers like this raises questions about their (and I’m talking specifically about the small number that emulate for-profit payday lenders) reason for being.
But it also points to the fact that small-amount short-term loans like these are very hard to make money on without high interest rates, and CPI is good to give plenty of room to that.
It’s important to emphasize up high that most credit unions don’t operate like this. But the ones CPI found are egregious. Like this one (emphasis mine):
At Mountain America Federal Credit Union in Utah, a five-day $100 “MyInstaCash” loan costs $12, which works out to an 876 percent annual interest rate. That rate rivals traditional storefront payday lenders.
Hallman has some nice on-the-ground reporting, showing anecdotally how payday borrowers tend to get on a debt treadmill:
Heredia had come for the Nix standard payday loan offer: a $400, 14-day loan, for $42.25…
Every two weeks or so for the past year, Heredia has made the trip to Nix, borrowing $400 each time. That means he has paid about $1,000 in interest on his borrowing, which works out to a 362 percent annual interest rate.
Heredia borrows that money from a chain of 48 payday-loan stores bought four years ago by Kinecta Federal Credit Union. It charges him 15 percent APR but also a $40 dollar application fee for every loan.
And this is where the story gets more complicated. The credit unions that do the right thing end up losing money:
Campus Federal Credit Union, which serves mostly students and employees of Louisiana State University, offers a “Money-Wise” loan. Loans from $100 to $345 are available, at an 18 percent interest rate, with six months to repay. There are no additional fees.
John Milazzo, the president of Campus Federal Credit Union, said it loses about $30 on each payday-style loan. But with just a handful of borrowers—63 as of mid-April—the credit union can afford a small loss. “We understand that this is part of the business of helping,” he said. “And hopefully we can establish a good customer.”
The question this raises for me, though, is how much of that $30 loss per loan is due to the low number the credit union issues. If it had higher volume, it would be easy to find efficiencies and cut costs. But much higher volume would also be a failure, too, as the CEO of an Arizona credit union, which experimented with payday loans and dropped them, says:
“The payday loan is a highly addictive product conditioning borrowers to live beyond their means,” he said. “This is a product that should never have been created.”
So what’s the alternative?