Cash-advance businesses, also known as payday lenders, provide loans to working consumers who need immediate cash before they receive their next paycheck. Consumers provide a post-dated check or electronic checking account information as collateral for the loan. At a payday lender, the annual percentage rate (APR) of interest for a 14-day advance of $100 or $200 can be 460 percent.
There are more than 23,000 payday loan outlets nationwide. The number has quadrupled in the past three years. The payday loan industry reported more than $40 billion in loan volume and collected $6 billion in finance charges in 2005. In 2006, during an impasse over regulatory and legislative proposals to address payday lending in Pennsylvania, former banking secretary A. William Schenck III challenged financial institutions to offer an alternative product. The Pennsylvania Credit Union Association (PCUA) and the Pennsylvania Treasury Department worked closely together to design such a product.*
The PCUA created Credit Union Better Choice (CUBC) and offered it to its member credit unions, which have the option of providing it to current and other eligible members.
The CUBC product is a short-term installment loan of $100 to $500 for a maximum term of 90 days. There are no rollovers and additional loans are not permitted until the first loan is paid off. A maximum of 18 percent APR and a $25 application fee may be charged. Employment verification and other loan decision criteria are determined by the credit union.
Pennsylvania’s Treasury Department made an unprecedented $20 million deposit in Mid-Atlantic Corporate FCU, which serves PCUA member credit unions. The state receives a market rate of return on its investment. Monies earned above the return fund a CUBC loan loss pool that reimburses credit unions for up to 50 percent of losses and support CUBC marketing. The Treasury Department has promoted the program through letters to credit unions, press releases, and its website.
Michael A. Wishnow, senior vice president of communications and marketing at the PCUA, said the trade association “recognized a market need and wanted to encourage a consumer-friendly alternative.” Keith Welks, deputy treasurer for fiscal operations at the Pennsylvania Treasury Department, said, “We wanted to help working families meet shortterm unexpected cash flow needs in a way that’s fairer, more transparent, and more supportive.”
The product provides for some forced savings. At loan disbursement, 10 percent of the loan amount is deposited into a savings account in the member’s name. The borrower cannot withdraw any portion of the deposit or close the account until the loan is paid in full. The interest that the credit union pays on the deposit is rebated to the savings account upon payoff.
Participating credit unions offer financial education to CUBC borrowers, although borrowers are not required to receive it. Financial education is typically provided by nonprofits in the local community or by the credit union.
The credit unions do their best to move consumers from CUBC to traditional products, Wishnow noted. Borrower repayment records on CUBC loans are reported to the credit bureaus. Diane M. Powell, PCUA’s director of communications, said: “These are second chance loans. Credit scores are sub-600, sometimes even sub-500.” Participating credit unions contact existing payday lender users, as identified through automated clearinghouse reports, to offer CUBC.
For a traditional lender, there are two unconventional aspects to the program. First, participating credit unions do not check the credit score or credit record of CUBC applicants; this mirrors the practice of payday lenders. Second, the product is intended to break even, not to make money. Wishnow said that breaking even is acceptable for credit unions because they are not-for-profit financial cooperatives.
CUBC was launched in October 2006 with 25 credit unions that together have 108 branches. As of June 30, 2008, 73 credit unions with 198 locations were participating. The PCUA has 520 members; excluding smaller credit union members with deposits of $10 million or less, about 35 percent of the PCUA’s members are offering CUBC, Wishnow said.
Of the 73 credit unions, 66 have reported CUBC results to the PCUA and have made 9,499 loans totaling $4,473,275. About 5 percent of the loans are more than 90 days late and are in default, according to Wishnow. Participating credit unions have incurred losses of $220,000; of this amount, approximately $110,000 has been paid out in claims, Wishnow said.
Participating credit unions tend to be clustered in city and suburban locations in the Philadelphia, Pittsburgh, Harrisburg, Lancaster, Scrantonâ€“Wilkes-Barreâ€“Hazleton, Erie, and Johnstown areas. (For a list of participating credit unions, go to www.pacreditunions.com.)
Wishnow and Welks said they were pleased with the results of the program. Welks added that the product “is gaining traction” and will prove even more valuable in a slowing economy. He said the program has received the strong support of former treasurer Robert P. Casey, Jr., and current treasurer Robin L. Wiessmann.
Involvement with CUBC carries potential long-term benefits for the credit union industry. A CUBC promotional brochure says: “This program positions credit unions as a solution to the growing problem of payday lending practices.”
Wishnow added: “It enhances the image of all credit unions and makes a clear differentiation between what credit unions and banks and other financial service providers are willing to do.”
Reports and papers on payday lending can be found at the Center for Responsible Lending’s website at www.responsiblelending.org. See also “The Economics of Payday Lending,” by John P. Caskey at filene.org/free/econ .