Update 8/31/18: A reader graciously made me aware of an NCUA program empowering credit unions to provide payday lending alternatives. It is used by a bit over 500 credit unions and discussion is invited from institutions on how to evolve it in the future. See more direct from NCUA. Looks like a great opportunity to keep your members out of the payday lending debt cycle.
Originally published on CUInsight.com
This post is a continuation of “Your Mission Demands It“. We’re focusing on payday lending and how its very existence should sadden all credit union supporters.
Your credit union members are everything to the institution. Literally. Without them, you’re not a credit union. You’re a credit. With no credit. So I think it is important to bring to light the topics which are affecting members that others might have missed. And then, how you can help fulfill your mission…you know, serving your members (even those who may not yet have a credit union relationship)!
Today, let’s have a little talk about payday lenders. For many people in this country, they’re the closest thing they have to a bank. Of course, you know the cost of such an arrangement. Or maybe not. Spoiler: It’s substantial. Some users understand this, unfortunately, they don’t have much of a choice, or they prefer the instant exchange of check for cash. It’s a big industry, with $38.5 billion in volume in 2009 (yeah, I know, I couldn’t find a newer figure…assistance?). As of 2017, the industry collects $9 Billion (that’s billion with a B) in fees each year. What does your credit union charge for depositing a check? And for cashing it? Not a gazillion dollars? That’s what I thought.
Needless to say, payday lenders are commonplace for people without financial security. You read studies which mention them as living paycheck-to-paycheck. This means all their necessities are paid in the moment, and they hardly ever get ahead of debts. Remember how I’ve said it’s expensive to be poor? Payday lenders provide the service of speed. When rent, electric, water, and car payments are all due, while the refrigerator and pantry are both empty, money from one check buys another week/month of security. Getting that money as quickly as possible is essential. At that point, giving up some in the form of interest rates or fees is a small price to pay to keep the water running. Not surprisingly, usage of payday lenders is rare for those with more financial security. If you have disposable income and savings, and a place your money can reside, why pay someone else massive interest rates to get only some of it in cash?
A person who goes to payday lenders is likely to use them repeatedly. The average is 8-10 transactions per year, where 80% of them are re-borrowed within a month, with 25% building fees greater than what they received in credit. These can be at over 900% APR. What’s your ceiling unsecured loan rate? Anyway, this isn’t illegal. Well, it is for members of the military, as Congress banned them (for being too financially dangerous) during the George W. Bush years. But for everyone else, all’s good here. And these companies aren’t considered predatory lenders. But not for the reasons you may think.
Remember the CFPB? While under the leadership of Richard Cordray (pre-2017), they looked at payday lenders to better understand if this rapidly growing industry was harming its customers. In October of 2017, they released a rule to help people avoid falling into payday lender debt traps. It required lenders to determine upfront whether people could afford to repay their loans. Along with a number of other consumer-safety focused policies, it took 5 years to develop, using insights from more than 1 million public comments.
For the unbanked, it was good policy. In the case of consumers who truly needed this service, it presented an enormous opportunity for credit unions to step in and offer fair services for these people. But 2017 came around and Cordray was out and Mick Mulvaney was in. This rule was immediately scrapped. Entirely unrelated, Mulvaney took over $60,000 in campaign contributions from payday lenders. He also dropped an investigation into one of the largest payday lenders that had been ongoing within CFPB for years before his entry. They also were Mulvaney campaign contributors.
Insulated from investigation or regulation, the payday lending industry is booming. Which means more people who can’t afford to pay are now paying outrageous fees to access their money. They’re just like the credit union movement, except without all of the core principles.
So, in pursuit of their missions, credit unions have been quick to speak out in support of the unbanked and the prior efforts of the CFPB, right?
Oh, you don’t hear anything, either?
I have heard a lot of grumbling over CFPB regulatory compliance challenges. And you’re right, most credit unions should not be subjected to the same regulatory burden as JP Morgan Chase. But where is the speaking out for people whose lives are dictated by the debt they accumulate with these payday lenders?
Credit unions can be an enormous voice for “the little guy”. Besides it being the right thing, people who use payday lending are probably enormously profitable potential members of your credit union. And you’ll never hit them with 900% APR.