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Banks and Credit Unions Move Into Payday Loans
March 20th, 2012
A tough industry to control
A fixture for years in poor, working-class neighborhoods, payday loans are increasingly being offered by local banks and employee credit unions, triggering concerns by consumer groups that more Americans will be trapped in high-interest loans that could take years to pay off.
The Payday Loan
Conventional payday loans from storefront operations provide workers a two-week advance of as much as $500 on their paychecks for a flat fee or an interest rate that doesn’t sound too extreme on the surface. But many people can’t repay the loans when they come due. Instead, they simply roll the loans over from payday to payday, or take out new loans to cover the old ones, piling on additional costs that can result in interest charges of 300 percent or more over the course of a year.
Mushrooming
More than two dozen regional and community banks now offer versions of these loans, most starting their programs since 2007. The biggest increase, however, has come at credit unions. Nearly 400 of them now are in the market, attracted by a 2010 change in regulations that boosted the maximum interest rate on payday loans to 28 percent from 18 percent.
The banks
The move by banks into payday lending, or direct deposit advances, as many call it, led about 200 groups to write to federal regulators last month and call for prompt action to stop “this inherently dangerous product.”
Credit Unions Moving into Payday Loan Territory
May 29th, 2011
Short-term loans at prices far higher than they are permitted to charge for any other product.
The credit unions are the financial equivalent of a trusted uncle, dispensing prudent loans for cars, homes, and education without the profit motive of traditional banks to millions of customers.
High interest rates
Encouraged by federal regulators, an increasing number of credit unions are competing directly with traditional payday lenders, selling small, short-term loans at prices far higher than they are permitted to charge for any other product.
Interest rate raised
This past September, the National Credit Union Administration raised the annual interest rate cap to 28 percent from 18 percent for credit unions that offer payday loans that follow certain guidelines. Under this voluntary program, credit unions must allow at least one month to repay, and cannot make more than three of these loans to a single borrower in a six-month period. But because these firms can charge a $20 application fee for each new loan, the cost to borrow $200 for two months translates into an annual rate of more than 100 percent.
Outside the federal program
“We spent a long time trying to do this in a way that would work for members and for the credit unions and not be predatory,” said NCUA Chairman Debbie Matz. What’s more, many credit unions prefer to sell loans outside the federal program, allowing them to charge customers significantly more to borrow.
Mountain America
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. An iWatch News investigation found 15 credit unions like Mountain America offering high-cost loans that closely resemble traditional payday loans. “They are promoting these loans as payday alternatives, but they are not really alternatives, they are egregious payday products,” said Linda Hilton, a community activist in Salt Lake City. “We look at it as a moral lapse of credit unions.”
Credit unions
In total, more than 500 federally insured credit unions are making payday loans in an industry struggling to remake itself after the financial crisis of 2008-09. Rates for the short-term loans vary widely from the high triple-digit rate loans sold by Mountain America to a modest 12 percent interest rate with no fees at State Employees Credit Union in North Carolina.
Warning
Consumer groups typically warn against borrowing at interest rates higher than 36 percent per year. That’s the maximum allowed by many states and by the Pentagon for loans to active-duty members of the military. The push into payday lending comes at a time when some credit unions are facing questions about their financial viability. Credit unions operate as not-for-profits and can’t raise investor capital like banks when times are lean. The NCUA has designated about 7 percent of about 4,600 credit unions as either a serious supervisory concern or at high risk of failure.
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