Emergency Loans Rescue Members in Need

Credit Union Magazine
January 22, 2008 | COMMENTS

Consumer protections, direct deposit, and more affordable rates are the key success factors for payday loan alternatives, according to "Cooperative Credit: How Community Development Credit Unions Are Meeting the Need for Affordable, Short-Term Credit," a report by the Woodstock Institute in Chicago.

The institute conducted an 18-month evaluation of the affordable payday loans offered by credit unions participating in the "Alternatives to Payday Lending Program" (APPLE) sponsored by the National Federation of Community Development Credit Unions and JP Morgan Chase.

The report, authored by Woodstock senior vice president Marva Williams, identifies several factors that account for affordable payday loan program success, including adopting consumer protection practices that discourage overborrowing by limiting the number of loans a borrower may receive, and encouraging or requiring financial education.

Initially, predatory payday loans were single-payment products requiring borrowers to repay the entire loan principal plus fees at once. Most consumers experienced great difficulties paying the entire principal and had to refinance or rollover their loans for additional terms, leading to a spiral of debt for many borrowers.

That's why advocates believe these loans should be relatively small and be designed to allow borrowers to repay the loans with a portion of their next paycheck.

Programs in Action

Many credit unions in this pilot have adopted this loan feature or instituted other practices to discourage overborrowing. For instance, staff of Northeast Community Federal Credit Union work with members, many on fixed- or low-incomes and homeless, on a one-on-one basis to discourage them from overborrowing, especially during holiday seasons. It also offers loans as low as $40.

Bethex Federal Credit Union in the Bronx, New York, offers a range of short-term consumer loans for as little as $500.

ASI Federal Credit Union in Harahan, Louisiana, requires borrowers of its Payday Lender ReBuilder loan to agree in writing not to take out another payday loan during the term of their loan with the credit union. Borrowers also must agree to attend financial education classes, which are led by the credit union's CEO. The classes include basic budgeting but are flexible to accommodate participants' concerns. This:

• Enables borrowers to accrue savings during the loan term so they don't need to rely on loans to pay emergency expenses.
• Charges interest of 18% annual percentage rate (APR) or lower by using commonsense underwriting criteria. Such criteria include encouraging direct deposit of borrowers' paychecks or benefit checks, automatic loan payments, and special loan loss reserves.

Direct deposit strengthens the relationship between the credit union and the member, and deducting loan payments electronically from the member's account increases the likelihood of repayment. Some credit unions implement fees to offset processing costs, including fees for the application, returned checks, and late payments. Benefits include:

• Serves as a convenient alternative to predatory payday lenders by adopting expedited loan applications and processing to allow borrowers to receive loan proceeds in a few minutes.
• Develops long-term relationships with members. Doing so improves repayment rates.
• Obtains borrowers' credit reports, identifying and fixing errors on them, and educating members on ways to improve their credit scores.
• Reports repayment of affordable payday loans to establish credit histories for borrowers.

This story first appeared at www.creditunionmagazine.com and is reprinted with permission.