Payday Loans by Credit Unions Come Under Fire

A top regulator is vowing to curtail short-term, high-cost consumer loans at federally chartered credit unions.

Debbie Matz, the chairman of the National Credit Union Administration, promised action in response to new research by consumer groups. Nine federal credit unions are making loans with what are effectively triple-digit annual percentage rates, the groups say.  The products resemble payday loans made by banks that have drawn fire from other regulators.

Dozens of credit unions have stopped offering payday loans in the last few years, and regulators are taking credit for the sharp decline. Of the nine credit unions that still offer high-cost loans, six use third-party service providers that are not subject to NCUA supervision. Matz promised a close look at the other three credit unions.

"In the three instances where federal credit unions are charging high fees for short-term loans, we will review each case and use every tool at our disposal to resolve the situation," she said in an email to American Banker. "I care very deeply about protecting consumers from predatory payday loans and providing credit union members with affordable alternatives."

The three institutions making high-cost loans directly are Kinecta Federal Credit Union in California, Tri-Rivers Federal Credit Union in Alabama and Louisiana Federal Credit Union, according to research by the National Consumer Law Center and the Center for Responsible Lending.

Also cited by the consumer groups were Clackamas Federal Credit Union in Oregon and five Florida-based lenders — Buckeye Community Federal Credit Union, Martin Federal Credit Union, Orlando Federal Credit Union, Tallahassee Federal Credit Union and Railroad & Industrial Federal Credit Union. Those six institutions market high-cost loans made by third parties.

Of the nine lenders, only Orlando-based Martin FCU responded to a request for comment.

Over the last six and a half months, just 15 of Martin FCU's members have taken out a payday loan, generating a total of $302 in income for the credit union, according to president and chief executive officer Bob Beskovoyne. In an email, he acknowledged that the loans carry a very high interest rate and said the credit union offers them for two reasons.

"We  can still provide the service cheaper than others," Beskovoyne wrote, "and it gives us an opportunity to identify and possibly wean members away from payday lenders and into more reasonable credit union products. We did not get into the service for profit."

Federal credit unions are bound by an 18% usury cap, but a small number of them have gotten around that limit by charging fees they do not count in the annual percentage rate they disclose to customers, according to the consumer groups. Several state-chartered credit unions are making similar loans.

"The vast majority of credit unions offer responsible loans to their members," the two consumer groups said this week in a letter to Matz. "Unfortunately, a few credit unions threaten to taint the rest of the industry by offering predatory loans to their members."

Lauren Saunders of the National Consumer Law Center decries what she describes as the debt trap caused by high-cost consumer loans. "The trap is no different whether the lender is a bank or a credit union or a payday lender," she said in an interview.

In 2010 the National Consumer Law Center found that 58 credit unions were offering loans with triple-digit annual percentage rates. Fifty-two of them have since dropped the product, its new research found.

The NCUA took credit for the decline. "NCUA took action and convinced 52 of those credit unions to lower their fees even though they were not violating any law or regulation," Matz says.

NCLC's Saunders says a combination of pressure from regulators, pressure from the public and the bad publicity associated with offering high-cost loans were the likely reasons for the sharp decline.

She argues that regulators can do more to stamp out payday lending at the six credit unions that partner with third parties. For example, regulators could bar credit unions from partnering with payday lenders and then taking a finder's fee, she says.

Credit union regulators are facing increased pressure to stamp out high-cost, short-term loans in the wake of recent actions by banking regulators.

In April, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. proposed guidance that would require banks to underwrite the borrower's ability to repay the loan. It would also mandate cooling-off periods between loans to a specific individual.

Those steps are expected to sharply curtail payday lending by banks, if not eliminate it altogether.