Credit union payday loans among growing alternatives
For a sector that prides itself on its virtue, credit union payday loans don’t seem a likely product to exist. However, despite the stigma of the product and the industry, credit unions and other entities are slowly taking an alternative product mainstream.
Slow growth in credit union payday loans
Payday and other short term loan lenders are often stigmatized, which might make it confusing as to why credit union payday loans were allowed to exist. There are a number of good reasons, such as bringing a service in-house that members might be getting elsewhere or trying to drum up new business and increase revenue.
Regardless, the number of credit unions offering some type of payday-type loan has increased. According to a Cato Institute report from 2012, the National Credit Union Administration (the federal agency which regulates credit unions) reported 479 credit unions offering the product in March of 2009; by June of that year, the number increased to 503. Periodically, news reports and press releases will describe new entrants to the market.
Exact numbers aren’t available, but a steady number of new credit unions offering the product are emerging.
To Be Frank
The mainstream of banking hasn’t really taken to payday lending, which is why credit union payday loans are something of an anomaly. However, the loans themselves aren’t quite what they seem.
Some CU’s offer basically the same product as private or online payday lenders, with the same fee and interest rates. No difference in the product but the signage on the door. Others offer them at reduced rates.
There are also a number of institutions offering payday loan alternatives, such as through the NCUA’s Payday Alternative Loan program, or PAL. The PAL program was created under the Dodd-Frank Act of 2010, which created grant programs for financial institutions to create alternatives to short-term loan products. The specifications are a loan principal between $200 and $1,000, a term of one to six months, fees no higher than $20 and interest rates no higher than 28 percent APR. NCUA-regulated credit unions can offer loans of this configuration, provided they stay within the federal guidelines.
Additionally, the Federal Deposit Insurance Corporation launched a small dollar pilot lending program from 2007 to 2009, which extended grants to 28 participating banks (mostly smaller community banks and trusts) to make small dollar loans. Principal amounts, according to the data recorded by the
The FDIC found charge-off rates (meaning loans at least six months delinquent) roughly the same as comparative loan products such as unsecured loans to individuals and credit cards.
Sword of Damocles
All payday-type products, be they traditional payday loans or credit union payday loans, are currently an item of interest for the Consumer Financial Protection Board. Earlier this year, the CFPB announced it was gathering information for proposed regulations for the industry. A number of credit unions called for caution, as regulating the product too harshly might impede with credit unions’ ability to participate in the market, according to the Credit Union Times.
The CFPB, it should be noted, is more of a watchdog than a regulatory body. However, since the inception of the CFPB, there has been no more anticipated action than what it does with the payday lending industry. The interested parties now happen to include more of the mainstream institutions.