There are few organizations on this planet with less political capital right now than the American Bankers Association. Amazingly, though, they have still decided that the time is right to continue their attacks on credit unions.
I stumbled upon ABA Senior Economist Keith Leggett's "Credit Union Watch" blog today, which held no punches in responding to USA Today's story about credit union payday alternatives. Upon first glance, Leggett makes an excellent point - credit unions are supposed to, as he puts it, be "an alternative to usurious money lenders." He points to payday alternative loans at Kinecta FCU and Nevada FCU that amount to an annualized 275% and 455% APR, respectively.
Written that way, any reader should be disgusted. That's Leggett's plan.
Here's reality.
Credit unions are not-for-profit financial cooperatives owned by members and directed by democratically-elected volunteers. While we serve members of all income levels, we are particularly adept at helping those who have been shut out by the rest of the financial services world - people of modest means. This is precisely the target market of the "usurious money lenders" Leggett describes. The moral dilemma many credit union boards are faced with is: how do we help this segment avoid the payday lending trap (high fees, high interest rates, terms that disallow borrowers from ever getting rid of their debt), while protecting the credit union's (read: members') assets?
Many credit union boards have decided that offering lower cost payday alternative loans is in line with the credit union mission of people helping people. What I personally love about a lot of these programs is the unique ways they are addressing the issue. North Carolina State Employees' Credit Union, for example, has been amazingly successful at reaching out to this population with small, short-term loans (maximum 31 days and $500) at 12% APR. A key component of these loans is a 5% automatic deduction of the loan amount that is placed in the member's savings account. So, through time, the borrower isn't digging him/herself deeper in the hole. Conversely, the borrower is building savings with which the cycle can be broken.
That is looking out for the little guy, Mr. Leggett. That is a conservative credit union doing a remarkable job of reaching out to those who need a credit union's touch more than anything. These are the exact same people who the financial institutions you represent have either fleeced for every nickel and dime they could squeeze out of them, or shut out of the system completely. All of this while nearly screeching the entire world economy to a halt and requiring bailouts bigger than the GDPs of several continents.
I won't take one moment of anyone's time trying to defend Kinecta FCU or Nevada FCU, especially since I know no more about their products than what I've read in USA Today and the NCLC Report. I get even more disgusted with poor credit union behavior than I do with bad bank behavior. We expect it out of the latter. We expect much better out of credit unions.
And while I cannot stand people who justify bad behavior with worse behavior, I must point out the amazing timing of Mr. Leggett's comments. On the same day of his post, we learn that Bank of America was fined $33 million for misleading investors about $3.6 billion in Merrill Lynch bonuses paid to failure executives that needed $10 billion in taxpayer bailouts, California banks have cost the FDIC $15 billion, and Colonial BancGroup gets raided by the feds. Maybe you could have waited a day or two...or is there even worse news on the way?
There are bad apples in the financial services world, Mr. Leggett. Unfortunately, there are even a few on my side of the discussion. You have a lot of problems to fix on your side, however, before anyone anywhere will be able to come close to forgiving the banking industry for the nearly irreparable harm you have caused.
(PS...I would have written this on your blog, but you don't allow comments. That's not a blog, Mr. Leggett.)
9 comments:
Nicely done and that had to feel good.
I applaud any credit union that does a "pay day" loan the old fashioned way. As a signature loan. What happened to these? One of the excuses I get - and it's outlined in the USA Today story - is that payday loans are somehow advantageous to the credit union because they are easier to disburse.
What?
Ok - now I'm going to sound really old. But back in the day (which was a Wednesday according to Dane Cook) I had to type loan documents on an IBM Selectric. They were printed in triplicate with carbon paper. If you made a big enough mistake, you had to start all over again. Liquid paper was your best friend. My point being, we made these so called "pay day" loans all the time. They were our bread and butter. They were the type of loans that built fierce loyalty.
Today a chimpanzee could do a loan advance. Technology has made it so simple that I don't buy the argument of speed and convenience overriding what's best for the member.
But to your point about Mr Leggett. Glass houses dude.....
Matt: terrific post! If you take any information in a certain context, you can spin it any way you like. And that's the problem with the article that produced the rather humorous "blog" musings by Mr. Leggett.
In any payday loan program, real APRs can be inflated by tack-on-fees, that much is true. And that's for each institution to wrestle with, as you eloquently pointed out.
But the big picture question in any payday loan program (CU or otherwise) is this: does it help people dig a hole or build a foundation?
I'm pretty confident that in general, that's where the clear distinction lies between credit unions and other payday loan programs.
Mr Leggett might want to look into that distinction, as well as the distinction between a blog and - well, whatever it is he's got going.
The line I enjoyed most from the USA Today article was "It's a practice that raises questions about whether credit unions - which often bill themselves as the fee-friendly alternative to banks - have become too aggressively banklike in their quest for revenue." Have CUs lost their way? Not all, certainly - but I'd argue that some have. That's why the average consumer cannot tell the difference. The difference (or at least the perception of difference) is diminishing.
I don't think there is a credit union out there who doesn't have members who live on the edge of financial disaster. Matt, you clearly point out that it is ultimately the responsibility of credit union boards to oversee products and services so we don't make this struggle more difficult. As you say, boards also have a fiduciary responsibility to safeguard member shares. An effective board recognizes the need to weigh each of these tasks so that they are always kept in sight.
@Denise True credit committees made up of member peers is another old fashioned way of doing business that I'd like to see return...but that's another topic for another day. I'm with you on the definitions, though. My credit union offers many small loans at or around the $500 mark. Our rate? The same rate as if you borrowed $15,000 from us. Application fee? $0. Think a bank would waste its time with a loan this small? Not a chance.
@Jeff The thing that bugs me the most about Leggett's posts is the hypocrisy. He's clearly a good writer and an intelligent man. He's even 100% correct in SOME of his critiques about credit unions. The problem is simply that he represents a group of for-profit banks that could make a bull in a china shop look responsible. A wise person once told me that if you point a finger at someone, there are three more pointing right back at you. How applicable is that to the ABA?
@Michael That's a true struggle right now. The vast majority of credit unions are still doing the right things the right way. The bad apples get all the attention. We need to do a better job at calling them out for it.
@Ginny Boards have a responsibility to make sure that the credit union members they represent are provided with a full portfolio of financial services to affordably meet their unique needs. Credit union staff have a responsibility to make sure that they council members into selecting the proper services for their specific needs. In some cases either or both have fallen short. For the most part, however, terrific volunteers like yourself populate our Boards. With folks like that leading the way, such failures should continue to be rare.
Great post! Seems that bankers have forgotten that one part of an equation in lending is character and trust. There is always a portion of your CU earnings that you can afford to loose. Sometimes that loss happens (if you never lend you never loose) but more often than not people are appreciative of the chance they received and do pay. People never forget what the CU did for them.
I think we all agree that we always must determine what is in the best interest of the member. As long as our motives remain clear and transparent, the CU industry can thrive. If our industry simply plays into the commodity trap of offering the seemingly same products as banks or non-FIs, our value proposition will get clouded.
We must better communicate our differences in a manner relevant to the consumer. Then the Leggetts of the world will have less to talk about.
I have read each of your comments with great interest and agree with most that has been said thus far. Most credit unions offering payday loan products are doing so because they know thier members are using the product at alternative services providers. Our research has shown that anywhere from 7% to 20% (or more) of credit union members are currently using (or have within the past five years) a payday loan product. This includes some cu employees. That seems to indicate they need access to short term loans.
More problematic with these loans than the interest rate (bad enough) is the fact that they must be paid in their entirety or rolled over with new fees attached. Many payday lenders do no allow any partial payments. This is where credit unions really make the difference. We do NOT encourage a cyle of debt often seen with these loans. Credit Unions (most often):
1. Expand terms beyond the normal 14 days often as long as 90 days thus making repayment easier,
2. Limiting access to one loan that must be paid in full before another is advanced,
3. Monitor the size of the loan to a percentage of take home pay or small amounts,
4. Offering or requiring savings components (like SECU) that builds wealth,
5. Providing some onsite financial counseling to help the member choose the right prodcut for them
6. (Most) provide the loans at far lesser costs than traditional sources.
Some good examples of great programs are the Stretch Pay program and the Better Choice from Pennsylvania.
To learn more come and visit our Impact Center and http://realsolutions.coop
Matt,
Thank you for responding to that post from Leggett. It was right on. I really appreciate you as part of the credit union world.
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