LOS ANGELES, Calif.—Every credit union knows it has members who use—and reuse—payday lenders. Supposedly taking the high road by not offering alternative products isn’t helping those members, or the credit union for that matter, says one CEO.
Eric Bruen, CEO of Ridgecrest, Calif.-based Desert Valleys FCU, objects when payday lenders are identified as “the worst thing in the world,” even though some people in his audience agreed with that description when he offered it while speaking to the California and Nevada CU Leagues’ REACH Conference here.
“They are not the worst thing in the world,” corrected Bruen. “They are filling a gap in the consumer market. The problem we have as credit unions is we fail to realize that we can fill that gap. You need to ask yourselves as you talk about products and services about your members who will use these products either way. We have an opportunity as well as a duty in our model to look for products to fill that hole.”
Desert Valley FCU serves two socio-economic groups, said Bruen, including some highly educated, higher income members. But in its market to the east of Los Angeles it also serves many in the lower middle class who are living from one paycheck to the next. “We constantly saw the members with payday loans, or needing the $300 to cover bills,” he said.
Its response has been to roll out a STS (short term, small amount) product that is aimed at filling a market otherwise filled by predatory lenders, at assisting members, and at helping the credit union itself. As soon as NCUA approved guidelines for STS loans (NCUA Rule 701.21), Bruen said his credit union made its move. Its product charges 28% interest, is capped at $300 and includes a $20 processing fee (that the member can get back).
“In first year our credit union produced $12,000 in additional net income from this program alone,” he said in remarks to credit unions that are part of the California and Nevada leagues’ Shapiro Group, which serves smaller CUs. “But more importantly, it fills a need. It would have been paid to payday lenders either way.”
What The NCUA Requires
NCUA Rule 701.21 allows STS loans providing the following criteria are met: Principal must be between $200 and $1,000; the maximum maturity is six months; a member may not take more than three loans over a six-month period; the member must belong to the CU for a minimum of one month; there is a maximum app fee of $20; a maximum interst rate of 28%, and concentration in the loans is not to exceed 20% of net worth.
Desert Valleys’ program follows the “NCUA rules to a T.”
“But we also asked ourselves what are we going to do to empower people out of this?,” Gruen explained. “A problem is that people get into this cycle and can’t get out of it. We see these people who have four or five of these running and they feel they have nowhere else to go. You may not be willing to take on a $2,000 risk overnight, but even if you eliminate one (payday loan) you are building them toward something else. The first thing we said was once you repay the loan, we will repay the fee. We are still getting the 28%.”
Bruen called Desert Valley’s program a “starter platform” that includes getting these members into a credit card. “People will say, especially Shapiro credit unions, I don’t want to get into credit cards. Well, our credit card charges $75 annual fee, has no rewards, charges 18% interest, and has a $300 limit. And we are seeing high demand.”
For those members, it means an alternative to the higher-interest rate cards that target them, especially those emerging from bankruptcy. “We are generating annual fee income and getting interchange income, but more importantly, we are starting them on getting their financial lives rebuilt.”
Desert Valleys FCU does depart from the NCUA guidelines in at least one way in that it requires members in its STS program to have belonged for 90 days, not 30. “If someone is in a spriral relationship, we want to be very careful that we don’t spiral with them. We want to work with them.”
Any Employee Can Sign Off
It also requires proof of a direct deposit relationship, and a minimum monthly direct deposit of $800. There is no credit review, and any employee can process, including tellers. “Every employee has loan approval power,” said Bruen, noting it’s only on the one product, and there are only three criteria to meet.
All disclosure, he said, is done up front, with an explaination of the $20 fee as well as the opportunity for the refund. Marketing, Bruen added, has been word of mouth, especially at the teller window.
On the 213 loans the credit union has done in the program, its average rolling balance is $21,000, with $4,260 in application fee income, $8,523 in loan interest, $230 in fee refunds, and $502 in losses. “So we added $1,000 a month in income by simply following the NCUA rules. It was just that simple.”