By Ray Birch
MADISON, Wis.–Are credit unions asking the wrong question when it comes to what the CFPB’s new payday lending rule will ultimately mean for consumers, members and credit unions?
At least one person believes so, even as there is agreement credit unions will need to start thinking now about how best to deal with the fallout.
The CFPB’s new rule sharply reduces the often-triple-digit rates associated with payday and auto title loans, and many analysts expect numerous payday lending companies to exit the business. That will have big implications for the underserved in many communities who count on such lenders, despite the punishing fees and rates that are charged.
In this, the second in a two-part series, CUToday.info examines what might lie ahead for credit unions as a result.
“Everyone is trying to answer the question of whether this rule is good or bad for credit unions; good or bad for payday lenders,” said George Hofheimer, chief knowledge officer at the Filene Research Institute.
But Hofheimer said Filene believes this question is the wrong one—the question is what should credit unions choose to do with this opportunity.”
Hofheimer said the opportunity is clear.
“Those who need financial services akin to what a payday lender would provide can instead be served by a credit union if credit unions decide to offer products that would meet their needs while sustaining the business’ thresholds without being exploitative to the consumer,” he said.
George Hofheimer, Filene
More Than Short-Term Assistance
Adam Lee, director of Filene’s Financial Empowerment Incubator, believes the opportunity for CUs here is more than assisting consumers with their short-term loan needs.
Credit unions should use their energy and focus to pursue the tremendous opportunity the regulations present in filling the void left by providers exiting this space, as well as the growing consumer need,” Lee said. “Credit unions have an opportunity to respond positively and lead the way in meeting consumers' immediate small-dollar lending needs, but also help them achieve longer-term financial health. That is the credit union difference.”
Michael Moebs, economist and CEO at Moebs $ervices, sees community banks and credit unions getting a lot of new account holders as many payday lenders close their doors. The key to this new business, he said, will be adjusting overdraft pricing and carefully evaluating credit.
“Most definitely CUs and community banks will benefit from the demise of the payday lenders. And these will likely be new members who are struggling to get by and count on bouncing checks each month to make ends meet,” said Moebs. “If community banks and credit unions adjust how they price and assess risk this will be good for them.”
Moebs said that the current payday loan product makes little money for credit unions and emphasized that overdraft pricing therefore becomes critical. He recommended that credit unions lower their overdraft price to less than $20 (median OD price now is around $30). The price drop will help struggling members but also raise total overdraft revenue as more use the service as an affordable safety net.
“Philadelphia Police and Fire FCU charges $6 for a debit card OD and make a ton of money doing this,” Moebs pointed out.
OD Limits
Overdraft limits, too, need to be adjusted upward, Moebs added.
“Most credit unions use limits on ODs between $300 to $500,” said Moebs, who said a recent Moebs study shows if resources are available, creating set limits can be both beneficial for the depository as well as the consumer. Having higher limits, greater than $1,500 per account, can produce the most fee income.
Michael Moebs
“Creating higher limits earns at least 40% more than lower overdraft limit ranges. Higher limits also provide the consumer with the protection to cover mortgage or rent payments if necessary,” added Moebs.
Hofheimer summed up what could be ahead for credit unions as a result of the CFPB’s new rule, which still must survive two major challenges before becoming effective in 2019. Republican lawmakers, who often say CFPB regulations are too onerous, want to nullify it in Congress.
“Good, bad or indifferent, these regulations expose an opportunity to serve a segment of the population in need of better financial products and services,” he said. “Whether or not credit unions will gain members—or income—as a result of these regulations depends on if credit unions seek to serve those currently or previously using payday lenders by providing products to meet needs and promoting themselves as a better option. If these consumers don’t join or get what they need from a credit union, any number of other financial service providers are likely eyeing up the opportunity to serve this market segment instead.”
Click here for part 1 of this series