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A Good Story about Helping Members
Monday, November 28, 2016 6:40 AM

David England, Senior Research Analyst, Cornerstone Credit Union League

Until this year, I had been out of the credit union business for a long, long time. I came across a story the other day, and I would like to share a little of it with you. It reminded me of why I wanted to get back to working for and with credit unions. It's a story about the development of a loan product in 2010. Developing a new loan product is a rare event, and when the loan can be used to save our members a lot of money and get them through a financially rough patch, it's a home run for our members. I feel good about it too. And, I hope you will too.

First, the Bad News
Back in 2010, Payday Alternative Loans (PALs) were created to provide credit union members with a much less expensive option to Payday loans. Payday Loans are high-cost, short-term loans, often the only products that the traditional payday lenders sell. They make their money when borrowers who cannot repay the loans roll them over into new ones and pay additional “fees” (the term they like to use instead of the word interest). A typical fee for a payday loan is $15 per $100 borrowed… an APR of 391 percent. Now, that is bad. 

It is reported that 90 percent of the Payday Loan industry’s fees come from consumers who borrow seven or more times. The National Credit Union Foundation estimates that 15 to 20 percent of credit union members have taken out a payday loan within the previous five years. That’s what led to the creation of the credit union Payday Alternative Loan.

Now, the Good News
Hank Klein, retired president of the Arkansas Federal Credit Union, felt that too many credit union members who were bouncing checks from their payday lenders. So, he devised a product to help credit unions help members get out of those products. His solution loan was used to help develop a federal PAL.

PALs help small-dollar borrowers with no or low credit scores avoid the debt trap created by traditional payday loans. The general target profile is: women, younger members, and incomes in the low to mid-forties. 

Payday Alternative Loan Lookalikes
Official PALs are offered by federal credit unions, but many state-chartered credit unions have similar products. And some federal credit unions that don’t provide official PALs have their own versions of payday-style loans. But if they aren’t PALs, they can only impose an APR of up to 18 percent, according to federal law.

That might seem like a good deal, but lenders often compensate for a lower rate by imposing higher application fees, which can drive up the total cost of the loan, or the effective APR.

For example, an institution can offer a 0 percent interest payday loan, but it’s due within 30 days and has a $50 application fee. That brings the effective APR of a $200, one-month loan to 300 percent.

The terms of payday-style loans from state credit unions also vary. In 11 states, state credit unions must comply with federal credit union rules, and their payday loans might mirror PALs. In the rest, credit unions are bound only by the same state laws that govern all payday lending.

Still, credit union loans are generally considered safer than traditional payday loans from a storefront or online lender.

Conclusion
In 2016, about 20 percent of the country’s 3,721 federal credit unions offered PALs. This number is 13 percent in Arkansas, Oklahoma, and Texas combined. Credit unions in Arkansas, Oklahoma, and Texas have approximately 8,371 PALs on their books worth about $3,263,000. 

This is not a major financial impact on the bottom lines of all credit unions. The story of “How the PAL saved America” will not wind up in a book or in The Harvard Business Review. However, I think there are many credit union members who are glad that their credit union offered them a more economical way out of a difficult financial situation. I hope it sends their loyalty factor through the roof. It should. And that makes it a really good story.