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Federation launches Borrow and Save to fight predatory lending
NEW YORK (9/20/11)--For many working poor in New York City and nationwide, bridging the gap between generally declining incomes and the ever-higher cost of living is a challenge often met by increasing their consumer debt, typically through credit card debt and alternative, often high-cost, lenders. The National Federation of Community Development Credit Unions has launched a product to change that. Officials from city government, local credit unions, their members, a sponsoring bank, and the federation gathered Monday at Union Settlement FCU--one of the oldest community development credit unions (CDCUs) in New York City--to announce a new credit union product that demonstrates that responsible lenders in New York City offer alternatives to high-cost, predatory lenders that have become so pervasive in low-income communities nationwide. Borrow and Save, which will be offered at two New York City CDCUs, is designed to help borrowers break the continuous cycle of borrowing from high-cost alternative lenders and move towards healthier savings habits. Clifford N. Rosenthal, Federation president/CEO; Gina Rusch, Settlement FCU board chairman; and Jonathan Mintz, New York City Department of Consumer Affairs (DCA) commissioner, joined executives and credit union members from the two participating credit unions for the announcement. “The goal of the new program is to get consumers on the right track to financial health through responsible products that enhance positive financial behavior and builds assets,” said Melanie Stern, federation senior program officer, who is in charge of administering the program. To demonstrate how CDCUs offer affordable alternatives, while also promoting asset building, the federation, with support from Morgan Stanley, has provided five grants to CDCUs nationwide through the new pilot program, including two in New York City--Union Settlement FCU in East Harlem and Love Gospel Assembly FCU in the South Bronx. “Our goal in participating in Borrow and Save is to turn people into savers, so that they don’t need to borrow when an emergency expense pops up in the future,” said Audia Williams, CEO at Union Settlement FCU. “It’s a common misconception that low-income people can’t save, and through this product we hope to offer a much-needed product that also incentivizes positive behavior and shows our members that they can save.” The primary reason behind high levels of debt among the working poor is the occurrence of unforeseen and unexpected events such as job loss and expenses from medical emergencies, according to the Center for Responsible Lending. “Predatory lenders often take advantage of these emergency needs by offering immediate access to short-term loans, but at a cost that can exceed 400% per annum,” Stern said. A typical $500 small-dollar loan at the participating CDCUs requires no collateral, no credit report, is processed within 24 hours or less, has an interest rate of 18%, a fee of $20, and a term of 90 days. By contrast short-term loans from a typical pawn shop, loan shark or Internet payday lender have fees and interest equal to $15 per $100 borrowed every 14 days. The net result is that the CDCU payday alternative costs the borrower $40, while the payday lenders’ short-term loan ends up costing consumers $450. The Borrow and Save product has an added bonus, in that it incorporates an asset building component that requires a portion of the loan go directly into savings, and incentivizes additional saving with a savings bonus to the borrower when the loan is fully repaid. Participating credit unions in New York City and others around the country also couple their Borrow and Save loans with debt counseling and financial literacy as a way to help borrowers become more financially secure. While New York’s usury cap keeps most storefront payday lenders out of the state, predatory lenders, including Internet payday lenders, pawn shops, rent-to-own stores, and loan sharks continue to be a scourge in low-income neighborhoods. “The federation has long recognized the deleterious effects predatory lending and related schemes, such as rent-to-own and refund anticipation loans, have in low-income communities, so in 1999 we began placing Predatory Relief and Intervention Deposits, or PRIDEs which assume some of the risk to assist CDCUs in making affordable loans in their communities,” Rosenthal said. “It is with this combination of experience in targeted investments, advocacy and programming that we are launching Borrow and Save.”
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