CUNA News Now: CUs testify to Congress on payday loan alternatives

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WASHINGTON (3/22/07)--As federal lawmakers continue to scrutinize predatory lending practices, two credit union witnesses appeared before a House subcommittee to tell about their programs that offer consumers an alternative to predatory payday loans.

"In the credit union's 55 years of operation, Faith (Community CU) has been in the forefront of creating and implementing financial products and programs that assist lower income residents build wealth," Rita Haynes, manager/CEO of that Cuyahoga County, Pennsylvania credit union, told the House subcommittee on domestic policy Wednesday.

Rep. Dennis Kucinich (D-Ohio) chaired the hearing titled "Foreclosure, Predatory Mortgage and Payday Lending in America's Cities."

Hayes said her credit union's GRACE LOAN program, which began offering a lower cost alternative to payday lenders in 1999, has been one of the most successful of those products and programs.

"In our research, we found that members needed a product that was fast, simple, and a convenient way to obtain cash when an emergency or the need for extra cash arose," Haynes said.

She said Faith Community CU requires no credit report because member income can be verified with their application, a feature that both shortens and simplifies the loan process.

Haynes also told the subcommittee members that the application fee is significantly lower than that charged by payday lenders, and that since the fee is charged in advanced and not financed, the member receives the total amount they borrow.

CUNA Legislative Affairs Manager Debbie Kwon-Moore (left) discusses testimony with Northside Community FCU President/CEO Ed Jacob before Wednesday's hearing conducted by the House subcommittee on domestic policy. Northside Community FCU is located in Chicago, Ill. (Photo provided by CUNA)

"After explaining to them that they are saving from $72.50 to $95 on fees, we get their commitment to save $10 with the repayment of the loan that must remain in the savings account for a year," Haynes noted in her written statement.

She reported that in 2006, Faith made 2,023 GRACE LOANS totaling $698,000 and charged off seven totaling $1,922.

Also testifying, Edward H. Jacob, manager/CEO of North Side Community FCU of Chicago, told the House subcommittee that his credit union decided to get involved in creating an alternative to payday loans when a member brought in a sister who was in trouble with payday loans.

Before Jacob testified, Kucinich instructed staff to play a four-minute video about the member. Click on the image below to view.

"She'd taken out seven payday loans, owed about $3,000 and was using every paycheck just to pay the rollover fees on her loans," Jacob said, adding that not only was $3,000 gone that she could not "spend on her kids, or on investing, or on a down payment for a home," the payments did not show up on her credit report helping her to build a positive credit history.

"Her story, and similar stories from other community residents, pushed us to act," Jacob said.

The North Side Community Payday Alternative Loan (PAL) is structured as a $500 loan at 16% for a six-month term. Borrowers who do not meet a minimum credit score of 580 must agree to participate in a financial training program.

Twenty-five percent of PAL borrowers, Jacobs said, were previously unbanked. North Side has made more than 4,200 PAL loans, totaling more than $2.1 million, with charge-offs of about 6.7% or $140,000.

During the question and answer session, Kucinich wondered about the apparent absence of banks in many of the neighborhoods most affected by foreclosure. He pointed out that the American Bankers Association declined an invitation to testify at the hearing.

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