Credit unions are currently evaluating the first-ever federal regulations for payday loans and auto title loans, proposed in June by the CFPB. Public comments are due Oct. 7. As someone experienced in offering a payday alternative product, I believe the CFPB is right to step in and try to protect consumers, but the regulations need to be carefully designed and well-balanced if they are going to keep credit available while also driving down loan prices. With the right approach, the CFPB can encourage more credit unions to come into the market with lower-cost products of their own.
The CFPB has proposed rules that will give consumers more time to repay in installments, but 300% APR installment loans – which would still proliferate in the market under the rules as now proposed – are harmful too. Congress did not give the CFPB the authority to limit interest rates, so the only way for them to bring down prices is to encourage lower-cost lenders like credit unions to offer better loans.
Credit unions as well as banks have mostly avoided making loans of just a few hundred dollars, even though all payday loan borrowers are “banked,” meaning they have a checking account (because it is a requirement to get a payday loan). I routinely hear from credit union colleagues that they do not provide many small-dollar loans because of the difficulty of lending such small sums at a fair price without losing money. And they make a valid point.
For a while, our credit union did not offer small loans for this reason. As a result, our members with low credit scores were going outside the credit union to get small loans from payday lenders, auto title lenders, pawn shops and rent-to-own stores. Once they did, large payments trapped them in debt and high prices drained scarce funds from their accounts. We tried to solve this problem by offering a PAL loan, but the low revenue limit and the 30-day waiting period after joining the credit union made it unsustainable, and we lost money on these loans.
To help struggling members out of the cycle of debt while also lending sustainably, we developed a Payday Payoff Loan that allowed people to consolidate all of their payday, auto title, and other high-interest credit into one lower-rate loan repaid in installments over more time. Payments are set at an affordable 5% of each paycheck and reported to credit bureaus, so borrowers can improve their credit scores and qualify for other products.
Borrowing $500 for six months from payday lenders in California would cost a consumer around $900 in fees, but this loan costs that same borrower about 12 times less. We have issued more than 12,000 of these loans in the Los Angeles area, saving households millions of dollars and demonstrating that this approach is scalable.
But under the CFPB’s proposed regulations, we would probably have to discontinue these loans because of the “ability to repay” proposal’s heavy underwriting and compliance requirements. The CFPB originally proposed to protect consumers by limiting payments for certain loans to no more than 5% of a borrower’s paycheck. With that type of clear standard and regulatory certainty, we could continue this lower-cost loan program and use automation to grow it to serve more people who have been trapped by high cost loans. Without it, the additional staff time needed for processing applications and compliance would make the path forward difficult if not impossible.
If federal regulators can thread the needle of curbing high-cost loans while enabling safer ones that are viable for consumers and credit unions, then better credit can help people through tough times and keep them away from predatory lenders, which would be right in step with our movement’s philosophy.
Luis Peralta is the chief administrative officer for Kinecta Federal Credit Union. He can be reached at 310-643-1345 or luis.peralta@kinecta.org.
