Credit Union Management

August 2007

 

Community development credit unions can fill so many
urgent needs, but perhaps none is as important to the financial lives
of their potential members as providing affordable alternatives to predatory
payday lenders. The Woodstock Institute (localhost/wsi),
Chicago, recently conducted an 18-month study of affordable
alternatives to PDLs offered by credit unions participating in the
National Federation of Community Development Credit Unions and JP Morgan
Chase Alternatives to Payday Lending Program.

 

An executive summary of the study identified several
factors all credit unions can use to make these types of programs
successful:

 

• Adopt consumer protection practices that discourage
over-borrowing by limiting the number of loans a borrower may receive and encouraging or requiring financial education.

 

• All participating credit unions participating make
“affordable PDLs” at an annual percentage rate of 18 percent or
lower, thus documenting that it is possible to operate
financially feasible products at reasonable interest rates with common sense
underwriting.

 

• Enable affordable PDL borrowers to accrue savings
during the term of the loans so they do not need to rely on loans to
pay emergency expenses.

 

• Serve as a convenient alternative to predatory payday
loans by adopting expedited loan applications and processing;
allow borrowers to receive their loan proceeds in just a few minutes.

 

• Developing a long-term relationship with customers has
payoffs.  Participating credit unions reported that, in general,
longer-term members have better repayment records than newer members.

 

• Several CDCUs obtain the credit reports of borrowers to
identify errors and educate members on ways to improve their
credit. All CUs report repayment of affordable PDLs to credit bureaus,
thus helping members establish credit.

 

• Larger CUs can lower costs by offering direct deposit
and automatic loan payments, and using loan processing software to
decrease staff costs. They can also minimize the opportunity costs
of new products and spread the risk across multiple loan
products.