The P.A.

A weekly address from Patrick Adams,
President of St. Louis Community Credit Union

Credit Unions Are the Absolute Best Solution

On April 4th, 2016, posted in: Uncategorized by

Credit Unions are the absolute best solution

I recently traveled to Washington, D.C., so I could share with the press our credit union’s position on upcoming changes to the world of “payday lending.” I was invited by Pew Trusts, which does great work in the financial services world, analyzing and helping to shape sound, working regulation so consumers and businesses alike can benefit.

Here are my comments.  

As mentioned, I am here today representing St. Louis Community Credit Union. We are a CDFI (Community Development Financial Institution) that serves the (MSA) metropolitan statistical area representative of the City & County of St. Louis, Missouri. Our credit union has focused our target market to be the urban/near-urban footprint. With the deployment of our upcoming 15th branch, we will have a branch office within 2 miles of 98% of the city of St. Louis population. We also have a low-income designation (LID) issued by our regulator, NCUA. Our credit union has almost 82% of our members qualified as very low/low/moderate income. Payday lending is pervasive among these communities and effectively strips the opportunity for wealth accumulation and/or asset building among families. Quite frankly, these entities further strip the neighborhoods in which they locate by not providing for economic reinvestment. They take their profits and run to their corporate headquarters located elsewhere.  

Our credit union has been an active participant in the effort to combat payday lending by offering alternative products. We have two products: 1) A “payday alternative” product that is offered at an “all in” rate of approximately 36%. It has grown to an aggregate balance of approximately $2M. The average balance is around $488 with just under 4,100 participants.  2) We also provide a payday loan consolidation loan (at the same rate) that has an average balance of just under $800. When one calculates the savings at our all-in rate of 36% versus the average rate in Missouri of 440%, we provide our members and our market with an economic impact of more than $8M per year.

We are one of many credit unions and banks in our community, but clearly one of just a few that are active in the “payday loan alternative” space. Without much editorial, other depository institutions need to get involved. All depositories are part of the solution — both banks and credit unions. We believe that because a credit union is a not-for-profit financial cooperative, we, i.e., credit unions are the absolute best solution for serving stressed and distressed communities. Credit is needed in stressed communities — and demand will always exist.  The thought that the CFPB (Consumer Financial Protection Bureau) will eliminate payday lending is a misnomer.  Those payday lenders that remain will 1) charge even higher rates to pay for new regulation and 2) take advantage of a shrinking supply of competitors.  What credit unions can provide is the assurance that fairness remains on the supply side because good, affordable credit remains available. 

Our mission-oriented reason to exist as a not-for-profit positions not only our credit union, but all credit unions, to invest in the community more so than a for-profit entity. While I say that, it is also important to note that while we are not-for-profit, we are also not for loss. Therefore, it is imperative that products, services and pricing are not punitive to our constituency, but allow for good stewardship of the use of ALL of our members’ money.

Likewise, our member offers must also allow for us to be good stewards of their money by being soundly constructed and fairly regulated. Credit unions must maintain their member-oriented nature by offering good products. That is why any rulemaking set forth by the CFPB in short-term credit, i.e., alternatives, to payday lending must allow for credit unions to be a solution. One of my greatest concerns is that the CFPB focuses so hard on eliminating bad practices that the constrictive nature of their rulemaking is an unintended deterrent for credit unions to enter the market with good practices. As an example, if the “alternative rule” is too narrow, it will not allow for innovation and creativity in new product development to emerge.

Regarding payday lending, many people ask me what I think of the CFPB’s rulemaking. I have responded with the idea that it is not what they do — it’s how they do it. For credit unions to enter this space in earnest, the CFPB must be clear. Clarity in their approach will eliminate confusion and establish sound boundaries of operation. Within the boundaries, the CFPB must allow for flexibility to meet the demands of member credit in this space. Allow for products to be cost-effective. Even as a not-for-profit, credit unions must be able to see an ability for return on investment. Without clarity, flexibility and cost-effectiveness, credit unions (banks, too) will be hesitant to enter the market. Closing down supply in the market is dangerous for the consumer. Remaining players will be even more expensive, to say nothing for the likely increase of unregulated lenders emerging in the shadows.  

I appreciate the CFPB’s effort to develop much-needed regulation in an effort to protect consumers. I sat on the SBREFA panel convened by the CFPB to discuss the proposed rulemaking. It was an active panel that put forth many opinions on the CFPB’s initiative. As you might imagine, payday lenders were an active voice in their pushback to any regulation. I, too had reservations, especially regarding the need for credit reports and documenting member expenses, both of which work against cost-effectiveness for such a small loan with a high loss rate. There is no profit left after these proposed new costs are incurred. 

Alternatively, a proposal by the CFPB included a provision by which a maximum payment of 5% of monthly income and a loan duration not to exceed six months would be established. It would help the consumer and allow for paid-as-agreed loans to earn a slim profit. Low-cost, streamlined underwriting may be the most sustainable means by which to insure depository institutions (both banks and credit unions) can participate. 

I mentioned our credit union’s focus on serving stressed and distressed communities in and near St. Louis city. One of those communities is Ferguson, Mo. I sat on the Ferguson Commission’s committee specific to Economic Inequity & Opportunity. Fair financial services and further investment in consumers were recommendations that were put forth by the commission to the state’s governor. 

Well-designed regulation is what is needed in order to create a win-win environment for both the consumer and the depository institutions.

I look forward to answering any questions you may have.

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