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 (www.woodstockinst.org), 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.