The Center for Responsible Lending estimates that 12 million Americans use payday lending. It is illegal in 13 states and is regulated — generally in the form of usury limits and APR rate caps — in the remaining 37. So why do consumers use alternative financial services providers despite terms, fees, and rates that trap borrowers into a cycle of dependence?
“When you don’t have a lot of money, you don’t have a lot of options,” says Mike O’Brien, senior vice president and chief advocacy officer at St. Louis Community Credit Union.
But plenty of credit unions are reaching out to individuals who would otherwise use predatory providers, individuals who often lack credit histories or are unable to prove their ability to repay a loan. The three credit unions below are using products like employer-sponsored loans, financial education platforms, and payday loan alternatives to reach consumers that reside outside of the economic mainstream.
Where Financial Education Meets Financial Choices
Manatee Community Credit Union ($27.2 M, Bradenton, FL) was chartered in 1958 to serve Tropicana Products and expanded to a community charter in 1998 when Pepsi Co. purchased the orange juice maker. Despite the broader charter, the credit union posted declines in membership growth and by 2012 knew it needed to change.
“We are located in the heart of a relatively economically challenged part of town,” says CEO Sherod Halliburton. “And the members that were joining were from that community.”
Armed with that information, Manatee’s then-CEO transformed the credit union’s business model to accommodate its new pool of members. The demographics of its neighborhood and membership qualified Manatee for an underserved designation and a low-income designation. In 2012, Manatee became certified as a community development financial institution (CDFI).
To connect with potential members who fit these designations, the credit union provides community employers — such as City of Bradenton, Manatee County Rural Health, and the Manatee Community Action Agency — a coaching tool as well as a payday loan equivalent for their employees.
Manatee creates a customized financial wellness plan — similar in theory to a health wellness plan — for employees that live or work in Manatee county. Employees have access to a financial coach and consumer credit counseling services to learn the basics of credit and personal financial management. The interactive and ongoing nature of the program’s components offer a practical spin to the theoretical take aways found in traditional financial education workshops.
“I can have a plan based on priorities I set and then connect to a socially responsible lending institution that will make products and services available based on my needs,” Halliburton says. “Then I have the ability to monitor how all this is going to impact my credit score and savings.”
“If I want to access more information — take advanced webinars or read articles on how to budget — then I can do so,” Halliburton continues.
Manatee also offers a payday equivalent loan of up to $1,500. The loan is sponsored by the employer and requires no credit check. Borrowers’ ability to repay rather than their credit history is the most important factor in approval decisions. For this reason, Manatee puts a lot of stock in a borrower’s debt-to-income ratio. Additionally, borrowers must set up payroll deductions through their employer to cover the cost of the loan, which mitigates the credit union’s risk.
“To default on your loan you have to be fired or go to your employer and cancel your payroll deduction, which signals to your employer you are about to default on a loan that you received strictly on your employer participating in this program,” Halliburton says.
Halliburton does not have statistics available regarding the number of employees participating in the two programs; however, that doesn't stop Manatee from setting lofty goals.
“We want to impact hundreds and thousands of people in our community,” Halliburton. “That starts by having real experiences with real people and impacting their lives in a real way that allows them to go out and share those experiences.”
Help For Citizenship
Although Self-Help Federal Credit Union serves a diverse membership, a large number of members are Latinos living in California and Chicago. For this reason, the credit union — which is part of a larger network that provides financial services, financing, technical support, and advocacy to un- and underbanked consumers — is carving out a niche in citizenship lending.
“Up to one in four legal Latino permanent residents in this country don’t apply for citizenship even if they’re eligible simply because financing is too great a barrier,” says Self-Help’s special projects manager Sarah Brennan, citing statistics from the National Council of La Raza (NCLR).
The average cost to apply for citizenship in the United States is $680. Through partnerships with organizations like NCLR, Self-Help offers employer citizenship loans at $680 with a 12% APR and a 12-month term. Not limited to a Latino population, the loan is designed for anyone who wants to become an American citizen but struggles to cover the cost.
“It’s designed for folks who are in that hard-to-reach area,” Brennan says. “They don’t have solid credit or they have no credit history but they can show us a history of paying bills on time. Or they might have credit but are just below where lenders would be willing to offer them a personal loan.”
The credit union will start piloting the loan in late July, and Brennan expects several hundred applications when it goes live. Because Self-Help is a federally chartered institution, some of those loans might come from remote channels outside of the institution’s primary branch footprint. To Brennan, that is where employer partnerships provide value.
“It’s not that [the applicant] is just employed now,” Brennan says. “We are also looking at the tenure of that employment. From a financial institution’s perspective, it gives us confidence that we know about [their] ability to repay.”
With an applicant’s income and length of employment verified, Self-Help can then determine what they can realistically afford to repay. This helps the credit union mitigate the chances the loan will put a borrower into more debt than they can handle.
St. Louis Community’s Challenges
Employer-based lending doesn’t come without its challenges, as St. Louis Community Credit Union ($245.2M, St. Louis, MO) can attest. A 50,000 member CDFI located in St. Louis, MO, 85% of the credit union’s population lives in zip codes deemed low-to-moderate income by the NCUA. To help these members and add value to its SEG relationships, the credit union has started reaching out to build an employer-backed payday service. The response, however, has been tepid.
“Employers may not have the motivation or sense of urgency to adopt such a program even though many of their employees could benefit from it,” Mike O’Brien, senior vice president and chief advocacy officer at St. Louis Community Credit Union, writes in an email.
Additionally, the only place the targets for these small loans might have access to the Internet is at work, so employers must be willing to let their employees check and manage their finances at the workplace.
“Smartphones can bridge that gap, but it’s often cumbersome to apply for a loan on your phone,” O’Brien says. “It’s important for the employer to allow their employee to access the program from work.”
St. Louis Community currently has one employer relationship and it hopes to expand its employer-based lending footprint to the point that it benefits the community, O’Brien says.
For now, the credit union relies on its own payday loan equivalent, the Freedom Loan. The Freedom Loan offers a 90-day, $500 line of credit with an APR of 25% and a $25 annual fee. Borrowers may withdraw the money as often as they want provided they repaid their previous draw on time. The roughly 4,750 members who currently use this product hold an average balance of $437. The credit union reports Freedom Loan activity to the credit bureaus so borrowers who make timely payments are also improving their credit scores and setting themselves up for better opportunity down the road.