Increasing regulation is having an impact on the available resources consumers turn to when cash is tight. More than a dozen states either outright ban or tightly regulate short-term, i.e., payday, lending. The highly televised Western Sky Financial, a short-term lender headquartered in South Dakota’s Cheyenne River Indian Reservation, suspended operations on Sept. 3 because of “unwarranted regulator overreach,” according to a statement on its website. Western Sky’s previously published rates ranged from 89% to 342% on loans from $10,000 to $850, respectively, and the lender charged fees from $75 for larger loans up to $350 for its $850 loans.
What’s A Cash-Strapped Consumer To Do?
Within the cooperative financial services industry, there is much debate about whether credit unions should offer short-term credit options. Opponents argue the inflated rates that typically accompany the riskier loans aren’t in the best interest of members while proponents say credit unions can offer more reasonable rates and complementary programs that help members break the payday lending cycle. The Federal Trade Commission urges consumers to consider alternatives to payday lenders — specifically suggesting they take small loans from their credit union.
State-chartered WSECU ($1.9B, Olympia, WA) launched its Q-Cash payday loan alternative in 2004 as a way to deliver a short-term loan that members need without charging the exorbitant rates and fees typical of payday lenders.With Q-Cash, members can borrow $50-700 per instance and repay it in one or two installments over a 60-day period for a lower APR than traditional payday lenders offer (see chart below) and one-time fee of $12 per $100 borrowed. In 2012, WSECU expanded its product line with Q-Cash Plus, which offers members up to $4,000 to pay back over 36 months.
Q-Cash is a streamlined product line for both the member and the credit union. The credit union already has on file most of the financial information it needs from the member, which simplifies the application process from the user’s end. Plus, the credit union has fully automated the entire front-end process. As long as an application meets certain criteria, no human involvement is required from the credit decision to the disbursement.
Service Without Judgment
“Like it or not, the demand for this product is high,” says Keith Troup, chief lending officer for WSECU. And according to the Pew Charitable Trust, he is right. A 2012 Pew report on payday lending shows 12 million borrowers spend approximately $7.4 billion on payday loans in the United States each year. On average, a borrower takes out eight loans of $375 each per year and spends $520 on interest.
Although the Q-Cash product line is restricted to current credit union members,WSECU has been gaining market share in short-term lending. According to the credit union, it has funded more than $8.5 million in Q-Cash loans year-to-date. That amounts to nearly 20,000 loans. For Q-Cash Plus, WSECU has funded 1,400 loans so far in 2013 for a total of $4 million.
Short-term loan products have a reputation for being high risk and low reward. According to midyear data available in the Search & Analyze tool on CreditUnions.com, WSECU’s net charge-off ratio is slightly higher than its asset-based and state peers — 0.86% versus 0.55% for credit unions with more than $1 billion in assets and 0.56% for Washington credit unions. However, its delinquency ratio is roughly half that of similar-sized credit unions, 0.54% versus and 1.02%, as well as lower than the 0.70% ratio posted by Washington credit unions.
“At around 5%, the losses have been well below half of what we expected,” Troup says about Q-Cash Plus. “Although this is higher than other types of unsecured loans, it is still less than what a typical credit card loss rate might be.”
WSECU realizes members sometimes use the Q-Cash Plus option, which offers larger balances and longer terms, to pay-off Q-Cash loans. But according to Heidi Tinsley, Q-Cash director for One Washington Financial, WESCU’s wholly owned CUSO through which it offers Q-Cash, the credit union focuses on making options available to members, not in judging how they use them. And if members find themselves having trouble repaying their Q-Cash loans, WESCU is there to help.
“We have many options to help members who find themselves getting caught in a cycle,” Tinsley says. “We have ways to help them get back on track such as putting them on a 6-month payment plan or deferring a payment. This is not usually the case with traditional payday lenders and is an example of the credit union difference at work.”
As an option of last resort, members have The Smart Solution, a referral-only product that combines the member’s overdraft privilege and Q-Cash balance into one loan.
“Once a member takes out a Smart Solution loan, which typically has a 16-17% APR and a term of one-year or less, we restrict them from using the Q-cash and overdraft services until the loan is paid off,” Tinsley says.
Working With Regulators
Several years ago, regulators approached WSECU regarding how to structure a successful payday lending alternative program
“We gave regulators within the state of Washington input based on our experience with the Q-Cash product, which was five or six years old at the time,” Troup says. “We were pleased the law within the state on short-term loans seemed to reflect some of our input.”
In addition, the credit union’s CEO, Kevin Foster-Keddie, is a member of the credit union advisory board of the Consumer Financial Protection Bureau. His participation puts the credit union in a position to listen to and provide input on issues the CFPB is focused on, which bodes well for its product suite.
“We feel the payday lending alternatives we offer to our members are a better solution than what they could get anywhere else,” Troup says. “We would hate to be restricted in that area.”
In addition to offering a superior APR for its Q-Cash loans (see chart below), the credit union also urges its short-term loan members to take advantage of the free financial counseling it makes available through BALANCE. However, it stops short of mandating a financial education component.
Courtesy of WSECU.org
“We have a tremendous focus in our organization and many thousands of dollars dedicated to financial literacy efforts,” Troup says. “The focus of Q-Cash is to make it available to as many members as we can, which is why we haven’t tied any specific requirements to it.”
As the Consumer Financial Protection Bureau evaluates payday lending and seeks ways to prevent short-term loans from trapping consumers into a cycle of debt, credit unions should continue to assess their own members’ needs and decide whether a payday alternative would be beneficial.