# Presentation: 479952

## The credit union alternative 

***The credit union alternative ***
***to payday loans***

## Credit Unions	Different from Banks:

- Not-for-profit financial cooperatives.
- Capital raised only through retained earnings.
- Serve only field of membership as defined by its charter and regulator.

## Credit Unions	Pennsylvania Landscape:

- 8,630 credit unions nationally
- 626 in Pennsylvania
- 265 < $5 million
- 193 = $5 - $20 million
- 128 = $20 - $100 million
- 40 > $100 million

## Fixing the PayDay Lending Problem:

- Legislative initiatives in Pennsylvania unsuccessful –
- strong opposition efforts by payday lending groups.
- Regulatory efforts ineffective.
- PA Banking Department pro-active.
- Litigation against Advance America.

## Backdrop:

- Top PA Banking Department agenda item to curb abusive lending against consumers.
- Former Treasurer Bob Casey interested in addressing payday lending issue.

## Mutual Goals:

- Transition borrowers from wealth-stripping products to wealth-building products.
- Break the cycle of debt and encourage savings.
- Provide lower-cost alternatives to existing payday lending products.

## Credit Union Better Choice	Our Answer:

- Short-term installment loan:    	30, 60, 90 days.
- Loan payments options: weekly, 	bi-weekly, or monthly.
- Max loan amount: $500 ($575).
- Application fee: $25 (or less).
- Max interest rate: 18%.

## Credit Union Better Choice	Other Features:

- Available to current or eligible members.
- Loan decision without considering credit score or past credit history.
- No rollovers and no additional loans until loan is paid off.
- Financial counseling available.

## Credit Union Better Choice	Required Savings:

- 10% above requested loan amount is deposited into members savings account. Borrower cannot withdraw deposit or close the account until the loan is paid in full.
- Interest paid on required 10% deposit is rebated to the member if loan is paid off according to term.** **

## Credit Union Better Choice	Motives: 

- Product is intended to break-even.
- Segue consumer to traditional, mainstream credit union products and services.
- Provide consumers with financial education opportunities.
- Repayment history reported.

## Credit Union Better Choice	Support:

- Lenders are credit unions operating in Pennsylvania.
- Created by the Pennsylvania Credit Union Association.
- Supported by the Pennsylvania Treasury Department.
- Endorsed by the Pennsylvania Department of Banking.

## Pennsylvania Treasury		Participation:

- Addresses Treasurer’s concern over debt trap ensnaring Pennsylvanians.
- Treasurer and Treasury staff promote Credit Union Better Choice Program:
- Webinar participation.
- Promoted on Treasury Web site.
- Letters to credit unions.
- Press Releases.
- Planned targeted mailings.

## Pennsylvania Treasury		Commitment:	

- $20 million dollar investment in the credit union system.
- State receives market rate-of-return on investment.
- Monies earned above market return fund the loan loss pool.

## Treasury Proceeds	How are they used?

- Credit unions reimbursed up to 50% of losses.
- Credit unions must follow their normal collections procedures prior to making reimbursement claim.
- Claims exceeding the total amount of available funds will be reimbursed on a pro rata basis.

## Member Example

- Member Robert applies for a $500 Credit Union Better Choice Loan and requests that the $25 application fee be added to his loan balance.
- Credit union opens a savings account for Robert and deposits $50 into the account. Robert’s principal loan balance is $575.

## Member Example	

- Robert agrees to make three monthly payments of $197.45.
- Total interest paid over 90 days is $17.34.
- Credit union rebates $2.25 in interest to Robert when loan is paid in full. Robert has $52.25 in savings.

## Product Comparison

| Credit Union Better Choice – $500 for 90 Days | Payday Lending –$500 for 90 Days |
| --- | --- |
| 18% APR$25 Application Fee | Fees and Interest equal to $15 per $100 borrowed every 14 days |
| Total cost after rebate:$40.09 | Total cost for 90 days:$450 |
| Amount in Savings Account:$52.25 | Amount in Savings Account:$0 |

## Credit Union Better Choice	Where we are:

- Program launched on Oct. 19, 2006, with 25 credit unions and 108 locations.
- As of March 14, 47 credit unions and 147 locations enrolled (numbers continue to increase).
- Semi-annual reporting required.

## Slide 19

## Credit Union Better Choice	Product Variations:

- Community credit union in northeast PA offering product for $15 application fee and 13.5% interest rate.
- Community credit union in southeastern PA offers product with an interest rate of 16% if payments made via direct deposit.

## Credit Union Better Choice	Real Stories:

- Credit unions contacting existing payday lender users, as identified through ACH reports, to offer Credit Union Better Choice product.

## Credit Union Better Choice	Real Stories:

- Last summer, woman found herself short on cash, so she got a payday loan. She was paying $150 monthly, with only $20 towards principal.  In December, she got a Credit Union Better Choice loan from a central PA credit union to pay off that loan and make her situation better.

## Credit Union Better Choice	Real Stories:

- Domestic violence victim left with no cash took out loan to buy Christmas gifts for child and make car payment (then moved car loan to credit union).
- New police academy graduates using loans to purchase gun and vest.

## Credit Union Better Choice	Better Choices:

- Many credit unions are reporting that the Credit Union Better Choice loans are being paid back using the monies from tax refunds, in lieu of using higher priced tax refund anticipation loans.

## Credit Union Better Choice

- Thank You!
- Questions?