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Credit unions in North America have a duty to promote financial health through services that focus on helping improve members’ spending, saving, borrowing and planning habits. One piece of that puzzle is the small-dollar, short-term loan, which fills a critical niche in assuring access to money for millions of borrowers.
Many consumers in both the United States and Canada rely on these financial products. However, each of these countries has its own regulatory landscape, which poses differing obstacles for credit unions in developing and offering loans to help members with their short-term borrowing needs.
In the United States, the Consumer Financial Protection Bureau has encouraged credit unions to offer members an alternative to payday loans. At the same time, the bureau’s new, overly prescriptive proposed regulations may stifle innovation and impose onerous restrictions on lenders, particularly in meeting expectations for confirming a borrowers’ ability to repay. The proposed “full-payment test” is one of the most controversial elements in the CFPB’s planned requirements. Placing too much importance on confirming a member’s ability to repay by requiring prescriptive, specific methods, such as credit checks and human intervention, is likely to make these loans too costly for many credit unions to offer.
Many members, even higher-income households earning between $100,000 and $150,000 annually, are unable to produce $2,000 within 30 days for an unexpected expense, according to a recent study. This makes these types of loans a valuable service for members across the spectrum of income and credit standing. By permitting credit unions to use automated technology that analyzes members’ transaction history to determine their ability and willingness to repay, CFPB could ensure that consumers have access to much-needed small-dollar loans.
CFPB’s stated mission to address the causes of “debt traps” through small-dollar lending is worthy, but some of its proposals may hamper the efforts of credit unions to engage in relationship-based lending with their members.
Certainly, these lending programs should be regulated—and they are. Regulations are already in place to ensure that credit unions issue sound and fairly priced loans, including fair lending standards, unfair, deceptive, or abusive acts or practices regulations, and restrictions on interest rates charged on payday loans. These regulations offer credit unions strict parameters that limit the rates and fees associated with these loans and the time allowed for members to repay them.
In Canada, on the other hand, payday lenders lenders have little competition and few regulations on the interest rates they charge, the number of times a loan can be rolled over or the underwriting process. Most Canadian provinces limit the fees payday lenders charge to $23 per $100 borrowed, including application fees, making the APR up to 626 percent. Quebec is an exception, as the province has limited loans originated there to 35 percent APR. However, there are few rules defining limits on the number of loans a consumer can borrow in a year or limits to deferral or roll-over fees.
The Canadian payday lending industry is thriving in meeting consumer demand for these loans with little competition or viable alternative loan programs through credit unions. However, this industry is coming under closer scrutiny, both on the national and provincial level, and credit unions are working to offer member-friendly alternatives. As just two examples of advances in this area, the Alberta government is considering An Act to End Predatory Lending, and Windsor Family Credit Union in Windsor, Ontario, recently unveiled its Smarter Cash loan product.
To encourage credit unions in both the United States and Canada to offer better alternatives to payday loans, regulatory agencies in both countries must carefully consider credit unions’ responsibility to members to weigh each new service for its value to members and its financial sustainability.
There is enormous opportunity for credit unions in both countries to play a much-needed role in increasing access to reasonably priced small-dollar, short-term loans. They can do so in a way that fulfills their mission and meets their margin goals. Hopefully, CFPB and the Canadian national and provincial governments will foster a lending environment that encourages credit unions to offer these loans to provide borrowers an alternative to payday lenders. Then consumers across North America would have greater access to loans with better rates and more favorable terms.
Ben Morales is CEO of Olympia, Wash.-based QCash Financial, a provider of an automated, cloud-based, mobile lending platform that enables financial institutions to provide short-term loans quickly to the people they serve.
