By Ray Birch
MANHATTAN BEACH, Calif.—One of the most experienced credit unions in the payday lending space believes new rules from the CFPB capping rates and fees on payday loans won’t accomplish what the Bureau is hoping for, which is to push down rates on such loans and drive customers of payday lenders to other providers, such as credit unions.
Luis Peralta, chief administrative officer at Kinecta FCU and president of the credit union’s chain of check cashing stores known as Nix Neighborhood Lending, told CUToday.info that credit unions won’t be able to afford to step up and take on a lot more of the payday business the new rules are expected to drive away from payday lenders.
Peralta also beleives that the CFPB’s payday rule, as it currently stands, will see marked changes by the time it is introduced, if it is not struck down entirely by Congress.
Under the CFPB’s final rule on small-dollar loans, which CUToday.info reported here, there is a cap of 36% on such loans, far below what many payday lenders charge.
Peralta said that the NCUA Payday Alternative Loan (PAL) –which was cited as an example of consumer-friendly lending by the CFPB when it issued its rule–is not profitable enough for CUs to do much more than offer it as a community service. He added the new rules also make PAL alternatives much less profitable.
NCUA PAL Program
To support his point regarding the viability of the PAL program, Peralta said that NCUA PAL loans today total between 180,000-200,000 total loans, and that the $4.1-billion Kinecta, with its 30 Nix Neighborhood Lending locations, has made approximately 17,000 loans that do not follow PAL guidelines.
“In comparison, Nix alone has made about 10% of all the credit union payday-type loans,” he said. “That shows you that credit unions are offering this on a limited basis and that they do it mostly for community service.”
Luis Peralta
But experts predict that if the payday rules become effective in their current form, payday lenders will either close operations or what as much of their business moves elsewhere. The CFPB itself is projecting that the payday lending industry’s revenue will plummet by two-thirds.
But that isn’t business CUs can’t afford to take on, according to Peralta, who believes that those credit unions that intend to serve the PAL space are already in the market.
“I think the CFPB is hoping that credit unions and community banks will step in to really take that market share,” said Peralta. “But with the limitations under the new CFPB rules and the NCUA PAL program, which is not a profitable product, figuring out the economics of payday lending is extremely difficult. I think most lenders who are already not in this business will stay on the sidelines.”
Peralta stressed that NCUA’s PAL program comes with a lot of rules that make the product unattractive for a CU and borrower, as well.
PAL Roadblock
A roadblock for many borrowers is the PAL requirement that borrowers wait 30 days to take out the loan once they join the credit union.
“Many of these borrowers can’t wait 30 days to pay the rent or cover the cost of the car repair,” said Peralta. “Credit unions, too, are limited in how much they can charge, and these very short-term loans are very difficult to underwrite—for the most part there is not a lot of visibility to the income and expenses of these borrowers, so you have to do a lot of manual verification. That is expensive.”
Peralta also pointed to limits on PAL loan borrowers to no more than $1,000 over six months; that’s often not enough money to help these members get by, he said.
“We once had the PAL program at Kinecta, and we did about couple thousand of those,” said Peralta. “We lost money. It was very unprofitable, because it was very hard to follow the guidelines and make it work. We decided to pull back and look at alternative payday loans to serve this segment of borrowers.”
What Nix offers now is a payday alternative installment loan up to $2,500 that charges 18% APR with a $49.95 application fee, with terms out to 24 months and repayment based on the borrower’s paycheck schedule. Nix also offers a payday-like loan of up to $400 that charges 15% and an application fee of $37.95.
A Nix Neighborhood Lending Center.
Cooling Off Period
Perlata said the new CFPB payday rules limiting a borrower to three loans in 90 days, and then a 90-day cooling off period before another series of three loans could be made, would have an impact on Nix payday loans, which have no limit on the number of consecutive loans a borrower may take.
“The economics of our product relies on the fee,” said Peralta. “The payday product is not a portfolio income product. You need the frequency of use of that product to subsidize the lack of credit worthiness of these customers. It would be hard for us and for other credit unions with alternatives to the NCUA PAL to continue to serve this segment of borrowers if these new CFPB rules go into effect.”
But Peralta is not overly concerned today for the future of Nix’s own offerings, as he suspects the CFPB payday rules will be derailed.
“These rules are expected to take effect in the fall of 2019, but we think they will face a lot of roadblocks before then,” said Peralta. “The payday lending trade associations are ready to file lawsuits, there will be a change in the director of the CFPB, and Congress could take action like they did against the CFPB’s arbitration rule. As a result, we are really not anxious to implement any changes to our products because we know there will be lot of pushback from many different channels.”