TACOMA, Wash. – While credit unions across the country explore ways to offer payday lending services at more affordable rates than traditional payday lenders, Harborstone Credit Union has been there, done that, and has come to an unexpected conclusion. Two months ago, the $600 million institution discontinued payday loans and subsequently sold its interests in CU on Payday, Harborstone's CUSO that handles the product. The reason was twofold: Harborstone officials were not satisfied with the way members were using the product; at the same time, increased scrutiny toward payday lenders had the potential to damage the credit union's relationship with its original sponsor group, the U.S. military. Harborstone's justification to offer the controversial product sounds familiar. Branch employees noticed members were depositing checks from payday lenders into Harborstone accounts, and the credit union felt it could better meet member needs by offering lower rates, fewer fees, and money management education. Although the credit union already offered signature loans and credit cards which could fund emergencies, the CU said neither of those products was specifically designed to meet those needs. “Once upon a time, credit unions were doing $200 to $300 loans, but we don't do that anymore,” said John Renforth, senior vice president at Harborstone. “The fact is most credit unions, especially larger ones, have to deal with asset and liability management issues, as well as regulator scrutiny,” Renforth explained. “And while all of those things over time have made credit unions more sophisticated, it has changed the product line a bit, and perhaps we aren't meeting member needs in that way anymore.” Harborstone decided to create its own program and form a CUSO to handle operations and underwriting. The credit union partnered with Capital Finance, LLC of Salt Lake City, Utah, to form CU on Payday. CU on Payday President Ed Seidenberg, a Capital Finance owner, was formerly Chief Financial Officer at Harborstone. In early 2002, Harborstone and Capital Finance launched CU on Payday, and began offering the product to Harborstone's 50,000 members. Around mid-2004, Harborstone researched payday loan usage and discovered the same 400 members were the only ones using the product. “Rather than an emergency-style product, it became a lifestyle product, where they were just using it to live paycheck to paycheck,” he said, adding that those members weren't taking any additional steps toward decreasing their reliance on the product. Around the same time, Renforth said he noticed increased press scrutiny, both in the consumer and industry press, regarding payday lending. The straw that the broke the camel's back came when the military began to scrutinize payday lenders, declaring them predatory upon soldiers. To make matters worse, reports produced by the Government Accountability Office and Consumer Federation of America supported those accusations. Although Harborstone currently extends membership to all residents of Washington State, the credit union originally served McChord Air Force Base, and still counts nearly one-third of its members as enlisted and retired military personnel. “There was no pressure put on us by the military to discontinue the product, but we knew the scrutiny wouldn't go away,” Renforth said. The SVP said he didn't want the situation to escalate to the point where the military would come knocking on Harborstone's door, asking the credit union to cease and desist offering the product to soldiers, an event that would likely result in bad press for the credit union. “We didn't go into this to make money, we just wanted to offer our members a service. If it wasn't of service to our members, and when fewer than 1% of members were using it, why continue?” he reasoned. Although Harborstone has sold its share of the CUSO to Capital Finance, it hasn't abandoned its original idea to meet the needs of members who need emergency funds. “If someone wants to break the cycle of payday lending, we'll help them with it,” Renforth said. The credit union now provides members with short-term loans up to 12-months on a case-by-case basis. Loan amounts vary based on the borrower's need and credit history, but typical loans range from $100 to $700, Renforth said, which happens to be the same amounts available through CU on Payday. “It's not exactly an alternative because it lacks the convenience factor of doing it on the phone or online as the CUSO did,” Renforth said, “But help is still available for those who truly want it.” As for CU on Payday, the company currently works with eight other credit unions, including $1.5 billion Mountain America Credit Union, headquartered in West Jordan, Utah. CU on Payday is also able to offer payday loans to residents of Washington, Utah, Oregon and Arizona. Renforth has kind words for the CUSO, saying CU on Payday is a “very buttoned up company that knows what they're doing.” He also said that the program is a convenient turnkey solution for credit unions, and because it's also user friendly for members, the company continues to be successful. Has the Harborstone SVP soured on payday lending programs as a result of the credit union's experience? Renforth says no. “In the right market, it still makes good sense” he said. “A credit union can offer better pricing, can be more attentive to individual members needs and their situation, and if they see danger signs, they can intervene and help members in ways payday lenders won't.” Renforth added that as long as payday lending meets a consumer need and the product continues to be inconsistently regulated from state to state, payday lenders are unlikely to go away any time soon. -

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