Usury is pernicious at best, but government-endorsed usury lite helping people in dire financial straits is flat out repugnant. There is just no justification for participation in this vile activity. Government-sanctioned usury lite is still hurtful to the downtrodden. There is never a valid reason to do the wrong thing. The NCUA through their proposed changes to the payday advance loan regulation is simply trying to justify doing the wrong thing by doing only a little less evil.
It is absolutely mind boggling that the regulator has the misguided need to raise a misguided usury ceiling during a historically low interest rate environment. During the Great Depression when the Federal Credit Union Act was signed, the ceiling was 12%. With cost of funds at truly all-time lows, it is questionable why a credit union would need a 35-point spread. If you are making loans for provident or productive purpose, it is difficult to imagine how extracting that interest rate out of an unfortunate member is on its face is not provident and questionable if it reaches productive standard.
Currently, the cap is 28% with a $20 allowed underwriting fee. Consider the impact of a million dollar portfolio of these PALs. If you have a 10% gross charge-off in this portfolio and you have a 2% cost of funds, your margin is $160,000, not including the impact of the $20 underwriting fee. This margin would have Ebenezer Scrooge and Old Man Potter dancing with glee. For what good purpose could the NCUA be actively considering granting additional income?
It can only be argued that the need for an increase in this type of usurious activity against the least able to afford it is again to subsidize imprudently priced secured auto loan lending and other amazingly low loan interest rates on signature credits to A-level members. The margin is so low that the room for error is nonexistent. It is just plan fools folly to participate in interest offerings as low as 1.9% on a new auto when you cost of operations is 3%. You cannot be profitable making these low margin loans on volume.
Maybe the NCUA should add an S to CAMEL and task their examiners with the duty to attempt to fix stupid. How many bogus strategic plans will include amazingly dumb loan offerings under the guise of being competitive? The greatest failure in strategic planning is a failure to first attempt strategic thinking. How can you smile about the achievement of your statutory mission to make funds available for provident or productive purpose by ripping off the poor and rewarding the wealthy? Sounds like a banking strategy that is soon to be governmentally endorsed.
The root of the problem is that most credit unions have either forgotten how to underwrite a loan for a member in financial distress, or they recognize that it take so much human effort and concern which does not fit their easy to use computer models. It is extremely difficult to look a person eye to eye and determine a lending strategy to help the member out. I guess the modern credit union new lending strictures now suggest some computer model to determine if they can make enough usurious loans to cover the losses on the mistakes of the A member loans and forget helping a member in need.
Appropriate payday lending is difficult. Losses happen. We fail as credit unions with our misguided attempts to structure loan policies and procedures to cater to the wealthy credit members. Proper lending to people in financial difficulty takes time, compassion, courage and appropriate risk taking that is properly priced. Not all loans can be made. It would be a membership benefit for the rejected to receive advice about the appropriate charity, social service organization or legal aid society to assist them with their financial issues along with the governmentally required adverse action notice.
The appropriate interest rate charged to a member is credit union specific. Many credit unions could make a reasonable return with PALs earning the traditional 12%. This is not theory. It is presently being done. Employee-based credit unions in solid companies come to mind for a lower level of interest charge. Church-based limited income credit unions may need to charge a higher rate for PALs.
Let's face it the usurious payday lenders are returning the profit to investors, and it is greater than the current 1% on a five-year CD. One has to question the NCUA failure to strategically think about the implications of their proposed lending regulation. If a credit union could truly justify a 500% APR payday loan as provident and productive loan to a member, it should be supported. Any proposed increase in the APR ceiling just says you can only be just a little evil and that is O.K. Maybe be the NCUA should attempt strategic thinking as to the root problems with the current credit unions structures and what part they play in the problem?
Bill Brooks is a certified financial planner with CU Prosper in Rehoboth Beach, Del.
Contact 302-258-4668 or [email protected]
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