In September, the National Credit Union Administration raised the annual interest rate cap to 28 percent from 18 percent for credit unions that offer payday loans that follow certain guidelines. Under this voluntary program, credit unions must allow at least one month to repay, and cannot make more than three of these loans to a single borrower in a six-month period.
But because these firms can charge a $20 application fee for each new loan, the cost to borrow $200 for two months translates into an annual rate of more than 100 percent.
“We spent a long time trying to do this in a way that would work for members and for the credit unions and not be predatory,” said NCUA Chairman Debbie Matz.
What’s more, many credit unions prefer to sell loans outside the federal program, allowing them to charge customers significantly more to borrow.
At Mountain America Federal Credit Union in Utah, a five-day $100 “MyInstaCash” loan costs $12, which works out to an 876 percent annual interest rate. An iWatch News investigation found 15 credit unions that, like Mountain America, offer high-cost loans that closely resemble traditional payday loans.
“They are promoting these loans as payday alternatives, but they are not really alternatives; they are egregious payday products,” said Linda Hilton, a community activist in Salt Lake City. “We look at it as a moral lapse of credit unions.”
All told, more than 500 federally insured credit unions are making payday loans in an industry struggling to remake itself after the financial crisis of 2008-2009. Rates for the short-term loans vary widely from the high-triple-digit-rate loans sold by Mountain America to a modest 12 percent interest rate with no fees at State Employees Credit Union in North Carolina.
Consumer groups typically warn against borrowing at interest rates higher than 36 percent per year. That’s the maximum allowed by many states and by the Pentagon for loans to active-duty members of the military.
The push into payday lending comes at a time when some credit unions are facing questions about their financial viability. Credit unions operate as nonprofit groups and can’t raise investor capital as banks can when times are lean. The NCUA has designated about 7 percent of about 4,600 credit unions as either a serious supervisory concern or at high risk of failure.
Thomas Glatt, an industry consultant in North Carolina, said although most credit unions offering payday loans do so to give members a better alternative to storefront payday lenders, some see the loans as a new revenue stream to shore up crumbling finances.