Credit unions increasingly offer high-rate payday loans

“Not every credit union is as pure as they could be,” he said. “If they are offering something similar to what is sold on the street corner, you have to wonder if that is keeping with the credit union philosophy.”

It isn’t clear how profitable payday lending is for credit unions. But there is potential for big profits. Payday lenders extended an estimated $40 billion in credit in 2009, according to Consumers Union. Profits were about $7 billion.

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Many of the credit unions that offer high-cost loans declined to discuss their profitability, but NCUA filings show that Mountain America Financial Services — which administers the Mountain America credit union payday program — reported profits of $2.4 million in 2010. That includes profits from its insurance business, which the subsidiary operates.

Still, several that offer low- or moderate-priced loans said they either broke even or lost a little money on their programs.

Ways around the rate cap

For now, most credit unions that offer payday loans do so outside the new federal program. Those that do so must follow the old 18 percent interest rate cap. Some get around the restriction by charging high application fees.

At Kinecta Federal Credit Union, which has branches throughout the country, a $400 two-week loan costs $42.25.

That’s an annualized interest of more than 350 percent, well above the allowable federal limit. But in calculating the charge, Kinecta says that just $3 is interest. The rest comes from a $39.95 application fee, which is charged each time — even for repeat borrowers.

Kinecta Vice President Randy Dotemoto said that it could not afford to make loans for less. He said that credit unions are permitted to exclude application fees from financing costs under the federal truth-in-lending law.

Other credit unions, such as Mountain America, sell loans in exchange for a commission by third-party payday companies with such names as “Quick Cash” and “CU on Payday.”

Mountain America referred questions to Scott Simpson, head of the Utah Credit Union Association, a trade group.

“They are creating an alternative in the marketplace,” Simpson said. “The demand doesn’t stop if these loans go away.”

In other cases, the loans are financed by a state-chartered credit union, such as Mazuma Credit Union in Missouri, which does not have to comply with federal lending rules. Missouri imposes few restrictions on loans made in the state.

Lauren Saunders, a lawyer at the National Consumer Law Center, said regulators should stop these relationships. “They should prohibit any federal credit union from partnering with payday lenders or marketing anything that they would be prevented from offering themselves,” she said.

The NCUA said it does not have the authority to shut down loans funded by third-party lenders. It added that any loan offered by a credit union must comply with the federal truth-in-lending law, but the agency declined to comment on whether specific firms were in compliance.

Fast cash for car loans

On a recent Saturday morning, Sam Heredia, 29, a producer for a Spanish-language morning radio show, stopped in at a branch of Nix Check Cashing, a Kinecta subsidiary, in a middle-class neighborhood near downtown Los Angeles.

The biggest drain on his finances is his car, a 2007 Toyota Tundra, Heredia said. Every two weeks for the past year, Heredia has borrowed $400 from Nix. That means he has paid about $1,000 in interest — a 362 percent annual interest rate.

“I think it’s a high percent,” he said.

Douglas Fecher, the president of Wright-Patt Credit Union in Dayton, Ohio said that a fee on top of interest is necessary to make loans affordable.

A $250 “Stretch Pay” loan comes with a $35 annual fee, which goes into a fund that backstops losses at about 50 Midwest credit unions. That fee could push the effective interest on a borrower who takes out two or three loans well above 100 percent per year.

But Fecher said that a lender earns just $3 on a $250, 30-day loan offered at 18 percent interest. “If one person doesn’t pay that back, we would need to make 80 more loans to make up for it,” he said.

His payday loan “doesn’t save the world,” he said. “But it’s cheaper than what they can get somewhere else.”

Freelancer Bethany Firnhaber contributed reporting in this story.

Hallman is a writer for iWatch News.org, a Web site of the Center for Public Integrity, which is a Washington-based nonprofit group focused on investigative journalism.