Account guaranteed loan payday savings

CUs lift members' fortunes with creative savings options, education, and debt management

Rough seas and global hot spots aren't the only dangers sailors face these days. Chalker Brown recalls how a troubled young serviceman sought financial resuscitation from Jax Navy Federal Credit Union after a runin with a local payday lender.

Brown, branch vice president for the Jacksonville, Fla.-based credit union, recalls how the sailor visited a local check-cashing outfit after running low on finds. To borrow $200, the sailor wrote a $250 check the lender wouldn't cash until his next payday.

When payday arrived and the rest of his bills came due, the sailor couldn't pay back the $250. So he wrote a $325 check to the payday lender to keep the first check from bouncing. Two weeks later, the sailor, who earns $1,100 per month, couldn't cover the $325 check.

"When he came to us in March, he owed the payday lender $2,700-for an initial $200 loan," Brown relates. "This is a typical case. A week doesn't go by when we don't see several people who have been to payday lenders and have gotten in over their heads."

In May, the Florida Legislature passed a bill suported by the Florida Credit Union League to end abuses associated with title loans. At press time, similar league-supported payday lending legislation faced a less certain future as the legislature wound down.

Legislation is pending on state and national levels to curtail the worst abusers: payday lenders that regularly charge more than 600! annual percentage rates (APR) and title loan operators that swap cash for car titles. But reining in these predators doesn't deal with the underlying issue: Why do people use payday lenders in the first place?

"The bottom line is we're dealing with kids who are away from home for the first time with whatever financial training they've brought from home or school-which is next to nothing," Brown says. `They don't know how to live within their means or how to deal with credit, and no one has taught them how to save money."

But youth and inexperience aren't the only factors. The typical U.S. household has less than $1,000 in financial assets after subtracting debts, according to the Filene Research Institute in Madison, Wis. And the overall U.S. savings rate is 0%, despite the thriving economy and booming stock market.

"Within the space of one generation, we lost saving as a social value," notes George Barony, executive director for WECO (Working for Empowerment Through Community Organizing), a Cleveland-based economic development organization.

The answer for low- and moderateincome consumers, say credit union and community leaders, involves four components: education, wise use of credit, debt reduction, and access to creative savings vehicles to help people accumulate assets and build wealth-- sometimes one dollar at a time.

THE EXTRA GREEN MILE

Overall, credit unions do an excellent job of making affordable services available to low- and moderate-income members. More than half (54%) of credit unions require only $5 or less to open a regular share account, according to CUNA & Affiliates' market research department. The average minimum requirement is $16.34.

Plus, 53% of credit unions grant loans for $100 or less, including 15% that have no minimum loan amount. The average minimum loan amount is $245.

Many credit unions go the extra mile or two to help members. To ward off payday lenders, which often prey on military personnel because of their guaranteed paychecks, Jax Navy Federal offers overdraft protection starting at $500 to any member, combined with as much education as the member needs, says Brown.

The credit union has full-time financial counselors at four of its 12 branches, available at no cost to members. "If members come in with bad credit problems or are into the payday or title lenders, we send them immediately to one of our financial counselors," Brown explains. "And our member service personnel who open accounts and process loans have been trained to educate members about the intent of the overdraft protection.

"We tell members this should be used only in an emergency," he continues. "We don't want them getting into the habit of writing checks when there's not enough money in the account. We also tell them they should pay off the loan on payday. We recognized that some people would take advantage of it and max it out right away. But few people have actually done that. It's generally used as intended."

This way, borrowing $100 for a few days at 15% interest costs members about a dime. The best-case scenario with a payday lender-borrowing $100 for a two-week period-results in an APR of nearly 600%.

The only downside to providing overdraft protection is lower fee revenue. "When you offer overdraft protection, you don't get a lot of NSF [not sufficient funds] fees," Brown says. "That's why the banking industry-and some credit unions-are reluctant to offer overdraft protection. NSF fees generate a lot of revenue. It boils down to what credit unions are about. Are we in it for the money or to help people?"

Of course, overdraft protection safeguards members' creditworthiness and makes them more qualified to borrow in the long term. Members who have been assessed a lot of NSF charges have more difficulty getting loans, Brown adds.

PARTNERING BOOSTS PROGRESS Nancy Pierce, president/chief executive officer (CEO) of Mazuma Credit Union in Kansas City, Mo., also hopes education will lead consumers to make wiser credit decisions. The $200 million asset credit union partnered with several community groups to offer personal financial empowerment seminars in Kansas City's midtown section, where residents' average annual household income ranges from $18,000 to $40,000.

The semimonthly seminars featured budgeting information and spread the message that the road to wealth and financial security is through asset accumulation, not debt, Pierce explains. "There was a strong emphasis on getting rid of debt, saving money, and finding ways to do both."

Meetings attracted an average of about 50 attendees. Held at local elementary schools, the credit union and its partners offered the seminars for free from February to May. Another incentive: Attendees received free child care and dinner, and one meeting had a Spanish translator. A big bonus: no expenses for Mazuma Credit Union.

"Our partners have objectives that are similar to ours, and they have budgets to fill certain needs," Pierce explains. "For example, the local investment commission took care of the child care and dinners because it's connected to the schools. Another partner picked up the cost of the advertising fliers. And the people who facilitated the seminars are trainers for the Kansas City Neighborhood Alliance. So our only investment was to make our members aware of the seminars and send them to it."

Mazuma Credit Union and its community partners also invited John Caskey, associate professor of economics at Swarthmore College in Pennsylvania and author of "Fringe Banking," to Kansas City. While in town, he met with the Kansas City Star's editorial board, appeared on a radio program, and spoke to a forum of legislators, social agencies, community leaders, and consumers about the high costs and long-term effects of using payday and other fringe lenders.

"We realized that, even though we were reaching 50 people twice a month, that's still a small number compared with the number of people who could benefit from the information," Pierce says. Caskey's visit helped spread the word further.

The credit union also has benefited from sponsoring the seminars, and not just because its member service representatives in attendance picked up some business. "It's enhanced our image in the community," Pierce says. "At one seminar, a person in the audience said she belonged to the credit union but wasn't comfortable talking about these issues. By realizing we were there supporting these seminars, attendees realized we have a real interest in their personal financial needs. They can use us as a resource for helping them achieve financial security."

The seminars were the result of building partnerships and relationships with midtown community groups and residents. Pierce believes more credit unions should form partnerships to expand their impact, although doing so takes patience and persistence ("Partnerships Enhance Resources," p. 76).

"Credit unions have tended to believe that community involvement requires us to provide some sort of financial assistance or to do things on our own," she maintains. "By doing that, we've missed opportunities to partner with organizations that have similar interests, enabling us to expand available resources."