IMPACT: Credit union swaps payday loans for friendlier offering

Introduction

A Utah-based lender featured prominently in an iWatch News investigation of payday lending at credit unions has stopped selling the controversial loans and is instead offering a more consumer-friendly product.

Mountain America Credit Union had offered its 320,000 member-owners a “MyInstaCash” loan that topped out at an 876 percent annual interest rate for a $100, five-day loan.

These short-term, unsecured loans are usually due when the borrower receives his or her next paycheck. Consumer groups say lenders charge exorbitant interest and often trap borrowers in a cycle of debt that they can’t escape.

The new “Helping Hands” loan complies with rules set by the National Credit Union Administration that permit federal credit unions to lend at a maximum 28 percent annual rate provided they follow certain guidelines, such as giving customers more time.

“Our intent is to offer a payday lending alternative that will help these members get out of the payday lending cycle,” said Sharon Cook of Mountain America, in an emailed response to questions.

Mountain America, a large credit union with $2.8 billion in assets, is one of several that skirted the interest-rate-cap rule by partnering with third-party lenders that financed the loans. Customers were directed to these lenders through a link on the credit unions’ websites.

Those lenders would then turn over a finder’s fee, or a cut of the profits, to a separate business, set up by the credit union.

The third-party lender that backed Mountain America’s payday loans was Capital Finance, LLC, located just a few miles from Mountain America’s headquarters in a Salt Lake City suburb.

But Mountain America wasn’t just a client of Capital Finance. It was also — at least as of this past spring — a business partner.

In a telephone interview in April, Capital Finance executive David Taylor said that Mountain America and another large Utah credit union, America First Federal Credit Union, are part owners along with Capital Finance of “CU Access” — another payday product for credit unions (CU Access appears to make loans that comply with federal guidelines).

Last year, America First dropped its payday loan product, called “e-access” — also backed by Capital Finance — following an investigation by the NCUA.

America First did not respond to repeated requests for comment.

Cook said that Mountain America does not use a third party for its new loans. “We decided that an ‘in-house’ solution would better meet the needs of our members who choose to use this type of product,” she wrote. The “Helping Hand” loan includes financial counseling and education for borrowers and offers longer terms.

An NCUA spokesman said credit unions are permitted to direct customers to payday lenders from their websites in exchange for a commission fee.

Scott Simpson, the head of the Utah Credit Union Association, a trade group, said he was surprised that there was opposition to the loans.

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

But Linda Hilton, a Salt Lake City community activist who led a protest against America First’s payday lending, sees it differently.

“They are promoting these loans as payday alternatives, but they are not really alternatives, they are egregious payday products,” she said. “We look at it as a moral lapse of credit unions.”

Other credit unions named in the iWatch story are still making high-cost loans. They include Kinecta Federal Credit Union in California, which actually owns a chain of 48 storefront payday lenders called Nix Check Cashing, where the interest rate is more than 300 percent per year.

This story has been updated.