CFPB’s Future May be Cloudy, but the Outlook is Bright for Credit Unions

By: Beth Planakis, Director of Marketing, Velocity Solutions.

It’s hard to believe it’s been seven years since the formation of the CFPB, but it’s easy to remember what fueled its creation – a financial crisis that Americans hadn’t seen since the Great Depression. And what was one of the most flammable fuels in the fire? Mortgages. Specifically, mortgages that consumers couldn’t afford, couldn’t understand, and for which, in years prior, would never have qualified.

So, as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB was formed to protect consumers from unfair, deceptive or abusive practices in their dealings with financial services and products. Fortunately, the subprime mortgage crisis has since been reigned in, but the bureau has long monitored other types of predatory lending – namely, high-cost payday loans.

While Richard Cordray was Director of the CFPB his expectations were very clear that banks and credit unions could and should be low-cost providers of small-dollar loans, and that payday loans should be more closely regulated. So he proposed a payday lending rule and made significant progress with his agenda. On October 3, 2017, the CFPB cracked down on this “predatory practice” and issued its final payday lending rule, restricting lenders’ ability to profit from high-interest, short-term loans. The tough new restrictions were predicted to essentially decimate the storefront payday lending industry, potentially resulting in up to an 80%* plunge in payday loan volume. The $37,000 annual profit generated by the average storefront lender was estimated to become a $28,000 loss*. That’s a bleak outlook for payday lenders.

Flash forward to today. We’re now living in a post-Cordray world, with front-row seats to a helter-skelter leadership scuffle in the CFPB. Mick Mulvaney, the newly appointed Director of the CFPB, has vehemently voiced his opposition to the payday lending rule. However, it appears that the rule will not be rescinded by the CFPB itself, and it is debatable whether Congress will use its authority under the Congressional Review Act to overturn the rule.

So, what does this mean for credit unions? How can they better serve their members despite the uncertainty?

Proponents of the CFPB say it’s a watchdog agency working for American consumers, and that the payday rule will protect consumers from lenders behaving badly. Opponents believe the CFPB has too much power and that the rule is limiting consumers’ access to liquidity, and even their right to choose how to obtain that liquidity.

But whatever the outcome of the payday lending rule, credit unions have an enormous opportunity to better serve their members with small-dollar loans that are responsible, affordable and compliant.

If the rule takes effect as scheduled in 2019, consumers will be desperate for sources to obtain emergency cash with the storefront payday lenders closing shop. If the rule is overturned, it’s still just as critical to offer your members smarter, more affordable loan options, and to help educate consumers that these superior options exist. Now is the time for credit unions to step in and provide low-risk and affordable small-dollar loans for their members in need of emergency cash.

Here are the top 5 reasons this is a grand slam for credit unions, regardless of the future of the CFPB’s payday lending rule:

  1. Provide a new valuable service to your members, increasing loyalty, retention and lifetime value.
  2. Generate a new source of revenue from members paying high fees elsewhere.
  3. Protect your members from predatory lenders.
  4. Acquire new members by promoting an affordable and convenient small-dollar loan option.
  5. Work more efficiently and effectively. By joining with a partner company that offers a comprehensive, automated solution, your credit union will benefit:
    • No additional loan officers or other additional staff needed
    • Underwriting technology that is automated and proven
    • Assistance with compliance best practices
    • Data-driven marketing to educate consumers about the availability of lower-cost loans

Seize the opportunity now, and make it a resolution to implement a small-dollar, short-term loan solution in early 2018!

Velocity SolutionsVelocity Solutions is the NAFCU Services Preferred Partner for Account Holder Premium Card Rewards Program and Overdraft Management Solutions. More information and educational resources are available at nafcu.org/Velocity

*New York Times, Payday Lending Faces Tough New Restrictions by Consumer Agency, October 5, 2017.

Finding New Ways to Serve the Nation’s Underbanked

By: Lawrence Pruss, Senior Vice President and Payments Expert, Strategic Resource Management.

According to the Federal Deposit Insurance Corporation, approximately 27 percent of all American households are unbanked or underbanked – that’s 50 million individuals.

For purposes of this article, unbanked refers to individuals who don’t have a bank account and underbanked refers to those who supplement their bank account with alternative financial services like check cashers. Both underbanked and unbanked households are typically forced to rely on nonbank financial or high-rate lending solutions such as payday lending, tax refund, and settlement loans.

How did we get here? Why are so many people in the United States outside of traditional banking security in 2016? There are several reasons why, with many people falling into more than one category. This article addresses these issues and provides solutions your credit union can offer to serve the underbanked and help them become members of your credit union.

Case One: During the Great Recession from late 2007­— early 2009, many people with previously good credit had their credit history tarnished. Most financial institutions now exclude these individuals with a record of bounced checks, overdrafts, or delinquencies.

Solutions: Offer second-chance checking accounts, debit or prepaid solutions, and credit building tools generally available at local banks or credit unions.

Case Two: A significant portion of the immigrant population is underbanked. They often arrive to our country with a distrust of traditional banking systems, and depending on legal status, avoid traditional banks that require government issued identification. Increasingly stringent Know Your Customer (KYC) and other anti-money laundering regulations have exacerbated this situation.

Solutions: Develop easy account applications and use alternative identification solutions like individual taxpayer identification numbers (ITIN). The IRS issues ITIN numbers to non-citizens who are working in the U.S., but are not eligible for a Social Security number. Develop inexpensive money transfer solutions which can help alleviate high fees typically associated with transfers, and consider alternative lending scores to help qualify these individuals for financial products.

Case Three: Approximately half of the 80 million millennials in America (those between 18 and 29) are unbanked or underbanked. The 2009 Credit CARD Act put strict limits on how credit cards are marketed and issued, and an inherent skepticism of large money-making institutions and Wall Street means many young adults are hesitant to pursue credit cards and other traditional banking products. In fact, more than one-third of that population has never had a credit card.

Additionally, because of their digital communication preferences and desire for fee and pricing transparency, companies that offer clear debit, prepaid, or increasing alternative financing solutions are winning over this segment. Examples include PayPal, Google, and some of the more creative credit unions with “young and free” efforts geared toward the younger generation.

Solutions: Establish your institution as a trusted, tech-savvy brand to build loyalty with this consumer group, locking them in as future, long-term members.

Case Four: While the official unemployment number is at 5 percent, or 7.9 million people, an estimated 30 million Americans are still out of work or underemployed – an audience typically avoided by banks.

Solutions: Develop lending based on an individual’s potential. Many of these individuals have returned to school or pursued further training while being un- or underemployed. This offers a great opportunity for establishing lifelong loyalty for those institutions willing to take a chance on their future success.

The number of un- and underbanked individuals in the United States is larger than the total populations of many countries. As such, it offers a huge opportunity for American financial institutions willing to better understand “why” they are underbanked and then find ways to support them and help them reach their unique needs.

Strategic Resource Management is the NAFCU Services Preferred Partner for Vendor Cost Benchmarking and Negotiation Services.