Truth in Lending.
Truth in Savings.
Fair Credit Reporting Act.
All necessary evils. It’s interesting to look at those titles. They require financial institutions to tell the truth and to be fair.
It would seem like anyone wanting to be in the business of taking your money would already have those values. Wrong. So when we don’t tell the truth and we’re not fair, we get spanked with compliance. It’s the naughty stool. The time out issued by the Feds.
Almost everyone has lied at one time in their life. Whether it’s a little white lie or a whopper-of-a-televised-lie-in-an-interview. There’s some guilt, and if you’re caught you usually try to explain why it wasn’t really a lie…rather than just admitting, okay, I screwed up. I’m sorry.
My friend Jeff Hardin sent me a link to a podcast yesterday. It was the story of a single mom who got caught in the cycle of payday lenders. You see, the lenders lied. Of course they’ll tell you that they aren’t lying, they just don’t have to disclose everything because their business is not as regulated — yet.
I couldn’t help but think of the courtesy pay product that has become fee income heroin to many credit unions. We get to lie to members. Because “technically” we are not loaning them money, we don’t have to disclose an interest rate.
According to one credit union’s website:
It is a non-contractual courtesy that we extend to our Members who maintain their checking accounts in good standing. This feature is discretionary on the part of the Credit Union.
Back in the day (which, according to comedian Dane Cook was a Wednesday btw) the credit union I worked for had courtesy pay. We would look at the overdraft list and call members (as a courtesy) and let them know they needed to make a deposit or we were going to return a check. We did this for free. Most of the members brought money in right away and were very thankful for our courteousness. Now I get that we can’t possibly do that today. What with technology and all…but how about this:
If a member qualifies for a $700 courtesy pay limit, why wouldn’t you just qualify them for a $700 line of credit at 18% interest? The member would only have to pay $10.50 to repay that amount in 30 days. Instead of $27.50 per item (as noted on one credit union website) which puts the interest rate at around 50% – IF there was only one item paid for $700.00.
I found this company pops up first when you google “courtesy pay.” According to Parker in the video demo – you aren’t serving your members well if you don’t have a courtesy pay program. OH, AND you can Improve NSF income 120% to 400%
How can that be? One of the “features” of courtesy pay according to a credit union website:
Courtesy Pay is provided as a service to help you avoid additional fees by the merchant or payee. When you overdraw your account, a fee is assessed either as an NSF fee of $27.50 when we return the item unpaid to the merchant or payee, or as a Courtesy Pay fee of $27.50 when we pay the item.
Given that scenario, wouldn’t the fee income be the same to the credit union?
Here’s the saddest part for me. WE (meaning the credit union movement) were founded because of courtesy pay programs, aka loan sharks. People of small means could only get credit paying exorbitant interest rates. I’m not making this up..check it out:
Desjardins became aware of the outrageous interest being charged by loan sharks and organized the credit union to provide relief to the working class.
I hate to think that after 100 years (next year will mark the 100th anniversary of the first American credit union) that we would have to be legislated BACK to promoting thrift, telling the truth and charging fair rates.
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February 14, 2008 at 12:11 am
Credit Union Warrior
If that’s the credit union difference, I want out.
Thankfully, I work at one of the few credit unions that does not offer “courtesy pay” due to…wait for it…principle. Our Board and Executive Management adhere to the founding principles of the movement regardless what financial gain may be left on the table in doing so. We are, after all, not-for-profit. While that doesn’t mean “for charity,” it begs the question “at what point do you decide that certain income streams are unjust?” There are many great CUs out there that have made wise decisions NOT to offer courtesy pay…unfortunately those that have decided that the need for income trumps operating in the best interest of its members have made the public’s perception of credit union difference an unbelievable myth.
You and I both know that a credit union can be among the greatest social organizations created. Some have proven, however, that it can be a wolf in sheep’s clothing.
Desjardins would be disgusted at some of the ways unscrupulous credit unions have decided to earn non-interest income. Courtesy pay (read courtesy ripoff) has absolutely no place in the movement.
February 17, 2008 at 12:06 am
Tony Mannor
Excellent DC reference.
Ok, I despise payday lending. I really do. But when I was young, dumb and lax with funds – I took advantage of the service. I soon realized what I had gotten myself into.
There is a need for this product. It sucks, but that is the world that some folks live in. A car breaks down, emergency medical services are needed – whatever the case, sometimes people with bad credit, need a bump and they have no where to turn.
I think payday loan centers are the pimps of the banking world. They turn out those who rely on them for help. Once you hook up, it is hard to leave.
Credit unions could, and I think should, be that hand up from traditional payday lending services. The credit union can still provide this service while maintaining integrity. Offer interest rates comparable to the CUs credit cards. There are many things that a credit union could do to help their members in rough times that limit the financial risk of the credit union and prevent their members from utilizing these services.
Don’t think that if a CUs member takes advantage of this outside service that it does not affect the CU/Member relationship. Anytime a member needs to search out financial assistance outside of the CU there is to opportunity of losing the member.
The only difference between a loan shark and a bank/CU is the rate, and the means of collection. Make the “loan” a reasonable rate and offer reconciliatory services to assist the member over the long term and I have no moral problems with “Courtesy Pay”.
Just my thoughts though 🙂
February 17, 2008 at 6:37 pm
Denise Wymore
Hey Tony,
I think we’re saying the same thing – so long as the interest rate is not outrageous and members truly understand what they are doing, I’m all over “courtesy pay” for the reasons you stated.
Credit unions were notorious for small emergency loans. We were really founded on these. Car breaks down, fridge dies, etc. We’d get them a payment they could afford, sign ’em up for payroll deduction and nobody got hurt.
I think the anonymity of courtesy pay (meaning you can just overdraw your account for any purpose) is where it breaks down a little. There’s not an opportunity for counseling and education. It’s enabling bad behavior, in my opinion.
Good stuff..thanks for commenting.
February 18, 2008 at 1:58 pm
Mike Bartoo
Loved the “heroin” reference – and I think it couldn’t be more accurate. Overdraft programs have been a godsend for the income statement of multiple CUs (and banks) that have used that “pot of gold” to bolster their bottom lines instead of really learning how to manage themselves. I think we’re going to find that it’s enabled multiple institutions to survive in spite of themselves. The other problem I’ve seen with it, separate from the philosophical issue, is the fact that so many institutions now seem to be spending their time looking for the “next greatest thing”, rather than focusing on the fundamentals.
One other thought – I probably shouldn’t have read this post right after the discussion about “naming yourself” Denise. All of the discussion about multiple meanings of the same word, etc. I saw “stool” in the title along with “compliance” and immediately thought Oh boy, THIS should be fun!
February 18, 2008 at 10:02 pm
The Credit Union Warrior
Offering courtesy pay to prevent a member from seeking “financial assistance outside of the CU” is justifying bad behavior with worse behavior. I’m with Denise on this one, CU’s should continue to offer small dollar loans to help in these situations – not a product centered around non-interest income and bad behavior.
February 19, 2008 at 3:30 am
Denise Wymore
Mike – thanks for that……visual. LOL!!
Warrior – as a good friend of mine is fond of saying – just because someone wants to commit financial suicide, doesn’t mean we should give them the rope!