Creative Income Advance Program Battles Payday Lending

Payday

BURLINGTON, Vt.—NorthCountry FCU is offering a successful income-advance program that not only keeps members away from predatory payday lenders, it builds strong ties with employer groups.

Called the Employer Sponsored Income Advance Program, the loan is offered through participating employers served by NorthCountry FCU and is positioned by the companies as an employee benefit.

NorthCountry says the product also keeps the $450-million CU out of the crosshairs of regulators, which are paying close attention to payday alternatives.

The loan offers up to $1,500 immediately with no credit check. It charges 16.99% APR and payments are deducted from the employee’s paycheck until the loan is paid off. Terms are up to six months.

A key to the program’s rate—much lower than payday lenders and even beneath many CU payday alternatives—is that the employer offsets some of the risk. Employers pay NorthCountry a fee to offer the program. The charge is based on the projected number of employees who might take an advance, based on payroll history inside each company, and projected losses at each employer.

Employers Pay Loan Fee

Overall, the credit union estimated losses from this portfolio would be at 12.5%, and they have come in at about 14%, which CEO Bob Morgan said indicates NorthCountry has priced this offering right.

“By having the employer pay the fee, we can keep our APR at 16.99%,” said Morgan. “At that rate, and without any fees attached to the loan the member pays, I am not battling with the CFPB or NCUA saying our program is predatory. I do not believe other CU payday type loans are predatory, but credit unions have been knocking heads with regulators on this issue for more than a year.”

Morgan said that since these loans are not underwritten, they go from request to funding almost immediately. “We don’t analyze affordability, and as long as the employee remains employed at the company we get paid. Now when they leave we usually do not, but we don’t see a lot of that.”

Unless a special exception is granted, the loan must be paid back before another loan can be made, explained Morgan, who emphasized that this is an emergency loan and should not be used as an alternative to traditional credit.

“We let employers and members know that anyone who can borrow at more favorable terms should do so,” stressed Morgan. “This is aimed to help those members who face an emergency situation and would probably otherwise turn to a payday lender or use another type of high-cost emergency financial service, like courtesy pay on checking.”

NorthCountry currently offers the loan through 25 employers and while making more than $2 million of the loans in the last seven years, the portfolio size is about $150,000. Morgan explained the size of the portfolio remains small due to how quickly the loans are repaid.

The CU is partnering with the Filene Research Institute, Madison, Wis., which is scaling up the program, currently in pilot, to be offered nationally, said Morgan.

Morgan said employers like the program not only because it allows them to deliver an attractive employee benefit, but it also helps increase retention of  good staff members.

“We are delighted to help employees, but we are also delighted to help Vermont businesses that employ low- to middle income workers who are on the margins,” said Morgan. “This improves the employer/employee relationship. The last thing a business wants to do is let a good employee go because he can’t get to work because the brakes on his car have failed and he has no money to fix them.”

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