Self-Help Credit Union: Fair Lending, Strong Results
January 7, 2009
In their newest attempt to halt reform on their industry, payday lenders have created a fake "grassroots" group called the Consumers Rights League (CR League) to attack Self-Help and CRL by spreading misinformation about the groups' work. CR League has falsely characterized Self-Help's community development lending and public policy work as self-serving, but the facts prove otherwise.
Fact: As a community development lender, Self-Help offers responsible loan products at fair rates. It seeks to live up to the standards pushed for in its advocacy work.
Self-Help Credit Union has grown in the past several years as a result of strong demand for small-business loans and homes loans in North Carolina, primarily in disadvantaged communities that are underserved by mainstream lenders. Here's a summary of our major lending practices:
Mortgage Lending: Virtually all Self-Help mortgage loans are fixed-rate loans made to borrowers who do not fit conventional lending guidelines. These mortgages are priced substantially lower than other subprime mortgage loans, carrying a 1% origination fee and no private mortgage insurance. Self-Help has been a subprime mortgage lender for 24 years, but unlike many subprime lenders it does not charge prepayment penalties, and has maintained the strong underwriting guidelines that others abandoned (e.g. documenting income and the borrower's ability to repay their loan). Additionally, Self-Help gives borrowers the lowest rate they qualify for; it does not permit its loan officers to increase the rate in exchange for a kickback (yield-spread premium). In fact, if a loan applicant can qualify for a lower-cost conventional mortgage loan, Self-Help tells them so and refers them to local banks.
Overdraft Loans: Self-Help does not provide fee-based overdraft loans, but instead offers customers an overdraft line of credit that is capped at a 16% annual percentage rate of interest. Self-Help has been publicly and equally critical of credit union fee-based overdraft loan programs as it has been of banks' programs.[i]
Payday Lending: Self-Help has never offered payday loans and does not benefit from CRL's advocacy work in this area. It opposes 400% APR payday loans because they do significant financial harm, especially to low-income families.[ii] Since payday lending has been outlawed in North Carolina, the bulk of small consumer loans are made by financial institutions and consumer finance companies already doing business in the state.[iii] Contrary to payday lending industry charges, Self-Help cannot profit from the shutdown or rate caps on payday lending.
Fact: Self-Help has built its financial soundness in order to continue its community development work.
In an amazing display of illogic and distortion, CR League claims Self-Help's success as a community development lender has hurt our borrowers and enriched the organization and its employees. They couldn't be more wrong:
Self-Help has been Self-Help's management works there for many reasons, but getting rich isn't one of them. All Self-Help executives are subject to a company-wide salary cap: currently $71,000 annually for North Carolina.[v] In addition, the organization has strict policies that prevent insider loans or other self-gain by executives. Self-Help does not allow ANY senior official or board member (or their family members) to borrow AT ALL from Self-Help. It is the only retail financial institution we know of that does not allow its senior officials to even get personal credit cards. CR League has resurrected a false allegation of insider loans—even though they know it was refuted by state and federal regulators[iv]— in an attempt to damage Self-Help's reputation.
Self-Help uses grants from government and private funders to support lending —at reasonable rates—to higher-risk borrowers and in communities that are underserved by conventional lenders. For example, grants help support Self-Help's loans to childcare facilities in North Carolina, which carry only a 5 percent interest rate on average. Similarly, Self-Help makes loans to public charter schools that are often at below-market rates and with less-than-full collateral. At the same time, Self-Help provides many hours of (free) technical assistance to small business owners, and makes small business loans for as little at $2,000; both are things that conventional lenders cannot afford to do. Grant funds also provide downpayment assistance for families to become homeowners without putting substantial money down, and support Self-Help's work to revitalize neighborhoods by fixing up dilapidated houses and reselling them to first-time homebuyers.
Self-Help only forecloses on loans as a last resort. Its low loss rate (well under 1% per year throughout a 24-year lending history) shows this is a rare occurrence. Self-Help is a lender and not a government give-away program. Self-Help tells borrowers very clearly up front that it will collect and foreclose if they do not repay their loans; otherwise it would not be able to help other borrowers in the future. With 60,000 Self-Help loans financed by Self-Help Credit Union and its nonprofit affiliate, Self-Help Ventures Fund, to higher-risk borrowers, it is inevitable—although still unfortunate—that some foreclosures would occur. Self-Help works closely with its home and commercial borrowers so that foreclosure is an absolute last resort.
Self-Help's commercial real estate investments support its work and help other small businesses and nonprofits. When finding office space for staff, Self-Help has found it often makes economic sense to own rather than rent—it's a better use of limited resources and protects against rising rents—and has followed this practice in North Carolina for the last 20 years. Many nonprofits own their buildings, including nonprofit industry associations such as the Mortgage Bankers Association.[vi] Further, Self-Help makes space in its buildings available at attractive rents to other nonprofits and small businesses in North Carolina and D.C.
Fact: Self-Help Credit Union looks different than its "peer" credit unions because its primary focus is providing home-ownership loans to low-income and under-served families.
Self-Help has somewhat different financial results sompared to our credit union peers (with $100-500 million in assets).[vii] There are reasonable—not nefarious—reasons for this:
Self-Help's members have higher loan balances because its loans are predominantly home mortgages, rather than auto loans and other small loans offered by most credit unions.
For over 20 years, Self-Help's loan delinquency rates have been higher than its credit union peers because it makes home loans to low-income borrowers with few cash savings. These borrowers fall behind on their loans more frequently than borrowers overall when faced with an income disruption caused by divorce, illness or temporary job loss, but they remain committed to keeping their homes. In addition, Self-Help works very closely with borrowers to help them through these difficulties. As a result, very few Self-Help loans end in borrowers defaulting and losing their homes through foreclosure, a result reflected in Self-Help Credit Union's low loss rates of 0.26% per year over the past 5 years.
Self-Help has a higher return on assets than its peers because of lower expenses and a higher portfolio concentration of loans versus investments. Self-Help expenses are lower because it has fewer retail branches, fewer staff members, and its executives' salaries are significantly lower than its peers.[viii] In addition, Self-Help deploys a higher percentage of its assets into loans, which earn more than investments.
[i] Eric Halperin and Peter Smith, Out of Balance: Consumers pay $17.5 billion per year Center for Responsible Lending (July 2007). Available at http://www.responsiblelending.org/pdfs/out-of-balance-report-7-10-final.pdf
[ii] Uriah King, Leslie Parrish, Ozlem Tanik. Financial Quicksand: Payday Lending Sinks Borrowers In Debt Center for Responsible Lending (November 2006). Available at http://www.responsiblelending.org/issues/payday/reports/page.jsp?itemID=31101660
[iii] North Carolina Consumers After Payday Lending: Attitudes and Experiences with Credit Options. University of North Carolina Center for Community Capital. (November 2007). Available at http://www.ccc.unc.edu/documents/NC_After_Payday.pdf
[iv] Fight Between North Carolina Credit Union and Payday Lenders Gets Uglier, Aims For A Bigger Audience. Credit Union Times (November 2005). Available at http://www.cutimes.com/2005/10/19/fight-between-north-carolina-credit-union-and-payday-lenders-gets-uglier-aims-for-a-bigger-audience and Frank Norton. Report criticizes credit union. The News & Observer (November 4, 2005). Also, Badge of Honor (editorial). The News & Observer (November 8, 2005).
[vii] Self-Help "peer" credit unions have $100-$500 million in assets. Financial statements available at National Credit Union Administration website.
[viii] Source: HR Value Group, LLC, 2006 Southeastern Region Credit Union Compensation and Benefits Survey
(435 credit unions in the Southeast replied to the survey). Selected representative salaries appear below. This survey was conducted approximately two years ago; Self-Help's salary cap in 2006 was $63,000.
CEO: 2006 average salary for credit unions in the Southeast with $200-500mm in assets: $151,426 ($146,700 median)
COO (or equivalent): 2006 average salary for credit unions in the Southeast with $200-500mm in assets: $97,671 ($98,455 median)
CFO (or equivalent): 2006 average salary for credit unions in the Southeast with $200-500mm in assets: $78,248 ($75,541 median)