B of A and Other Banks Back Credit Union to Solve Payday Problem

July 18, 2014
American Banker 
payday lending news
Regulatory constraints make it difficult for banks to offer short-term consumer loans, but with credit unions entering this line of business, banks are capitalizing on a rare opportunity for cooperation. Bank of America, TD Bank, and four other banks offered financial and administrative support to help CommunityWorks Federal Credit Union open in Greenville, S.C. The single-branch institution targets low-income consumers, many of whom will be referred to the credit union from banks. CommunityWorks President and CEO Deborah McKetty says, "These banks are pretty honest that these are not markets they are in a position to serve."

While banks have long offered to help credit unions, Center for Financial Services Innovation President and CEO Jennifer Tescher says it is unusual for banks to pass along business opportunities to credit unions. However, at a time when banks say it is impossible for them to make a lot of small loans, credit unions are warming up to the idea. The $3.2 billion-asset Kinecta Federal Credit Union in Manhattan Beach, Calif., and the $2.1 billion-asset Municipal Credit Union in New York recently began offering small-dollar loan products, following in the footsteps of 14 credit unions that announced in March that they would participate in a nationwide pilot program to offer these products. The National Credit Union Administration reports a five-fold gain in the number of credit unions making short-term, small-dollar loans to 712 from 2010 to 2013. Over the same period, there was a 12 percent jump in the number of credit unions making payday loans to 573.

Banks benefit from the arrangement by getting Community Reinvestment Act credit from regulators. They also can use the credit union to develop prospects, and when these borrowers' finances improve, they might turn to banks for other products.

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