Utah Credit Union Drops Payday Loans After Press Reports

A Utah credit union has stopped selling payday loans after being featured prominently in news reports.  Mountain America Credit Union had been offering its members a "MyInstaCash" loan that topped out at an 876 percent annual interest rate for a $100, five-day loan.

The unsavory practice was revealed in an investigation by the nonprofit online investigative reporting site iWatch News. 

Payday loans are basically short-term, unsecured loans which are usually due when the borrower receives his or her next paycheck. Consumer groups call them predatory and say lenders charge exorbitant interest, often trapping borrowers in a cycle of debt that they can’t escape.

Mountain America's new "Helping Hands” loan complies with rules set by the National Credit Union Administration that permit federal credit unions to lend at a maximum 28 percent annual rate provided they follow certain guidelines, such as giving customers more time.

One of several

Mountain America, a large credit union with $2.8 billion in assets, is one of several that skirted the interest-rate-cap rule by partnering with third-party lenders that financed the loans. Customers were directed to these lenders through a link on the credit unions’ websites.

Those lenders would then turn over a finder’s fee, or a cut of the profits, to a separate business, set up by the credit union.

The third-party lender that backed Mountain America’s payday loans was Capital Finance, LLC, located just a few miles from Mountain America’s headquarters in a Salt Lake City suburb, iWatch News reported.

An NCUA spokesman said credit unions are permitted to direct customers to payday lenders from their websites in exchange for a commission fee.

Not just CUs

Credit unions aren't the only institutions that are finding it hard to resist the allure of the sky-high interest rates payday loans generated. Banks and even Indian tribes are getting into the act.

Big banks began muscling their way into the business last year, charging an average 365 percent APR, a study found. The report from the Center for Responsible Lending finds that, on average, a bank payday loan is repaid within 10 days, eats up 44 percent of a borrower’s next deposit, and often creates the need for a subsequent loan.

As a result, borrowers stay in debt an average of 175 days, paying over $900 in interest to borrow $500 for less than 6 months.

The entry of American Indian tribes into the business is an even bigger frustration to regulators' efforts to curtail payday lending. 

Because they are sovereign nations under their treaties with the U.S., Indian tribes are immune to state interest-rate caps and regulations imposed on the payday loan industry. They can even operate in the 12 states that have banned payday lenders outright.

It's not, of course, the Indian tribes themselves who are opening storefront and Internet loan operations. Instead, existing lenders “move” their headquarters to an Indian reservation,usually in name only,and share their revenue with tribal leaders.