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While many Californians are considering transferring their money from banks to credit unions by tomorrow as part of "Bank Transfer Day," consumer advocates are urging customers to look closely at the business practices of some credit unions.
Advocates are concerned about those involved in payday lending, small short-term loans with high interest rates.
Bank Transfer Day’s mission, according to its Facebook page, is to shift funds from for-profit banking institutions to not-for-profit credit unions.
“We will send a clear message that conscious consumers won't support companies with unethical business practices," organizers state on the page. "It's time to invest in local community growth!” More than 70,000 people already have said they're participating.
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But the National Consumer Law Center says not all credit unions operate in the same manner. They single out 24 credit unions, out of roughly 7,000 nationwide, that provide loans that can lead borrowers into a destructive cycle of debt.
In California, Kinecta Federal Credit Union acquired Nix Check Cashing, one of the largest payday lenders in the Los Angeles area, four years ago. To get around the interest rate cap imposed by federal regulators, consumer advocates say Kinecta is gouging consumers with inflated application fees.
Randy Dotemoto, president of Kinecta Alternative Financial Solutions, said short-term loans provide an important service to its members.
"While our goal is to transition consumers away from short-term credit and alternative financial services, the reality is there’s a tremendous need for immediate cash solutions in the communities we serve that must be addressed," he said in a statement. "For a multitude of reasons, many people choose to get a 'payday' loan; right or wrong, consumers are accessing emergency cash loans every day to cover an urgent cash need."
Credit unions often are more consumer-friendly, said Lauren Saunders, managing attorney of the National Consumer Law Center’s Washington, D.C. office. "That said, whenever you move your money, you ought to look closely at where you’re moving it to."
David Small, a spokesman for the National Credit Union Administration, the federal agency that regulates most credit unions, said he did not want to comment on a specific credit union's lending practices. In recent testimony before congress, David Marquis, executive director of the NCUA, said, "Each of these products represents market-driven, practical attempts at providing consumer-friendly credit alternatives for unbanked and underbanked communities...NCUA believes that the ability to offer small loans helps FCUs (federal credit unions) fulfill their statutory mission to promote savings and meet the credit needs of consumers, particularly those of modest means."
Of the 24 credit unions that the National Consumer Law Center says are engaged in payday lending, most use third-party vendors, known as credit union service organizations, rather than directly offering the loans. The National Credit Union Administration is the only federal financial institution regulator that does not have authority over third-party vendors. The agency is proposing strengthening its authority, but it has met strong criticism from industry groups, such as the Credit Union National Association [PDF].
A decision on the proposal likely would not come until after the first of the year.
“CUSOs (credit union service organizations) let you do things that a credit union cannot do," said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. "So, by definition, I just don’t like it. Credit union management should be serving the will of the members to have an alternative financial system to a stockholder-owned banking system, not an alternative financial system that is designed to extract wealth from its customers, which is what a payday lending operation is designed to do.”
In addition to the concerns about credit unions offering payday loans, consumer advocates also warn against signing up with a credit union that is not federally insured. California is one of only a handful of states that does not require credit unions to have federal insurance.
If the credit union fails, deposits are not guaranteed by the federal government. Of the roughly 450 credit unions in California, there are 13 credit unions that are backed solely by the private insurance company American Share Insurance. A list of credit unions in California without federal insurance is below.
“I would stay away from any credit union that is not federally insured,” Mierzwinski said.
American Share Insurance did not respond to a request for comment in time for publication.
|CREDIT UNIONS WITHOUT FEDERAL INSURANCE|
|California Association of Highway Patrolmen Credit Union|
|Christian Community Credit Union|
|El Monte City Employees Credit Union|
|Firestone Financial Services Credit Union|
|Fiscal Credit Union|
|Los Angeles Firemen's Credit Union|
|San Francisco Fire Credit Union|
|South Bay Credit Union|
|Southern California Postal Credit Union|
|Lutheran Credit Union of America|
|Mid-Cities Schools Credit Union|
|Monterey Credit Union|
|SafeAmerica Credit Union|