Lower-Paid Employees Encounter Higher Fees, Charges
It’s not that often that credit unions find their way into the business section of the New York Times: usually, if there’s some sort of financial disaster (i.e., 2009), if a Trump advisor goes bust in his taxi cab medallion business (i.e., Michael Cohen), or very occasionally, if there’s good news story about how members are getting a better deal at credit unions than banks.
But in an article on October 14, 2018, one credit union found itself in an unwelcome spotlight. Noam Scheiber wrote a lengthy article on a credit union serving Marriott corporation employees, many of whom are on strike: “Banking Fees for Workers, Deals for Bosses.” He pointed to the high fees that lower-paid Marriott workers paid to their credit union while more prosperous employees including board members obtained loans, including for mortgages and cars, at favorable rates. I was interviewed on background for the article, although not quoted, and Scheiber and I have had some ongoing dialogue. He did not share the name or, except in the most general terms, circumstances of the credit union.
There is, as far as I can tell based on public information, no scandal here—no violation of law or regulations and no corruption. However, depending on your viewpoint, the situation may appear scandalous. Workers earning as little as $13 an hour who often have to take second jobs to scrape together a scant livelihood pay substantial fees for short-term, small-dollar loans; application fees of $35 can bring the effective annual interest rate up to 40-50%, according to Scheiber. Overdraft fees also hit hard those with the least income. “By contrast,” Scheiber writes, “more affluent workers, including some executives at Marriott, appear to benefit at little cost from the credit union, securing favorable interest rates on car loans and mortgages while largely avoiding heavy fees.”
Anyone who has worked in the credit union industry knows the array of arguments marshalled to justify overdraft and small-dollar lending fees: members should pay for the services they use; one group of members shouldn’t subsidize others; risk-rated lending rates are rational and fair; payday lenders charge more; some people need to manage their finances better; a credit union needs fee income to survive and compete in the marketplace. The arguments are not frivolous; some have a factual basis. Yet, they also embody assumptions and moral stances that for me and others raise fundamental questions about the nature of credit unions today.
Credit unions began in the first decades of the twentieth century as a profoundly democratic movement, populist in the best sense. They were formed by and for working people—factory employees, farmers, civil service workers, and parishioners, who would otherwise have to resort to usurers or other predecessors of today’s payday lenders. They were strictly egalitarian—one member, one vote. Rates were simply 1% per month on the unpaid balance, an APR of 12%. The business of credit unions also was relatively simple: offering savings accounts and making modest loans. Risk-based pricing of loans are a relatively recent phenomenon in the long history of credit unions.
So, what to make of those credit unions with unequal loan rates and fees that disproportionately fall upon those with the least means? Traitors to the historic mission of credit unions? Pragmatic business people? Realists? I served for 32 years as CEO of the National Federation of Community Development Credit Unions, an organization dedicated to serving low-income people. Even within our membership, there were differing views on these issues. Attempting to cut through the thicket of arguments, I would borrow from the ethics of the medical profession: at least, do no harm.
Still, it is easier said than done.
For starters, you must make a judgement as to whether you want to be a market player or one with the primary mission of social justice and reducing inequality. The market is inexorably and relentlessly indifferent to moral arguments; the ranks of credit unions have declined from more than 20,000 when I joined the movement in 1980 to less than 6,000 today; next month there will be fewer, and five or ten years from now, far fewer still. If your credit union’s goal is survival, do what you must—study the competition (including other credit unions), charge fees, set market loan rates, strive for a return on assets that will equal or exceed your peers and satisfy your regulators.
If your primary mission is to serve social justice, you are not immune to market conditions and imperatives. You will still have to balance justice with economic survival. But your work will be guided by the mandate to minimize or eliminate harm on the most vulnerable of your members. You will not be driven by industry peer averages and the concomitant regulatory pressures for loan loss ratios, return on assets, or net worth.
No one said it would be easy.
Who makes the decision about the nature of your credit union? Ultimately, it can and should be the membership. In practice, it is the board of directors, who still—just as 100 years ago—are elected by the members. Does the Marriott credit union have a market-oriented board rather than one who puts the welfare of the poorest members first? There is a response (a solution, if you prefer): elect a new board. The fact is, except in moments of crisis or critical decisions—liquidate, merge, convert to another charter—membership participation is woefully small, especially in annual general meetings. It is smaller by far than the distressingly low participation in U.S. elections.
If you disagree with the policies enacted by your board of directors, run for office to change them. One person, one vote: The vehicles of credit union democracy still exist. Use them!
No one said it would be easy.