State Credit Union Group to Offer Alternatives to Predatory Financial Practices for Underbanked

Wisconsin credit unions are hoping that their help for low-income tax filers this year will flow more “unbanked” Wisconsin consumers into the financial mainstream, where they will receive fairer pricing for services and — beyond that — help to gain a stronger financial footing. Credit unions are helping low-income tax filers by opening deposit accounts into which fast, free refunds can be deposited, providing a no-cost alternative to costly “refund anticipation loans” that, according to the state, pick $28.5 million from taxpayers’ pockets.

Credit unions in Milwaukee, Madison, Dodgeville, Fond du Lac, Eau Claire, Wausau, Hayward and near the Menominee Indian Reservation will open deposit accounts for low-income tax filers, as well as work alongside volunteers from the Wisconsin Department of Revenue who are assisting them, at Volunteer Income Tax Assistance (VITA) sites. The sites offer free tax preparation, tax education and asset-building strategies to people with low incomes, the disabled, individuals with limited English proficiency and the elderly.

Many low-income filers — who often seek a fast refund to pay bills and meet immediate needs — turn to paid tax preparers charging interest as much as 521% APR to obtain what’s called a “refund anticipation loan,” or RAL. These short-term, high-interest loans — secured by the pending refund — can drain hundreds of dollars from a typical refund. RALs are aggressively marketed in low-income communities.

“Credit unions want to see that low-income people don’t get taken advantage of this tax season,” said Brett Thompson, President & CEO of The Wisconsin Credit Union League, the trade association supporting 280 not-for- profit, member-owned financial institutions. “Low-income people who don’t have an account with a financial institution may see a RAL as their only option to get a fast refund. That’s what needs to change.”

It only takes a small deposit — as well as meeting member eligibility requirements (such as living or working in a particular area) — to open a basic deposit account at a credit union. The account can then be used to receive tax refunds at no cost via electronic transfer. Taxpayers receiving help at VITA sites benefit not only by avoiding tax preparation fees and the “rapid refund” charges that are typical of RALs, but get their refunds in as little time as if they had used a RAL: usually within a week.

By providing an alternative to RALs, credit unions are also helping the state curb the broader “drain” RALs have on the economy. For example, RALs siphon away the tax benefit low-income filers should receive by claiming the Earned Income Tax Credit (EITC); as much as $8 million in this benefit was lost in 2003 in Wisconsin to RALs. Local economies also suffer when tax dollars are diverted due to a an economic “multiplier” effect: The estimated $3 million in RAL fees by federal EITC recipients in Milwaukee in 2003, for example, denied the city of as much as $6 million in economic activity that could have resulted had consumers been spared those costs.

Thompson emphasizes, however, that credit unions’ help for tax filers is just one way of combating a more pervasive problem in the state: low-income people being targeted by non-traditional financial providers charging excessive costs for services that can be obtained more reasonably through mainstream providers like credit unions.

Through an initiative called REAL Solutions, Wisconsin credit unions statewide are developing lower-cost alternatives to a range of services that are often sought by low-income people, including short term “paycheck advance” services, check cashing, wire transfers and more. While doing so will not drive profits for credit unions, they see their effort as part of their mission as cooperatives. The purpose of not-for-profit credit unions is to serve members, not make profits.

“RALs are just one example of how predatory services hurt Wisconsin,” Thompson adds. “Just look at the payday lenders popping out of just about every strip mall. People who use them for a short term loan often find they can’t afford to pay it back once the high fees and interest are applied, and take out another loan and another until they’re completely mired in debt. This effect depresses a whole segment of our economy.”

Thompson says credit unions’ goal with REAL Solutions is to meet consumers’ immediate needs for transaction services while moving them through the steps of opening basic deposit accounts, building creditworthiness with small loans, and — over time — building wealth.

Credit unions make loans as small as a few hundred dollars and offer free financial counseling to improve their members’ overall financial position.